Scott's S&S Incorporated v. Steak N Shake Enterprises, Inc, 765 F.3d 776

Background

Steak n Shake franchised restaurants to multiple franchisees (Druco, PSPC, Scott’s); one older PSPC contract (Brunswick) lacked any arbitration clause.
Franchise agreements reserved Steak n Shake’s unilateral “right to institute at any time a system of nonbinding arbitration or mediation,” while also specifying litigation in certain Indiana courts.
After franchisees sued in federal court seeking a declaratory judgment that they could set prices and decline corporate promotions, Steak n Shake adopted a company arbitration policy and moved to stay litigation and compel nonbinding arbitration.
The district court denied the stay and refused to compel arbitration, concluding the arbitration reservation was illusory and unenforceable under Indiana law, and that the policy did not apply retroactively to pending suits.
On appeal, Steak n Shake argued the clauses were enforceable, applied to pending disputes, and that nonbinding arbitration falls under the FAA; the Seventh Circuit reviewed de novo and affirmed.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether franchise clauses created binding arbitration agreements	Franchisees: clauses only reserved a unilateral option; no mutual agreement to arbitrate	Steak n Shake: reservation plus later policy created enforceable arbitration agreement, applying FAA policy favoring arbitration	Held: Clauses were illusory/vague under Indiana law and not enforceable; no valid agreement to arbitrate
Whether Steak n Shake’s post‑suit arbitration policy applies retroactively to pending suits	Franchisees: company cannot retroactively force arbitration where no binding agreement existed	Steak n Shake: adopted policy can be applied to suits filed before policy adoption if contract permits	Held: No need to reach because clauses were unenforceable; district court alternatively found policy didn’t apply to pending suits
Whether nonbinding arbitration qualifies as "arbitration" under the Federal Arbitration Act	Franchisees: nonbinding process may not satisfy FAA requirements	Steak n Shake: nonbinding arbitration falls within FAA’s scope	Held: Court did not decide because no enforceable arbitration agreement existed; district court had held it did not qualify
Whether a reservation to “institute at any time” is an enforceable option vs. an unenforceable agreement to agree	Franchisees: phrase makes performance entirely optional—illusory promise	Steak n Shake: language creates an option that can be enforced; FAA favors arbitration	Held: Under Indiana law the reservation rendered the promise illusory and too indefinite to enforce

Key Cases Cited

Gore v. Alltel Communications, LLC, 666 F.3d 1027 (7th Cir.) (standard of review for arbitration motions)
Lumbermens Mut. Cas. Co. v. Broadspire Mgmt. Servs., Inc., 623 F.3d 476 (7th Cir.) (standard of review for arbitration decisions)
Zurich American Ins. Co. v. Watts Indus., Inc., 466 F.3d 577 (7th Cir.) (elements to compel arbitration)
First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (U.S.) (arbitration is contractual; state law governs formation)
Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52 (U.S.) (FAA policy applies to interpretation/scope, not existence, of an arbitration agreement)
Volt Info. Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ., 489 U.S. 468 (U.S.) (FAA requires enforcement of privately negotiated arbitration agreements like other contracts)
Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (U.S.) (FAA makes arbitration agreements as enforceable as other contracts)
MPACT Constr. Group, LLC v. Superior Concrete Constructors, Inc., 802 N.E.2d 901 (Ind.) (Indiana law: intent and contract interpretation govern whether parties agreed to arbitrate)
Penn v. Ryan’s Family Steak Houses, Inc., 269 F.3d 753 (7th Cir.) (unilateral discretion to change arbitration procedures can render clause illusory)
Wolvos v. Meyer, 668 N.E.2d 671 (Ind.) (Indiana: difference between enforceable option contract and unenforceable agreement to agree)
Pardieck v. Pardieck, 676 N.E.2d 359 (Ind. App.) (illusory promise defined as performance entirely optional with promisor)
Morrison v. Amway Corp., 517 F.3d 248 (5th Cir.) (unilateral amendment rights render arbitration clauses illusory)
Dumais v. American Golf Corp., 299 F.3d 1216 (10th Cir.) (same principle on illusory arbitration clauses)
Floss v. Ryan’s Family Steak Houses, Inc., 211 F.3d 306 (6th Cir.) (unfettered discretion in defining arbitral forum renders clause illusory)