In 2010, Steak 'n Shake, a franchisor of hamburger restaurants, adopted new pricing and promotion policies that required all franchisees to follow company mandated pricing on every menu item and to participate in all promotions mandated by the franchisor.

Three franchisees resisted this policy, claiming that all Steak 'n Shake franchisees enjoyed the right to set their own menu prices and participate in corporate pricing promotions at their option since 1939. They sued the franchisor in federal court.

One month later, Steak 'n Shake adopted an arbitration policy requiring franchisees to engage in non-binding arbitration of all disputes at Steak 'n Shake's request. Then Steak 'n Shake moved to stay the federal lawsuit and compel arbitration based on a provision in its franchise agreement that granted Steak 'n Shake the right to initiate a system of non-binding arbitration and mediation at any time.

The court denied Steak 'n Shake's motion, holding that the arbitration clause was illusory and unenforceable because there was no limit on Steak 'n Shake's ability to arbitrate at its whim and, as a result, it was purely optional. An illusory promise is one that makes performance entirely optional with the promisor.

On appeal, Steak 'n Shake argued that the arbitration provision was not illusory. The appellate court disagreed, holding that Steak 'n Shake did not satisfy an essential requirement needed to compel arbitration: a clear agreement to arbitrate. The appellate court found the arbitration agreement was illusory because performance of the arbitration provision was optional to Steak 'n Shake and the provisions were so vague and indefinite that the material terms could not be determined.

All parties can benefit from reviewing the franchise agreement's arbitration provisions to determine whether to proceed in a dispute through litigation or arbitration. Though an agreement may require arbitration, if its terms are illusory or ambiguous, it may be possible to pursue claims in court.

For more information, click: Appellate Court's opinion for Steak 'n Shake Enterprises, Inc.