Volkswagen of America, Inc. v. Sud's of Peoria, Inc. ( 2007 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 05-3276
VOLKSWAGEN OF AMERICA,
INCORPORATED,
Plaintiff-Appellee,
v.
SUD’s OF PEORIA, INCORPORATED,
doing business as VOLKSWAGEN
and SUD’S AUDI, an Illinois
Corporation, GIAN C. SUD, an
Illinois Resident, HARISH C. SUD,
an Illinois Resident, et al.,
Defendants-Appellants.
____________
Appeal from the United States District Court
for the Central District of Illinois.
No. 04 C 1306—Joe Billy McDade, Judge.
____________
ARGUED MAY 8, 2006—DECIDED JANUARY 29, 2007
____________
Before BAUER, RIPPLE and ROVNER, Circuit Judges.
RIPPLE, Circuit Judge. Volkswagen of America, Inc.
(“Volkswagen”) brought this diversity action against one
of its car dealerships, Süd’s of Peoria, Inc. (“Süd’s”), for
breach of contract. Invoking the Federal Arbitration Act,
9 U.S.C. §§ 1-16, Süd’s moved to stay the entire action
2 No. 05-3276
pending arbitration. The district court denied the motion
in part; Süd’s now has appealed. See id. § 16. For the rea-
sons set forth in the following opinion, we affirm the
judgment of the district court.
I
BACKGROUND
A. Facts
In the summer of 2003, Süd’s, through its three prin-
cipal owners, contracted with Volkswagen to open an
authorized Volkswagen vehicle dealership. At the time
negotiations began, Süd’s was conducting its operations in
a vehicle showroom in Peoria, Illinois. In the 2003 agree-
ment, in exchange for the right to sell Volkswagen auto-
mobiles, Süd’s agreed to redesign its existing facility
according to Volkswagen’s uniform design specifications.
Additionally, the parties’ arrangement contemplated that
Süd’s soon would move its operations to a new site in
nearby Pekin, Illinois.
The parties signed three additional agreements. First,
a “Facility Construction Agreement” (“Construction Agree-
ment”) outlined a timetable and general design specifica-
tions for the construction of the new facility. According
to the terms of the Construction Agreement, Süd’s had
twenty-one months from the date on which it acquired
the new property to complete construction of the facility
and have it ready for use. The agreement set intermediate
deadlines for Süd’s to complete a land survey, to prepare
design plans and to furnish a warranty deed for the new
property. The Construction Agreement also contained the
following arbitration clause:
No. 05-3276 3
In the event of any dispute concerning any matter
arising under this Agreement, the parties consent to
mandatory binding arbitration to be held in Oakland
County, Michigan, under the auspices of a nationally
recognized arbitration service reasonably mutually
acceptable to the parties.
R.5, Ex.F at 5.
The parties also entered into a financing arrangement
to fund construction of the new facility. Under the terms
of a “Memorandum of Understanding-Capital Loan Agree-
ment” (the “Loan Agreement”), Volkswagen agreed to
extend to Süd’s a $500,000 loan at an interest rate of 4.25%.
In paragraph two of the Loan Agreement, Süd’s, in turn,
promised to service the loan with monthly interest pay-
ments and to repay the principal in five annual install-
ments of $100,000 due at the end of each year. In para-
graph four of the Loan Agreement, Süd’s also agreed to
execute and comply fully with the terms of the Construc-
tion Agreement. Failure to do so, the provision stated,
required immediate repayment of the loan balance and
accumulated interest.
Lastly, the parties agreed to a “Performance Incentive
Program” (the “Incentive Program”), which allowed
Süd’s to earn five, annual “incentive” payments of $100,000
from Volkswagen, in addition to a $60,000 bonus incen-
tive at the end of the five-year period. The incentive
payments were timed to coincide with Süd’s loan obliga-
tions so that Süd’s could use its yearly $100,000 earned
incentive to make its annual, $100,000 loan payment. To
earn the incentives, Süd’s was required to comply with
the minimum requirements of the Volkswagen Dealer
Operating Standards, a component of the parties’ franchise
agreement that governed the general design and operations
4 No. 05-3276
of authorized Volkswagen dealerships. Additionally, the
earning of incentives depended on Süd’s execution of,
and full compliance with, the Construction Agreement. If
Süd’s violated the Construction Agreement in year one, it
would not earn the incentive payment for that year and
also would be disqualified from earning future payments.
As construction of the new facility began, Volkswagen paid
Süd’s a $20,000 advance to be earned later under the
Incentive Program.
B. District Court Proceedings
On September 7, 2004, Volkswagen filed this diversity
action for breach of contract against Süd’s and its three
principal owners, each of whom had executed guarantees
on Süd’s performance. After several failed attempts to
resolve their differences amicably, Volkswagen filed an
amended complaint on March 11, 2005, reasserting its
breach of contract claims. At the heart of the complaint
were allegations that Süd’s had failed to meet the time line
set forth in the parties’ Construction Agreement; Süd’s
allegedly did not begin construction on time, failed to
acquire property for the new facility and did not tender
the construction plans required by that agreement. Ac-
cording to Count I of the complaint, this breach of the
Construction Agreement placed Süd’s in default of its loan
obligations; Count I also asserted, in the alternative, that
Süd’s had defaulted on its loan obligations by failing
to remit its first annual payment on time. Volkswagen
sought full repayment of the $500,000 loan principal.
Count II of the complaint alleged breach of the Incentive
Program and sought recovery of the $20,000 advance.
According to Count II, Süd’s had violated the Incentive
No. 05-3276 5
Program in two ways. First, Süd’s allegedly had disquali-
fied itself from earning incentives by violating the terms
of the Construction Agreement. Second, Süd’s allegedly
had not complied with the franchise agreement’s Dealer
Operations Standards, a precondition to receiving incen-
tives, because it failed “to order, install, or display at its
current dealership premises a Volkswagen facade dealer
nameplate that complies with [Volkswagen’s] current
corporate identity standards.” R.17 at 8.
Relying upon the Construction Agreement’s arbitration
provision, Süd’s notified Volkswagen of its intent to sub-
mit the matter to arbitration. It then moved, under the
FAA, to stay the action in the district court pending an
arbitrator’s resolution of the dispute. The district court
granted the motion in part and denied it in part. Address-
ing Count I of Volkswagen’s complaint—breach of the
Loan Agreement—the court stayed the issues related to
Süd’s compliance with the Construction Agreement
because of that contract’s arbitration clause. However, the
court refused to stay the question of whether Süd’s had
made its loan payments on time. In the court’s view, the
Loan Agreement did not provide for arbitration and did
not incorporate the Construction Agreement’s arbitration
clause for matters unrelated to construction.
With respect to Count II—breach of the Incentive
Program—the court also stayed one issue but not the other.
The court held that failure to install a dealer nameplate
was non-arbitrable because the Motor Vehicle Franchise
Contract Arbitration Fairness Act of 2002 (“Fairness Act”),
15 U.S.C. § 1226, requires the parties to arbitrate disputes
only if both parties assent to arbitration after a con-
troversy arises under a dealer franchise agreement. The
district court held that the nameplate issue arose under a
6 No. 05-3276
franchise agreement within the meaning of the statute.
Because only Süd’s, not Volkswagen, had agreed to
proceed to arbitration after the dispute had arisen, the
issue could not be sent to arbitration. With respect to the
alternate theory, however, the court held that Volks-
wagen’s theory that Süd’s had breached the Incentive
Program because it failed to comply with the Construc-
tion Agreement was arbitrable because of the Construc-
tion Agreement’s arbitration clause.
In short, all issues related to Süd’s performance of the
Construction Agreement were stayed pending arbitra-
tion, but the balance of the case was set to move forward
in the district court.
II
DISCUSSION
A.
The Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 1-16,
provides the starting point for our analysis. The FAA
was enacted in 1925 against the backdrop of “centuries
of judicial hostility to arbitration agreements.” Shearson/
American Express, Inc. v. McMahon, 482 U.S. 220, 225 (1987)
(internal quotation marks omitted). This hostility was a
vestige of the English common law, in which courts,
protective of their own jurisdiction, had refused to en-
force specific agreements to arbitrate; this practice per-
sisted in the United States well into the twentieth century.
Eventually, Congress reversed the common law trend
and, in enacting the FAA, attempted “to place arbitration
agreements ‘upon the same footing as other contracts.’”
Scherk v. Alberto-Culver Co., 417 U.S. 506, 511 (1974) (quot-
No. 05-3276 7
ing H.R. Rep. No. 96, at 1, 2 (1924)). The FAA accom-
plishes this goal by providing that binding arbitration
agreements “shall be valid, irrevocable, and enforceable,
save upon such grounds as exist at law or in equity for
the revocation of any contract.” 9 U.S.C. § 2. Thus, if one
party to a contract containing an arbitration clause at-
tempts to avoid arbitration and files suit in the district
court, the other party may move to stay or dismiss the
action on the ground that the FAA requires the arbitration
clause of the contract to be enforced. See id. § 3 (authorizing
a motion to stay); id. § 4 (authorizing a petition to com-
pel arbitration).
Although reflecting a “liberal federal policy favoring
arbitration agreements,” Moses H. Cone Mem’l Hosp. v.
Mercury Constr. Corp., 460 U.S. 1, 24 (1983), the FAA’s
purpose is not to provide special status for such agree-
ments. Rather, it makes “arbitration agreements as en-
forceable as other contracts, but not more so.” Prima Paint
Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404 n.12
(1967). The Supreme Court has made clear that
“[a]rbitration under the Act is a matter of consent, not
coercion and the parties are generally free to structure
their arbitration agreements as they see fit” and “may
limit by contract the issues which they will arbitrate.” Volt
Info. Scis., Inc. v. Bd. of Trs. of Leland Stanford Junior Univ.,
489 U.S. 468, 479 (1989). “[T]he federal policy is simply
to ensure the enforceability, according to their terms, of
private agreements to arbitrate.” Id. at 476.
In its brief before this court, Süd’s submits that the
district court, having determined that certain issues are
arbitrable, was “require[d]” to stay proceedings in their
entirety pending arbitration. See Appellants’ Br. at 13. In
8 No. 05-3276
support of this theory, Süd’s first relies upon § 3 of the
FAA, which provides that,
upon any issue referable to arbitration under an
agreement in writing for such arbitration, the court in
which such suit is pending, upon being satisfied that
the issue involved in such suit or proceeding is refer-
able to arbitration under such an agreement, shall on
application of one of the parties stay the trial of the
action until such arbitration has been had in accor-
dance with the terms of the agreement . . . .
9 U.S.C. § 3.
For arbitrable issues, a § 3 stay is mandatory. See
McMahon, 482 U.S. at 226 (“[A] court must stay its pro-
ceedings if it is satisfied that an issue before it is
arbitrable . . . .”) (emphasis added)); Merit Ins. Co. v.
Leatherby Ins. Co., 581 F.2d 137, 142 (7th Cir. 1978) (“If the
agreement to arbitrate is valid the court has no further
power or discretion to address the issues raised in the
complaint but must order arbitration . . . .”).
For remaining non-arbitrable issues, however, the
FAA does not give courts express guidance on how to
proceed. To fill this gap in the statute, Süd’s proposes a
rule that would require the district court to stay the
entire case whenever it finds at least one arbitrable issue.
Interestingly, although Süd’s does not point us there,
the literal language of the FAA, read in isolation, might
provide some support for such a theory: Section 3 states
that the court shall “stay the trial of the action”—not just a
part of the action—if the suit is “brought upon” an arbitra-
ble issue. 9 U.S.C. § 3 (emphasis added).
The courts, however, generally have not interpreted § 3
in this fashion. As we have remarked previously, “the
No. 05-3276 9
cases, perhaps concerned lest the tail wag the dog, treat the
question whether to stay the entire case as discretionary
in cases involving both arbitrable and nonarbitrable
issues.” Pryner v. Tractor Supply Co., 109 F.3d 354, 361 (7th
Cir. 1997) (citing cases and secondary sources). The Fourth
Circuit similarly has embraced this view in American
Recovery Corp. v. Computerized Thermal Imaging, Inc., 96 F.3d
88 (4th Cir. 1996):
Enforcement of agreements to arbitrate under the
Federal Arbitration Act may require piecemeal litiga-
tion, see Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213,
221 (1985), and the decision to stay the litigation of
non-arbitrable claims or issues is a matter largely
within the district court’s discretion to control its
docket, Moses H. Cone Mem. Hosp., 460 U.S. at 20 n.23;
Summer Rain v. Donning Co./Publishers, Inc., 964 F.2d
1455, 1461 (4th Cir. 1992). Therefore, we leave this
issue for the district court to resolve on remand.
Id. at 97 (parallel citations omitted); see also Klay v. All
Defendants, 389 F.3d 1191, 1204 (11th Cir. 2004) (“When
confronted with litigants advancing both arbitrable and
nonarbitrable claims . . . courts have discretion to stay
nonarbitrable claims.”); McCarthy v. Azure, 22 F.3d 351,
361 & n.15 (1st Cir. 1994) (holding that a party is not
“entitled as of right to an order staying litigation of all—or
even most of—[its] claims,” although noting that, “[o]f
course, the district court in its discretion could stay litiga-
tion of nonarbitrable claims pending the outcome of an
arbitration proceeding” (emphasis added)).
The Supreme Court has indicated its support for this
interpretation of § 3 on at least two occasions. In Dean
Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 221 (1985), the
Court was untroubled by the prospect of “piecemeal”
10 No. 05-3276
litigation resulting from the stay of some issues but not
others. “The preeminent concern of Congress in passing
the Act was to enforce private agreements into which
parties had entered, and that concern requires that we
rigorously enforce agreements to arbitrate, even if the
result is ‘piecemeal’ litigation, at least absent a countervail-
ing policy manifested in another federal statute.” Id.
Similarly, in Moses H. Cone Memorial Hospital, the Court
noted that, at the district court’s discretion, litigation
may proceed against parties who were not subject to the
arbitration agreement, even though claims against the
arbitrating parties have been stayed. See 460 U.S. at 20 &
n.23. “That decision,” the Court held, “is one left to the
district court (or to the state trial court under applicable
state procedural rules) as a matter of its discretion to
control its docket.” Id. at 20 n.23.
An exception to this rule has been recognized when
staying arbitrable issues, while allowing nonarbitrable
issues to proceed in the district court, risks “inconsistent
rulings” because the pending arbitration is “likely to
resolve issues material to [the] lawsuit.” AgGrow Oils,
L.L.C. v. Nat’l Union Fire Ins. Co. of Pittsburgh, 242 F.3d
777, 783 (8th Cir. 2001). The factors that bear on this in-
quiry include “the risk of inconsistent rulings, the extent
to which parties will be bound by the arbitrators’ deci-
sion, and the prejudice that may result from delays.” Id.
When these factors weigh in favor of staying the entire
action pending arbitration, the district court may abuse
its discretion in allowing the nonarbitrable issues to pro-
ceed absent a stay. In many instances, moreover, district
courts actually may prefer to stay the balance of the case
in the hope that the arbitration might help resolve, or at
least shed some light on, the issues remaining in federal
No. 05-3276 11
court. See, e.g, Hikers Indus. v. William Stuart Indus., 640
F. Supp. 175, 178 (S.D.N.Y. 1986).
Our decision in Morrie Mages & Shirlie Mages Foundation
v. Thrifty Corp., 916 F.2d 402 (7th Cir. 1990), abrogated on
other grounds, IDS Life Ins. Co. v. SunAmerica, Inc., 103 F.3d
524, 530 (7th Cir. 1990), provides helpful guidance on this
matter. In that case, we held that a district court’s refusal
to stay nonarbitrable issues pending the arbitration of
related, arbitrable issues constituted an abuse of discretion.
The buyer and seller to a corporate transaction had been
ordered to arbitrate a controversy arising out of their
purchase agreement, which contained an arbitration clause.
The buyer’s guarantor also was implicated in the lawsuit
but had not executed a similar arbitration provision in its
agreement to guarantee the buyer’s performance. Refusing
the guarantor’s motion to stay its litigation with the buyer
pending the result of the buyer-seller arbitration, the
district court reasoned that the guarantor had failed to
incorporate an arbitration clause into its agreement with
the buyer and therefore could not benefit from a stay.
Reversing, we held that a stay was required because the
nonarbitrable issue of the guarantor’s liability was “com-
pletely dependent upon the arbitrable issues of the fact and
extent of [the buyer’s] liability.” Id. at 407. Due to this
interdependence, we emphasized the “potential for impair-
ment of the issues before the arbitrator due to the collateral
estoppel effect of the [buyer-guarantor] litigation.” Id.
Thus, we ordered the district court to enter a stay and
await the result of the buyer-seller arbitration.
According to Süd’s, the issues sent to arbitration are
so interconnected to the ones proceeding to trial that
refusing to stay the entire action was an abuse of discretion.
As an example, Süd’s first invites our attention to the
12 No. 05-3276
question of whether it defaulted on the Loan Agreement by
failing to make its first annual payment—an issue that the
district court refused to stay. According to Süd’s, there are
two ways in which this issue is dependent upon the
arbitrable question of whether it complied with the Con-
struction Agreement. First, Süd’s contends that, if
the arbitrator finds that Süd’s did not breach the Con-
struction Agreement, no payments would be due under
the loan. We must note that, as far as the record indicates,
this first theory is incorrect. Under the Loan Agreement’s
default provisions, Süd’s failure to comply with the
Construction Agreement would trigger an obligation to
repay the loan in full and immediately. However, the
Loan Agreement also provides that, even if Süd’s fully
performs the Construction Agreement, it nevertheless
must meet its alternate obligation of making loan pay-
ments in a timely fashion.
Süd’s second argument concerning the interrelation-
ship of its obligations under the Loan Agreement to the
Construction Agreement deserves more attention. Süd’s
points out that its ability to repay the loan on time was
dependent on receiving incentive payments from Volks-
wagen. These payments were, in turn, dependent on Süd’s
compliance with the Construction Agreement, the issue
proceeding to arbitration. As the district court recognized,
in this context, performance under the Construction
Agreement is interrelated. If the arbitrator were to decide
in due course that Süd’s met its obligations under the
Construction Agreement, Süd’s would be entitled to the
incentive payments that would have allowed it to repay
No. 05-3276 13
the loan on time.1 In the alternative, the arbitrator may
decide that it was Volkswagen’s lack of good faith which
prevented Sud’s from meeting its obligations under the
Construction Agreement, thus frustrating Sud’s ability
to obtain the incentive payments, and, in turn, make its
payments under the Loan Agreement. Cf. Cenco, Inc. v.
Seidman & Seidman, 686 F.2d 449, 453 (7th Cir. 1982) (“A
breach of contract is excused if the promisee’s hindrance
or failure to cooperate prevented the promisor from
performing the contract. See Restatement (Second) of
Contracts § 245 (1979).”). A district court certainly
would act within the bounds of its discretion if it deter-
mined that proceeding on the issue of liability under the
Loan Agreement in federal court, while the Construc-
tion Agreement is before the arbitrator, would waste
judicial resources, would risk inconsistent verdicts and,
ultimately, might prejudice one or both parties. See
AgGrow Oils, 242 F.3d at 783.
The district court understood the relationship between
the Süd’s note obligation and its performance under the
Construction Agreement. Indeed, the court intimated
that, had this matter been the only issue before the court,
it well might have stayed the action until the completion
of the arbitration. However, the court was confronted
with a more complex situation, and, therefore, we must
consider these additional circumstances in determining
whether the district court abused its discretion in deciding
not to await the arbitrator’s decision on Süd’s compliance
with the Construction Agreement.
1
Süd’s entitlement to the incentive payments also depended
on whether it properly installed a Volkswagen dealer name-
plate. We discuss this issue later in the opinion.
14 No. 05-3276
The district court noted that the Loan Agreement exe-
cuted by Süd’s contained several conditions. The fourth
condition made the entire amount of the loan due immedi-
ately upon noncompliance with the Construction Agree-
ment. As we have just noted, the district court acknowl-
edged that, because compliance with the Construction
Agreement was a matter for the arbitrator, suit for collec-
tion on the Loan Agreement based on this condition was
related to the arbitrator’s decision. The court also noted,
however, that the Loan Agreement created an indepen-
dent obligation on the part of Süd’s to pay a yearly in-
stallment of $100,000, an obligation not dependent on Süd’s
performance under the Construction Agreement. In this
court, Süd’s makes no argument that the court erred in its
characterization of Süd’s obligation under this clause.
Moreover, before the district court, Süd’s made no argu-
ment that its obligation under the second clause is not
independent of its rights and obligations under the Con-
struction Agreement, nor did it invite the district court’s
attention, with any specificity, to any potential for “incon-
sistent rulings” that might arise if litigation proceeded
on the non-arbitrable issues. See AgGrow Oils, 242 F.3d at
783. In light of Sud’s independent obligation to make
payments on the Loan Agreement, we cannot say that the
district court abused its discretion in failing to stay litiga-
tion concerning this issue.
The district court also was faced with another issue
which, in its view, was not subject to arbitration and
which, if Volkswagen were to prevail, could supply an
avenue for relief completely independent of the Con-
struction Agreement. Under the Incentive Agreement,
receiving the incentives is conditioned upon compliance
with the “Dealer Operating Standards,” a component of the
No. 05-3276 15
Volkswagen Dealer Agreement. These standards required
Süd’s to display a Volkswagen facade dealer nameplate
that meets Volkswagen’s corporate identity requirements.
R.5, Ex.E at 6. Volkswagen’s complaint asserts that, by
failing to comply with this requirement, Süd’s disqualified
itself from earning incentives. As a practical matter, then,
if Volkswagen were to prevail on this claim, there would
be an independent basis for Volkswagen’s denial of the
payments upon which Süd’s claims it depended in order
to meet its loan payments.
The district court held that arbitration of this claim
was not authorized under the Motor Vehicle Franchise
Contract Arbitration Fairness Act of 2002, 15 U.S.C. § 1226.
The Fairness Act provides:
(a) Election of arbitration
(1) Definitions
For purposes of this subsection--
(A) the term “motor vehicle” has the meaning
given such term in section 30102(6) of Title 49;
and
(B) the term “motor vehicle franchise contract”
means a contract under which a motor vehicle
manufacturer, importer, or distributor sells
motor vehicles to any other person for resale to
an ultimate purchaser and authorizes such
other person to repair and service the manufac-
turer’s motor vehicles.
(2) Consent required
Notwithstanding any other provision of law,
whenever a motor vehicle franchise contract pro-
vides for the use of arbitration to resolve a contro-
16 No. 05-3276
versy arising out of or relating to such contract,
arbitration may be used to settle such controversy
only if after such controversy arises all parties to
such controversy consent in writing to use arbitra-
tion to settle such controversy.
(3) Explanation required
Notwithstanding any other provision of law,
whenever arbitration is elected to settle a dispute
under a motor vehicle franchise contract, the
arbitrator shall provide the parties to such con-
tract with a written explanation of the factual
and legal basis for the award.
(b) Application
Subsection (a) of this section shall apply to contracts
entered into, amended, altered, modified, renewed, or
extended after November 2, 2002.
Id.
The Fairness Act requires that, before car manufacturers
and their dealerships settle a dispute through arbitration,
“all parties” must consent in writing “after such contro-
versy arises.” Id. § 1226(a)(2) (emphasis added). The dis-
trict court determined that, because only Süd’s desired
arbitration of this issue, the parties had not executed the
bilateral, post-dispute, written agreement necessary for the
nameplate issue to be submitted to arbitration.
Süd’s nevertheless urges that, despite the term “after” in
the statute, we should infer the requisite consent in Volks-
wagen’s act of drafting the original franchise agreement.
Invoking the legislative history of the Fairness Act, Süd’s
submits that the Act is intended to “protect motor vehicle
dealers against automobile manufacturers” and to ensure
No. 05-3276 17
dealers “the remedy of arbitration that a dealer desires.”
Appellants’ Br. at 18 (emphasis in original). When it is the
dealership who wishes to arbitrate a dispute, Süd’s con-
tends, we should interpret the statute more leniently.
The legislative history cited by Süd’s—a Senate Commit-
tee Report to the Fairness Act—provides an enlightening
history of automotive franchise arrangements. As the
report describes, for over half a century, Congress has
understood “the imbalances in bargaining power” inherent
in the relationship between car dealers and manufacturers.2
S. Rep. No. 107-266, at 7 (2002), as reprinted in 2002 WL
32972956. According to the Senate Report, unlike other
types of franchisees that have a wide selection of franchis-
ers with whom to contract, automotive dealerships “may
only obtain the right to merchandise and sell their product
from an extremely limited group of manufacturers.” Id. at
3. Leveraging this disparity in bargaining power, motor
vehicle manufacturers historically have forced dealers
2
In 1956, Congress enacted the Automobile Dealers Day in
Court Act, 15 U.S.C. §§ 1221-1225, to provide dealerships with
“recourse in Federal court against manufacturer abuses irrespec-
tive of contract terms.” S. Rep. No. 107-266, at 7 (2002), as
reprinted in 2002 WL 32972956. In codifying protections to
remedy the inherent unfairness in the dealer-manufacturer
relationship, this federal statute set the stage for the Fairness
Act, passed some thirty-six years later. Although its predecessor
statute provided a federal forum to enforce the good-faith
obligations of car manufacturers, the Fairness Act expanded
upon these protections by guaranteeing “that binding arbitration
to resolve disputes involving a motor vehicle franchise contract
is entered into only after voluntary agreement by both parties.”
Id. at 9.
18 No. 05-3276
into boilerplate franchise contracts “on a ‘take it or leave it’
basis.” Id. Prominent in these “contracts of adhesion,” id.,
are mandatory arbitration clauses that remained enforce-
able under the FAA, despite attempts by state legislatures
to prohibit unfair dealer-manufacturer arbitration.
Even if we accept Süd’s submission that the drafters of
the Fairness Act likely intended to equalize the bargain-
ing equation in favor of the dealer, we cannot ignore
that this same Senate Committee Report insists repeatedly,
consistent with the statutory text, that “both parties” must
consent to arbitration, and only “after” a controversy arises.
See, e.g., id. at 2, 8, 9 (emphasis added). Indeed, if the
legislative history confirms anything, it is that Congress
intended such boilerplate arbitration clauses to be dis-
placed in favor of “forums otherwise available” under
federal or local law. Id. at 3. In view of this history,
we refuse to depart from the Fairness Act’s plain word-
ing. As the statute provides, both parties must consent
voluntarily to arbitrate a dispute under a manufacturer-
dealer agreement and that consent must be expressed
only after that dispute has arisen. The district court deter-
mined correctly that the record revealed that only Süd’s
has consented to arbitration at this stage. Accordingly,
we must affirm the court’s refusal to stay the dealer
nameplate issue pending arbitration.
Conclusion
In short, while the district court had the discretion to
stay judicial proceedings until the arbitration was com-
pleted, we cannot say that the district court abused its
discretion when it decided not to do so. The court recog-
nized that the Loan Agreement contained a condition
No. 05-3276 19
not dependent on the Construction Agreement. If Volks-
wagen were to prevail on that issue, the first-year pay-
ment would be due no matter what result was reached
in the arbitration proceeding. Moreover, the court cor-
rectly recognized that the parties’ dispute with respect to
whether Süd’s complied with the dealership standards
was not subject to arbitration and, if Volkswagen prevailed
on its claim, provided, as a practical matter, another
basis for denying Süd’s participation in the incentive
program.
For these reasons, we affirm the judgment of the dis-
trict court.
AFFIRMED
A true Copy:
Teste:
_____________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—1-29-07