Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—S.D. Ind.: Wrongful termination action stayed pending appeal of arbitration denial, (Jan 29, 2014)

By John W. Arden, J.D., LL.M.

A declaratory judgment action brought by Steak n Shake franchisees against its franchisor—regarding whether violation of certain franchisor policies constituted cause for termination—was stayed by the federal district court in Indianapolis, pending appeal of an earlier denial of a motion to compel arbitration (Druco Restaurants, Inc. v. Steak n Shake Enterprises, Inc., January 23, 2014, McKinney, L.).

Three franchisees individually sued Steak n Shake, seeking a declaratory judgment on whether violation of some of the franchisor’s policies constituted cause for termination and alleging breach of contract, fraud, and violation of franchise laws. In each case, the franchisor moved to stay the action and to compel the franchisees to participate in non-binding arbitration, as provided by the franchise agreements. In each case, the court denied the motion for multiple reasons. One of those reasons was that the non-binding nature of the arbitration provided for in the franchise agreements brought the provisions outside of the Federal Arbitration Act (FAA). The franchisor appealed these rulings to the Seventh Circuit.

On the motion to stay pending appeal, the franchisor argued that (1) absent the stay, the point of the appeal would be defeated, (2) Seventh Circuit case law demands that the district court stay the proceeding, and (3) the issue presented—whether non-binding arbitration is subject to the mandatory stay provisions of the FAA—was a novel one for the Seventh Circuit. The franchisees argued that the district court’s decision that non-binding arbitration is not subject to the FAA did not divest the court of jurisdiction while the appeal is pending.

The district court concluded that a stay pending appeal was proper. As the franchisor pointed out, the question was not whether the franchisor showed a powerful reason why the district court must halt proceedings, but whether there was any good reason why the district court may carry on once an appeal has been filed. The filing of a notice of appeal is an event of jurisdictional significance that confers jurisdiction on the court of appeals and divests the district court of control over those aspects of the case involved in the appeal.

In this case, the franchisees simply failed to show that there was any good reason for the district court to proceed while the Seventh Circuit is considering the fundamental issue of whether the court proceedings are proper under the franchise agreements, according to the district court.

The case is No. 1:13-cv-00560-LJM-DML, No. 1:13-cv-00654-LJM-DML, and No. 1:13-cv-00655-LJM-DML.

Attorneys: Irwin B. Levin (Cohen & Malad LLP) for Druco Restaurants, Inc. Fredric A. Cohen (Cheng Cohen LLC) for Steak n Shake Enterprises, Inc.

Companies: Druco Restaurants, Inc.; Steak n Shake Enterprises, Inc.

Cases: FranchisingDistribution IndianaNews