## Facts

- Volkswagen of America, Inc. entered a set of related agreements with Sud’s of Peoria, Inc. to operate a Volkswagen dealership and to relocate and construct a new facility.
- The Facility Construction Agreement imposed construction specifications and deadlines and required arbitration in Michigan for “any dispute concerning any matter arising under this Agreement.”
- A separate Capital Loan Agreement provided a $500,000 loan for construction, set repayment terms, accelerated repayment upon breach of the Construction Agreement, and contained no arbitration clause and no express incorporation of the Construction Agreement’s arbitration clause.
- A Performance Incentive Program agreement provided bonuses tied to compliance with dealership obligations; a Construction Agreement breach disqualified the dealer from incentives.
- A Franchise Agreement governed dealership operations, including a requirement to install a Volkswagen nameplate.
- Volkswagen sued in federal court (diversity) for breaches of the Construction Agreement, Loan Agreement, Franchise Agreement, and related incentive obligations.
- Sud’s moved under the Federal Arbitration Act (FAA) to stay the entire case pending arbitration based on the Construction Agreement’s arbitration clause.
- The district court stayed only the Construction Agreement claims (and certain construction-dependent incentive claims) and refused to stay the Loan Agreement and Franchise Agreement claims.

## Issues

1. Whether an arbitration clause limited to disputes “arising under” the Construction Agreement required a stay of all claims, including claims under separate loan and franchise contracts.
2. Whether the Motor Vehicle Franchise Contract Arbitration Fairness Act of 2002 barred arbitration of the franchise disputes absent written post-dispute consent by both parties.
3. Whether FAA § 3 requires a stay of the entire action when some, but not all, claims are arbitrable.

## Decision

- The Seventh Circuit affirmed the district court’s order granting only a partial stay.
- The court held that the “arising under” arbitration clause covered only disputes whose rights and duties derived from the Construction Agreement, plus closely construction-dependent incentive disputes.
- The court held that Loan Agreement claims were not subject to arbitration because the Loan Agreement was a separate contract that did not adopt or incorporate the Construction Agreement’s arbitration provision.
- The court held that franchise-related claims were not stayed because the Motor Vehicle Franchise Contract Arbitration Fairness Act required mutual written consent to arbitrate after the dispute arose, which was not present.
- The court held that FAA § 3 permits staying only those issues referable to arbitration and does not mandate staying non-arbitrable claims.

## Legal Principles

- An arbitration clause limited to disputes “arising under” an agreement is construed narrowly and generally reaches only disputes grounded in that agreement’s rights and obligations, not all disputes factually connected to the parties’ relationship.
- Courts will not compel arbitration of disputes under a separate contract lacking an arbitration clause absent clear evidence (such as express incorporation) that the parties intended arbitration to apply.
- Under FAA § 3, a court must stay proceedings only “upon any issue referable to arbitration,” permitting partial stays when some claims are arbitrable and others are not.
- In motor vehicle franchise disputes, the Motor Vehicle Franchise Contract Arbitration Fairness Act conditions enforceability of arbitration on both parties’ written post-dispute consent, limiting enforcement of pre-dispute arbitration provisions for such controversies.

## Conclusion

The Seventh Circuit upheld a partial stay: construction-based disputes subject to the Construction Agreement’s narrow “arising under” arbitration clause were stayed for arbitration, while separate loan claims and franchise claims proceeded in court because the loan contract did not incorporate arbitration and franchise arbitration required mutual post-dispute written consent.


Volkswagen of Am., Inc. v. Sud's of Peoria, Inc., 474 F.3d 966 (7th Cir. 2007)