You Might Be Able to Avoid Forced Arbitration, Even in 2014

October 06, 2014

The Seventh Circuit has recently upheld litigants’ rights to pursue their claims in court rather than in arbitration in two cases: Druco Restaurants, Inc. v. Steak ‘n Shake Enterprises, Inc. et al., No. 13-3489, 2014 U.S. App. LEXIS 16869 (7th Cir. Aug. 29, 2014) and Jackson et al. v. Payday Financial, LLC, et al., No-12-2617, 2014 U.S. App. LEXIS 16257 (7th Cir. Aug. 22, 2014).

In Druco, plaintiffs were several Steak ‘n Shake franchisees who sued the franchisor, seeking a declaratory judgment that certain pricing and promotional policies should not be enforced. Druco, 2014 U.S. App. LEXIS 16869 at *3-4. The franchise agreements contained provisions that stated that Steak ‘n Shake “reserved the right to institute at any time a system of Stean N Shakenonbinding arbitration or mediation.” Id. at *4. Approximately a month after the franchisees had filed suit, Steak ‘n Shake adopted a policy by which it could require the franchisee to engage in non-binding arbitration at Steak ‘n Shake’s request. Id. Pursuant to this policy, Steak ‘n Shake sought an order compelling the franchisees to arbitration. Id. The District Court denied Steak ‘n Shake’s request, holding the arbitration “agreement” to be illusory – finding no limit on Steak ‘n Shake’s ability to demand or avoid arbitration. Id. at *5. The District Court further held that even if Steak ‘n Shake had the ability to institute an arbitration policy any time it wanted, such a policy could not be applied to already pending suits. Id. The Court finally held that the non-binding arbitration permitted by the Steak ‘n Shake policy was not “arbitration” under the Federal Arbitration Act (“FAA”). Id.

Steak ‘n Shake appealed, arguing that the agreement to arbitrate was not illusory, that the policy could be applied to suits pending at the time of adoption, and that non-binding arbitration falls within the FAA’s definition of arbitration. The appellate court applied Indiana law to determine whether there was an agreement to arbitrate. Id. *10-11. Because the performance of the arbitration clause was entirely optional on the part of Steak ‘n Shake, the agreement was deemed illusory. See, e.g., id. at *15 (“nothing in the any franchise contract precludes Steak ‘n Shake from instituting a new system of non-binding arbitration at any time, changing the rules and procedures as the company sees fit.”). The Seventh Circuit also held that the arbitration clauses were “too vague and indefinite to be enforceable.” Id. at *17. Having determined the arbitration agreements to be illusory, the Court of Appeals declined to decide whether the disputes were within the scope of the arbitration provisions or whether non-binding arbitration is covered by the FAA. Id. at *19.

In Jackson, the Seventh Circuit considered the question of whether an arbitration agreement requiring that all disputes be resolved through arbitration conducted by the Cheyenne River Sioux Tribe on its reservation, located in South Dakota, is enforceable. See 2014 U.S. App. LEXIS at *2. See also. Plaintiffs applied to the defendant loan entities through those entities’ websites. Id. at *4. The loan agreements indicated that plaintiffs would pay 139% interest annually. Id. The loan agreements also stated that the loan agreements were “governed by the Indian Commerce Clause of the Constitution of the United States of America and the laws of the Cheyenne River Sioux Tribe” and “not subject to the laws of any state.” Id. The agreements contained arbitration provisions providing that any disputes were to be “resolved by Arbitration, which shall be conducted by the Cheyenne River Sioux Tribal Nation by an authorized representative in accordance with its consumer dispute rules and the terms of this Agreement.” Id. at *4-5. Initially, plaintiffs sued in Illinois state court, the action was removed to federal court, and defendants sought dismissal for improper venue, arguing that the disputes must be resolved in arbitration. Id. at *6. The District Court dismissed on venue grounds and plaintiffs appealed. Id. at *7. The Court of Appeals held that some issues needed to be resolved by the District Court before the appellate court could determine proper venue; namely, “whether the Cheyenne River Sioux Tribe has applicable tribal law available to the public and, if so, under what conditions”; and (2) “whether the Cheyenne River Sioux Tribe has an authorized arbitration mechanism available to the parties and whether the arbitrator and method of arbitration required under the contract is actually available.” Id. The District Court held that the tribal law was available, but that “the intrusion of the Cheyenne River Sioux Tribal Nation into the contractual arbitration provision appear[ed] to be merely an attempt to escape otherwise applicable limits on interest charges. As such, the promise of a meaningful and fairly conducted arbitration [wa]s a sham and an illusion.” Id. at *8 (internal citations omitted).

Following the District Court’s decision, the Court of Appeals considered the enforceability of the forum selection clause, deciding that enforcement would be unreasonable. Id. at *24. The record clearly established that the forum selected did not actually exist. Id. The court further held the forum selection clauses procedurally and substantively unconscionable. Id. at *29. The court stated:

The arbitration clause here is void not simply because of a strong possibility of arbitrator bias, but because it provides that a decision is to be made under a process that is a sham from stem to stern. . . . The arbitrator is chosen in a manner to ensure partiality, but, beyond this infirmity, the Tribe has no rules for the conduct of the procedure. It hardly frustrates FAA provisions to void an arbitration clause on the ground that it contemplates a proceeding for which the entity responsible for conducting the proceeding has no rules, guidelines, or guarantees of fairness.

 Id. at *33 (emphasis in original).

Neither the result in Druco nor Jackson should be shocking, but it has seemed in recent years that courts go to great lengths to enforce arbitration agreements at all costs. However, if a litigant can show that the arbitration agreement is illusory, either because the option of arbitration is simply at the whim of the company, or because the procedure the policy envisions is a complete sham, he or she might just get his or her day in court–even in 2014.


Photo Credit: Tim Psych


Your Comment