Scott's S&S Incorporated v. Steak N Shake Enterprises, Inc

In the
United States Court of Appeals
For the Seventh Circuit
DRUCO RESTAURANTS, INC.,
Plaintiff-Appellee,
No. 13-3489 v.
STEAK N SHAKE ENTERPRISES, INC.,
et al.,
Defendants-Appellants.
PEOPLE SALES & PROFIT
COMPANY, INC.
Plaintiff-Appellee,
No. 13-3490 v.
STEAK N SHAKE ENTERPRISES, INC.,
Defendant-Appellant.
SCOTT’S S&S INC.,
Plaintiff-Appellee,
No. 13-3491 v.
STEAK N SHAKE ENTERPRISES, INC.,
et al.,
Defendants-Appellants.
2 Nos. 13-3489, 13-3490, 13-3491
Appeals from the United States District Court for the
Southern District of Indiana, Indianapolis Division.
Nos. 1:13-cv-00560-LJM-DML, 1:13-cv-00654-LJM-DML
1:13-cv-00655-LJM-DML — Larry J. McKinney, Judge
ARGUED MAY 19, 2014 — DECIDED AUGUST 29, 2014
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 restau-
rants 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 approxi-
mately 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”)
1
Steak n Shake Operations, Inc. runs the company’s non-franchised
restaurants. The entity also granted franchises until 2005. After a restructur-
ing in 2005, Steak n Shake Operations, Inc. assigned all of its franchise
contracts to Steak n Shake Enterprises, Inc., and that company has acted as
the franchisor of the brand since that time. For the purposes of this appeal,
these Indiana companies are the same and we will refer to them together as
Steak n Shake.
Nos. 13-3489, 13-3490, 13-3491 3
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 “Bruns-
wick Agreement.” Finally, Scott’s S&S Inc. (“Scott’s”) operates
a single restaurant in Pennsylvania under a franchise agree-
ment 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 Franchi-
sees to adhere to company pricing on every menu item and to
participate in all corporate promotions. Because the Franchi-
sees 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 corpo-
4 Nos. 13-3489, 13-3490, 13-3491
rate 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 Franchi-
sees 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.
2
Each of the Franchisees filed its own lawsuit and the cases were then
consolidated for decision in the district court. The cases are similarly
consolidated on appeal.
Nos. 13-3489, 13-3490, 13-3491 5
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 agree-
ment can abrogate or reduce any of your rights as
6 Nos. 13-3489, 13-3490, 13-3491
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 partici-
pate 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 JURISDIC-
TION 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
Nos. 13-3489, 13-3490, 13-3491 7
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 acknowl-
edge the receipt and sufficiency of mutual consider-
ation 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 jurisdic-
tion 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 Agreement shall be gov-
erned by the laws of the State of Indiana.
8 Nos. 13-3489, 13-3490, 13-3491
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 (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 (2010) (arbitration is a matter
of contract; arbitration contracts are on equal footing with
other contracts and must be enforced according to their terms
but also may be invalidated by generally applicable contract
defense such as fraud, duress or unconscionability). We
therefore must first determine whether there are valid agree-
ments to arbitrate in the franchise contracts.
The parties agree that Indiana law applies to all of the
franchise contracts. But Steak n Shake also asserts that the
court must give due regard to the FAA policy in favor of
arbitration in applying those state law principles, resolving
Nos. 13-3489, 13-3490, 13-3491 9
ambiguity in favor of finding enforceable agreements to
arbitrate. Steak n Shake is incorrect. Arbitration is a matter of
contract and a party cannot be required to submit to arbitration
any dispute which that party has not agreed to submit. AT & T
Technologies, Inc. v. Communications Workers of America, 475 U.S.
643, 648 (1986). Both federal and state courts acknowledge that
the FAA’s policy in favor of arbitration applies when determin-
ing the scope of an agreement to arbitrate, but not when
deciding whether there is an agreement to arbitrate in the first
instance. Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S.
52, 62 (1995) (when a court interprets ambiguous provisions in
an agreement covered by the FAA, due regard must be given
to the federal policy favoring arbitration, and ambiguities as to
the scope of the arbitration clause itself resolved in favor of
arbitration); Volt Info. Sciences, Inc. v. Board of Trustees of Leland
Stanford Junior Univ., 489 U.S. 468, 478 (1989) (the FAA “simply
requires courts to enforce privately negotiated agreements to
arbitrate, like other contracts, in accordance with their terms.”);
Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404
n.12 (1967) (the FAA was designed to “make arbitration
agreements as enforceable as other contracts, but not more
so.”); MPACT, 802 N.E.2d at 906–07 (a court must determine
under applicable state law whether the parties generally
agreed to arbitrate disputes, without being influenced by the
federal policy in favor of arbitration). We therefore must turn
to Indiana law to determine the threshold question of whether
the parties generally agreed to arbitrate without giving any
special consideration to the federal policy favoring arbitration.
Under Indiana law, “[w]hether the parties agreed to
arbitrate any disputes is a matter of contract interpretation, and
10 Nos. 13-3489, 13-3490, 13-3491
most importantly, a matter of the parties' intent.” MPACT, 802
N.E.2d at 906; Wolvos v. Meyer, 668 N.E.2d 671, 675 n.1 (Ind.
1996) (when interpreting written contracts, courts seek to
ascertain the intent of the parties at the time the contract was
made as disclosed by the contract language); Brockmann v.
Brockmann, 938 N.E.2d 831, 835 (Ind. App. 2010) (the court’s
ultimate goal is to determine the parties' intent in drafting the
contract, and to effectuate that intent). Unless the terms of a
contract are ambiguous, they will be given their plain and
ordinary meaning. Brockmann, 938 N.E.2d at 834. With these
standards in mind, we assess the language of franchise
contracts.
As Steak n Shake candidly conceded at oral argument, none
of the franchise agreements contain the terms of its later-
adopted arbitration policy. Oral Argument at 4:22. Rather, each
contract contains an “option” of sorts, “reserv[ing] the right to
institute at any time a system of nonbinding arbitration[.]”
Oral Argument at 3:45 (“I think what it gives us is an option to
institute a system of arbitration.”). Each venue and dispute
resolution clause also contained a provision for litigation in
courts of competent jurisdiction, and in fact the Franchisees
were limited to resolving disputes in those courts. Steak n
Shake decided to exercise its “option” to institute a system of
nonbinding arbitration after the Franchisees had filed their
lawsuits in federal court.3 But Steak n Shake was also free
3
At that time, Steak n Shake adopted an arbitration policy that provided,
in relevant part:
(continued...)
Nos. 13-3489, 13-3490, 13-3491 11
under the terms of the franchise agreements to ignore the
arbitration provision and never adopt an arbitration policy.
“An illusory promise is a promise which by its terms makes
performance entirely optional with the promisor.” Pardieck v.
Pardieck, 676 N.E.2d 359, 364 n.3 (Ind. App. 1997). See also
Restatement (Second) of Contracts § 2 cmt. e (1981) (“Words of
promise which by their terms make performance entirely
optional with the ‘promisor’ whatever may happen, or what-
ever course of conduct in other respects he may pursue, do not
constitute a promise. Although such words are often referred
to as forming an illusory promise, they do not fall within the
present definition of promise. … Even if a present intention is
3
(...continued)
If a lawsuit is filed in which claims are based on or arise
out of a franchise agreement between the Company and a
franchisee, and the franchise agreement at issue permits
the Company to require the franchisee to participate in
nonbinding arbitration or mediation, the parties shall, at
the request of the Company, submit to nonbinding arbitra-
tion or mediation as described in the applicable franchise
agreement. … If the underlying franchise agreement
permits the Company to require participation in arbitra-
tion, the proceedings will be conducted by a single arbitra-
tor according to the then-current Commercial Arbitration
Rules of the American Arbitration Association. … All
matters relating to an arbitration will be governed by the
Federal Arbitration Act (9 U.S.C. §§ 1 et seq.) except that
the decision of the arbitrator will be nonbinding.
Druco Dkt., R. 23-1.
12 Nos. 13-3489, 13-3490, 13-3491
manifested, the reservation of an option to change that inten-
tion means that there can be no promisee who is justified in an
expectation of performance.”). Under that standard, the district
court correctly found that the franchise agreements’ arbitration
clauses were illusory because performance was “entirely
optional” with Steak n Shake. See also Penn v. Ryan’s Family
Steak Houses, Inc., 269 F.3d 753, 759–60 (7th Cir. 2001). In Penn,
which was decided under Indiana law, an arbitration company
committed itself only to providing a forum, rules and proce-
dures, and a hearing and decision based on any dispute. But
the firm did not provide any details about the nature of the
forum or standards with which its arbitrator must comply.
Instead, it retained the sole, unilateral discretion to modify or
amend its rules. We found in that instance that the arbitration
contract is “hopelessly vague and uncertain as to the obligation
… undertaken.” Because performance was entirely optional
with the promisor, we concluded that the contract was illusory.
See also Morrison v. Amway Corp., 517 F.3d 248, 254–55 (5th Cir.
2008) (finding an arbitration clause illusory and unenforceable
when the party seeking to enforce it retained the right to
unilaterally amend the policy simply by publishing notice of
amendment, where nothing in the agreement prevented that
party from eliminating arbitration entirely or restricting it to
certain claims and disputes); Dumais v. American Golf Corp., 299
F.3d 1216, 1219 (10th Cir. 2002) (joining “other circuits in
holding that an arbitration agreement allowing one party the
unfettered right to alter the arbitration agreement's existence
or its scope is illusory”); Floss v. Ryan's Family Steak Houses,
Inc., 211 F.3d 306, 315-16 (6th Cir. 2000) (concluding that
unfettered discretion in choosing the nature of an arbitral
Nos. 13-3489, 13-3490, 13-3491 13
forum combined with reservation of the right to alter the
applicable rules and procedures without any obligation to
notify or seek consent from the other party renders a promise
to provide an arbitral forum illusory). As we noted above,
Steak n Shake was free to exercise or not exercise the arbitra-
tion clause at its whim. The company also retained the discre-
tion to determine the circumstances and procedures under
which arbitration may take place, including deciding which
types of claims will be subject to arbitration. Indeed, nothing
in any franchise contract precludes Steak n Shake from
instituting a new system of nonbinding arbitration at any time,
changing the rules and procedures as the company sees fit.4
Under Indiana law, such a clause is illusory because perfor-
mance is entirely optional with the promisor. Pardieck, 676
N.E.2d at 364 n.3.
Moreover, in order to be enforceable, an agreement must be
sufficiently certain and definite in all of the essential terms so
that a court may ascertain when and whether it has been
performed. County Dept. of Public Welfare of Lake County v.
American Federation of State, County and Municipal Employees,
AFL-CIO, Indiana Council 62, 416 N.E.2d 153, 156 (Ind. App.
1981). For this reason, an “agreement to agree” is not enforce-
able under Indiana law. Wolvos, 668 N.E.2d at 674; Mays v.
4
At oral argument, Steak n Shake denied that it could institute a new
system of arbitration at any time, contending that it was bound by the terms
of Commercial Arbitration Rules of the American Arbitration Association.
But the company adopted those rules not in the franchise contracts
themselves but in its later-enacted arbitration policy. Nothing in the
franchise agreements precludes Steak n Shake from adopting a new
arbitration system or policy at any time.
14 Nos. 13-3489, 13-3490, 13-3491
Trump Indiana, Inc., 255 F.3d 351, 357–58 (7th Cir. 2001) (a mere
agreement to agree is not a binding contract under Indiana
law). But an option contract may be enforceable in certain
circumstances, and parties “may make an enforceable contract
which obligates them to execute a subsequent final written
agreement.” Id. The difference between an unenforceable
“agreement to agree” and a valid option contract depends
upon intent to be bound and definiteness of terms. Wolvos, 668
N.E.2d at 675. When parties are agreeing to strike a final deal
at a later time, “it is necessary that agreement shall have been
expressed on all essential terms that are to be incorporated” in
the final arrangement, and the final document should serve as
a “mere memorial of the agreement already reached.” Wolvos,
668 N.E.2d at 674–75 (citing 1 Arthur Linton Corbin and Joseph
M. Perillo, Corbin on Contracts § 2.8 at 133–34 (rev. ed. 1993)).
See also Mays, 255 F.3d at 358 (“the existence or nonexistence of
a contract turns on whether material terms are missing”). In
Wolvos, the Indiana Supreme Court recognized that enforcing
an incomplete or ambiguous writing created a substantial
danger that a court would enforce something neither party
intended. Uncertainty in important contract terms might
indicate that the parties did not intend to be bound, although
parties might expect that more minor items would be left to the
discretion of one party or to customary practice. 668 N.E.2d at
675. The court in Wolvos evaluated an option contract by
assessing whether it was vague and uncertain in important
terms, and whether it contained essential terms in language
precise enough that neither party could reasonably misunder-
stand them. Wolvos, 668 N.E.2d at 675 (citing Burk v. Mead, 64
N.E. 880 (Ind. 1902)).
Nos. 13-3489, 13-3490, 13-3491 15
Applying that reasoning to the Steak n Shake arbitration
clauses, we conclude that the clauses are simply too vague and
indefinite to be enforceable. The franchise contracts left to
Steak n Shake’s sole discretion the very important issues of
whether and how any claims would be arbitrated, as well as
which disputes would be subject to arbitration. The company
interpreted its discretion so broadly that it sought to apply its
newly-created arbitration policy retroactively to litigation that
was pending before Steak n Shake implemented the policy.
Moreover, there is no indication that the arbitration policy
ultimately adopted by Steak n Shake simply memorialized the
terms of an agreement that had already been reached. To the
contrary, none of the franchise agreements express with any
specificity whether and how an arbitration policy would be
implemented. An agreement allowing a company to reserve
the right to institute (or not institute, at its sole discretion) “at
any time a system of nonbinding arbitration,” without setting
forth any of the key terms and conditions for the arbitration
system is simply too vague and indefinite to be enforceable
under Indiana law. Wolvos, 668 N.E.2d at 674–75; Penn, 269
F.3d at 759 (a contract is unenforceable if it is so indefinite and
vague that the material provisions cannot be ascertained).
Because performance of the agreement to arbitrate was
“entirely optional with the promisor,” and because the terms
of the arbitration clauses in the franchise contracts were so
vague and indefinite that the material terms could not be
ascertained, Steak n Shake has failed to demonstrate the
existence of valid agreements to arbitrate with any of the
Franchisees. As the district court also correctly held, there is no
16 Nos. 13-3489, 13-3490, 13-3491
basis to stay the litigation on the Brunswick Agreement, which
contains no arbitration provision.
III.
The district court correctly denied Steak n Shake’s motions
to stay the pending litigation and to compel arbitration.
Because we conclude that the district court was correct in
finding that the arbitration clauses are illusory and unenforce-
able under Indiana law, we need not address whether the
disputes were within the scope of the arbitration agreements
or whether nonbinding arbitration fits within the definition of
arbitration under the FAA.
AFFIRMED.