Volkswagen of America v. Sud’s of Peoria

In 2003, car dealer Sud’s of Peoria, Inc. (dealership) (defendant) contracted with Volkswagen of America, Inc. (VW) (plaintiff) to sell VW vehicles. The parties entered three agreements. The Facility Construction Agreement required the dealership to construct a showroom following VW’s approved design before an agreed-upon completion date and included an arbitration provision for resolving disputes. The Capital Loan Agreement set out terms for VW’s loan to the dealership for construction. The loan agreement stated that breach of the construction agreement made the loan fully payable. The Performance Incentive Program agreement allowed the dealership to earn annual bonuses for compliance with VW’s franchise agreement governing the operations of the dealership that all franchisees, including VW, were required to abide by. A breach of the construction agreement by the dealership meant that the dealership was disqualified from the incentives. The dealership failed to comply with the construction agreement and failed to make its loan payments. The dealership also failed to install a VW nameplate at the dealership in violation of the franchise agreement. The dealership was thus deemed disqualified for incentives. VW filed suit for breach of contract in district court. The dealership s filed a motion to stay the proceedings, requesting enforcement of the arbitration provision. The district court granted the stay for all claims arising out of the construction agreement that included the arbitration provision and the incentive agreement that was breached by the violation of the construction agreement. The loan agreement did not incorporate the construction agreement, so claims for breach of the loan were not stayed. Breach of the franchise agreement, based on VW’s nameplate, was not stayed because the Motor Vehicle Franchise Contract Arbitration Fairness Act of 2002 (Fairness Act) required both parties to agree to arbitrate a franchise agreement violation after the dispute arose, and only the dealership had agreed. The dealership appealed, arguing that the district court was required to stay all proceedings.