Druco Rests., Inc. v. Steak N Shake Enters., Inc.

• Decision Date: 29 August 2014
• Docket Number: 13–3490,13–3491.,Nos. 13–3489,s. 13–3489
• Citation: 765 F.3d 776
• Court: U.S. Court of Appeals — Seventh Circuit
• Parties: DRUCO RESTAURANTS, INC., Plaintiff–Appellee, v. STEAK N SHAKE ENTERPRISES, INC., et al., Defendants–Appellants. People Sales & Profit Company, Inc., Plaintiff–Appellee, v. Steak N Shake Enterprises, Inc., Defendant–Appellant. Scott's S & S Inc., Plaintiff–Appellee, v. Steak N Shake Enterprises, Inc., et al., Defendants–Appellants.

765 F.3d 776

DRUCO RESTAURANTS, INC., Plaintiff–Appellee,

v.STEAK N SHAKE ENTERPRISES, INC., et al., Defendants–Appellants.

People Sales & Profit Company, Inc., Plaintiff–Appellee,

v.Steak N Shake Enterprises, Inc., Defendant–Appellant.

Scott's S & S Inc., Plaintiff–Appellee,

v.Steak N Shake Enterprises, Inc., et al., Defendants–Appellants.

Nos. 13–3489, 13–3490, 13–3491.

United States Court of Appeals, Seventh Circuit.

Argued May 19, 2014.

Decided Aug. 29, 2014.

Kristen Moder Ahmad, Greenfelder, Hemker & Gale, P.C., St. Louis, for Plaintiff–Appellee.

Fredric A. Cohen, Cheng Cohen LLC, Chicago, IL, for Defendants–Appellants.

Before ROVNER, WILLIAMS, and TINDER, Circuit Judges.

ROVNER, Circuit Judge.

At issue in this appeal is whether a franchisor may compel several of its franchisees to engage in nonbinding arbitration of diversity claims that the franchisees brought in federal court. The district court refused to stay the franchisees' lawsuits and declined to compel arbitration. We affirm.

I.

Steak n Shake owns and operates 415 eponymous restaurants that feature hamburgers and milkshakes, among other items.¹ The company also grants franchises for the operation of Steak n Shake restaurants by others, and there are approximately one hundred franchises currently operating. Druco Restaurants, Inc. (“Druco”) operates two Steak n Shake restaurants in Missouri under franchise agreements signed in 2001 and 2004. People Sales & Profit Company, Inc. (“PSPC”) operates five Steak n Shake restaurants in Georgia. Franchise agreements for four of the restaurants were signed in 2007. PSPC acquired its fifth franchise in 2009 for a Brunswick, Georgia restaurant from another franchisee that had signed its agreement with Steak n Shake in 1995. Because that contract is markedly different from the others, we will call it the “Brunswick Agreement.” Finally, Scott's S & S Inc. (“Scott's”) operates a single restaurant in Pennsylvania under a franchise agreement signed in 2006. We will refer to Druco, PSPC and Scott's together as the Franchisees or the plaintiffs.

According to the plaintiffs, since 1939, all Steak n Shake franchisees have enjoyed the right to set their own menu prices and participate in corporate pricing promotions at their option. After a corporate takeover in 2010, Steak n Shake enacted a new pricing and promotion policy that requires all the Franchisees to adhere to company pricing on every menu item and to participate in all corporate promotions. Because the Franchisees are also required to purchase all of their products from a single distributor at a price negotiated by Steak n Shake, this new policy allows Steak n Shake to control the purchase and sale price for every item the Franchisees sell. The policy had an adverse effect on revenues, and so the Franchisees filed suit in federal court in Indiana seeking a declaratory judgment that, under the terms of their franchise agreements, they may set their own prices and are not required to participate in corporate promotions.² The Franchisees raised additional claims but none are relevant to the appeal.

Approximately one month after the Franchisees filed their lawsuits, Steak n Shake adopted an arbitration policy requiring the Franchisees to engage in nonbinding arbitration at Steak n Shake's request. Shortly after adopting the policy, Steak n Shake moved to stay the federal lawsuits filed by the Franchisees and for an order compelling nonbinding arbitration of the disputes. The district court denied the motion to stay and refused to compel arbitration. Although each franchise agreement (except the Brunswick Agreement) contained a clause in which Steak n Shake “reserve[d] the right to institute at any time a system of nonbinding arbitration or mediation,” the district court concluded that any agreement to arbitrate was illusory. The court noted that there was no limit on Steak n Shake's ability to arbitrate (or avoid arbitration) on its own whim. Because performance of the clause was entirely optional and because Steak n Shake retained the ability to terminate its system or arbitration at any time, the court concluded the clause was illusory and unenforceable. In the alternative, the court found that Steak n Shake's arbitration policy applied by its own terms only to prospective lawsuits and not to suits already pending when the company decided to implement the policy. Finally, the court held that the nonbinding arbitration or mediation contemplated by the franchise agreements did not constitute “arbitration” under the Federal Arbitration Act. For the Brunswick Agreement, the court simply noted that it contained no language implicating arbitration and so there was no basis to grant a stay or compel arbitration in that dispute. The court therefore denied all of Steak n Shake's motions to stay and to compel arbitration. Steak n Shake appeals.

II.

On appeal, Steak n Shake contends that the district court erred in concluding that the arbitration clauses in the franchise agreements were illusory under Indiana law. Steak n Shake also maintains that its arbitration policy applies to disputes that were pending at the time the company adopted the policy. Finally, Steak n Shake urges us to conclude that nonbinding arbitration fits comfortably within the FAA's definition of arbitration. We review de novo a district court's grant or denial of a motion to compel arbitration. Gore v. Alltel Communications, LLC, 666 F.3d 1027, 1033 (7th Cir.2012); Lumbermens Mut. Cas. Co. v. Broadspire Mgmt. Servs., Inc., 623 F.3d 476, 480 (7th Cir.2010). We review any findings of fact for clear error. Lumbermens, 623 F.3d at 480.

A.

Each of the franchise agreements contains a provision for venue and dispute resolution. The Druco franchise contracts provide:

Venue/Dispute Resolution.Minn.Stat. § 80C.21 and Minn. Rule 2860.4400J prohibit us from requiring litigation to be conducted outside Minnesota. In addition, nothing in the offering circular or agreement can abrogate or reduce any of your rights as provided for in Minnesota Statutes, Chapter 80C, or your rights to any procedure, forum, or remedies provided for by the laws of the jurisdiction. The Company reserves the right to institute at any time a system of nonbinding arbitration or mediation. Any arbitration under this Agreement shall be held in a forum in the City of Indianapolis, State of Indiana. The Franchisee will be obligated to participate in such system, at the Company's request, in the event of a dispute. The Federal Arbitration Act applies to the arbitration forum clauses contained in this Agreement.

Druco Dkt., R. 1–4, 1–5. A later addendum corrected the mistaken references to Minnesota by revising the paragraph “to replace the word ‘Minnesota’ with the word ‘Missouri’ wherever located and to delete all references to Minnesota statutes.”

Four of the PSPC contracts and the Scott's contract contain the following language:

Venue/Dispute Resolution. ANY AND ALL ACTIONS AND OTHER LEGAL PROCEEDINGS ARISING UNDER THIS AGREEMENT SHALL BE FILED AND MAINTAINED ONLY IN A STATE OR FEDERAL COURT OF COMPETENT JURISDICTION LOCATED IN THE STATE OF INDIANA, AND THE PARTIES HEREBY CONSENT TO THE JURISDICTION AND VENUE OF SUCH COURTS SOLELY FOR THE PURPOSE OF RESOLUTION OF ANY SUCH DISPUTES. Franchisee and Company acknowledge that the parties' agreement regarding applicable state law and forum set forth in sections above provide each of the parties with the mutual benefit of uniform interpretation of this Agreement and any dispute arising out of this Agreement or the parties' relationship created by this Agreement. Each of Franchisee and Company further acknowledge the receipt and sufficiency of mutual consideration for such benefit. The Company reserves the right to institute at any time a system of nonbinding arbitration or mediation. Any arbitration under this Agreement shall be held in a forum in the City of Indianapolis, State of Indiana. The Franchisee will be obligated to participate in such system atthe [sic] Company's request, in the event of a dispute. The Federal Arbitration Act applies to the arbitration forum clauses contained in this Agreement.

PSPC Dkt., R. 1–6; 1–7; 1–8; 1–9; and Scott's Dkt., R. 1–7.

The parties agree that the 1995 Brunswick Agreement contains no reference to arbitration. It states:

Venue/Dispute Resolution/Governing Law. Any and all actions and other legal proceedings arising under this agreement shall be filed and maintained only in a state or federal court of competent jurisdiction located in Marion County, Indiana, and the parties hereby consent to the jurisdiction and venue of such courts solely for the purpose of resolution of any such disputes. This Agreementshall be governed by the laws of the State of Indiana.

PSPC Dkt., R. 1–5. Steak n Shake sought to stay litigation on the Brunswick Agreement pending the outcome of arbitration on the other PSPC contracts but did not seek to compel arbitration for this contract. Steak n Shake sought both a stay of pending litigation and an order compelling arbitration on all of the other Franchisees' disputes.

B.

In order to compel arbitration, “a party need only show: (1) an agreement to arbitrate, (2) a dispute within the scope of the arbitration agreement, and (3) a refusal by the opposing party to proceed to arbitration.” Zurich American Ins. Co. v. Watts Indus., Inc., 466 F.3d 577, 580 (7th Cir.2006). When deciding whether the parties agreed to arbitrate a certain matter, courts generally should apply ordinary state-law principles that govern the formation of contracts. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995); MPACT Constr. Group, LLC v. Superior Concrete Constructors, Inc., 802 N.E.2d 901, 904 (Ind.2004). See also Rent–A–Center, West, Inc. v. Jackson, 561 U.S. 63, 68–69, 130 S.Ct. 2772, 177 L.Ed.2d 403 (2010) (arbitration is a matter of contract; arbitration contracts are on equal footing with...