The Franchise Memorandum

A federal court in Indiana has granted a franchisor’s motion to stay proceedings in three related lawsuits pending appeal to the Seventh Circuit. Druco Rests., Inc. v. Steak n Shake Enters., 2014 U.S. Dist. LEXIS 8198 (S.D. Ind. Jan. 23, 2014). Three franchisees had filed separate lawsuits against Steak n Shake (“SNS”) alleging breach of contract, fraud, and violations under their respective state franchise laws. After SNS sought to stay all three actions and compel arbitration, the trial court concluded the respective agreements contained only “nonbinding” arbitration provisions and, for that reason, were not controlled by the mandatory stay provisions of the Federal Arbitration Act.

SNS appealed the court’s decision to the Seventh Circuit and requested that the trial court stay proceedings until the appeal could be decided. The court granted the stay, noting that the franchisees had not shown any good reason for the trial court to proceed with the underlying actions while the Seventh Circuit considered the fundamental issue of whether the trial court had jurisdiction over the claims in the first place. The court further noted that because the nonbinding nature of the franchise agreements’ arbitration provision was an issue of first impression, the reasoning against asserting simultaneous jurisdiction with the court of appeals was all the more compelling.