Security Watch, Inc. v. Sentinel Systems, Inc.

Citation176 F.3d 369
Decision Date11 May 1999
Docket NumberNo. 97-6496,97-6496
PartiesSECURITY WATCH, INC., Plaintiff-Appellant, v. SENTINEL SYSTEMS, INC.; American Telephone and Telegraph Company, Defendants-Appellees.
CourtUnited States Courts of Appeals. United States Court of Appeals (6th Circuit)

Rebecca Adelman (argued and briefed), John Cacciatore, Glassman, Jeter, Edwards & Wade, Memphis, TN, for Plaintiff-Appellant.

Rebecca P. Tuttle (argued and briefed), Steven C. Brammer (briefed), Farris, Mathews, Branan & Hellen, Memphis, TN, for Defendants-Appellees.

Before: JONES, SUHRHEINRICH, and MOORE, Circuit Judges.

OPINION

MOORE, Circuit Judge.

Plaintiff-Appellant Security Watch, Inc. ("Security"), a dealer in security systems, brought this action in the Western District of Tennessee against Defendant-Appellee Sentinel Systems, Inc. ("Sentinel"), its distributor, and Defendant-Appellee American Telephone and Telegraph Company ("AT & T"), the manufacturer of the systems. Holding that the Tennessee forum was precluded under the pertinent dealer contracts, the district court dismissed the action. We AFFIRM IN PART and REVERSE IN PART. We conclude that the district court correctly held that a forum-selection provision of the agreements precluded the prosecution of the action in Tennessee against Sentinel, which was a party to the contracts with Security. We hold that the district court erred, however, in concluding that a dispute-resolution provision first included in the parties' 1994 contract was applicable to disputes arising under earlier contracts and precluded the prosecution in Tennessee of all claims against both defendants. Thus, Security will be permitted to proceed against AT & T in the Western District of Tennessee on its pre-1994 claims.

I. FACTS AND PROCEDURAL HISTORY

This commercial dispute involves several parties and several contracts. From at least 1988 through 1994 Security served as a dealer of security systems distributed by Sentinel and manufactured by AT & T. Annual agreements between Security and Sentinel governed the business relationship. AT & T was not a party to these agreements. The 1993 Agreement (and earlier contracts) included a forum-selection provision that confined litigation "involving, arising under, or interpreting" the agreements to certain state or federal courts located in Virginia (the "Forum-Selection Clause"). Joint Appendix ("J.A.") at 52-53 (1993 Agreement p 14). In addition to the Forum-Selection Clause, the 1994 Agreement contained an alternative dispute-resolution provision that required negotiation, mediation, and, in some circumstances, arbitration of disputes (the "ADR Clause").

In 1996 Security sued the defendants in the Western District of Tennessee alleging, inter alia, breach of express and implied warranties. 1 Security alleged that certain products purchased under the dealer contracts were defective. The defendants moved to dismiss the complaint pursuant to Federal Rule of Civil Procedure 12(b). The district court granted the motion on two grounds. First, the court held that Security was barred from proceeding against Sentinel in Tennessee by the Forum-Selection Clause of the agreements. Second, the court held that the ADR Clause of the 1994 Agreement was applicable to 1994 and pre-1994 claims against both defendants and also precluded litigation in Tennessee. Security filed a timely notice of appeal. This court's jurisdiction over the appeal is a matter of dispute that we will address before proceeding to the merits.

II. ANALYSIS
A. Appellate Jurisdiction

The defendants argue that under § 16 of the Federal Arbitration Act ("FAA"), 9 U.S.C. § 16, this court lacks jurisdiction to hear this appeal. Subject to limited exceptions that are not at issue here, § 16(b) provides that no appeal may be taken from an interlocutory order of the district court compelling arbitration or directing arbitration to proceed under the FAA. For two reasons we conclude that § 16 does not divest this court of jurisdiction in this instance.

First, in contrast to the prohibition on appeals of interlocutory orders, § 16(a)(3) permits an appeal to be taken from a final decision with respect to arbitration. This court has held that an order dismissing an action in favor of arbitration is a final order appealable under § 16(a)(3). See Arnold v. Arnold Corp., 920 F.2d 1269, 1275-76 (6th Cir.1990). The present action was dismissed by the district court.

Second, even if Arnold were not controlling, it cannot be said that this action was disposed of in favor of arbitration. To be sure the district court based its dismissal of Security's action, in part, on the preclusion of the Tennessee forum by the ADR Clause of the 1994 Agreement. That provision requires the parties to negotiate any dispute for forty-five days and then to mediate any unresolved matters in New Jersey. If mediation is not successful, the provision requires the parties to enter into binding arbitration in New Jersey if the amount in controversy is less than $1 million. If the amount in controversy exceeds $1 million, the parties may mutually agree to arbitrate or the aggrieved party may sue in New Jersey. See J.A. at 78-79 (1994 Agreement p 13). However, the district court did not determine the amount in controversy and thus did not determine whether arbitration would be required under the agreement if preliminary resolution efforts failed. The district court simply dismissed the action, because in any event the agreement precluded litigation in Tennessee.

The defendants have cited no authority for the proposition that the mere possibility that arbitration will be required under a contractual dispute-resolution process is sufficient to bar an immediate appeal under the FAA. Although it is the policy of the FAA to defer the appeal of an order compelling arbitration, it is not the purpose of that Act, or of any other statute or rule, to defer the appeal of a determination regarding a geographic forum-selection provision. Because it was the geographic forum-selection provision of the ADR Clause rather than the arbitration provision, per se, that provided the grounds for the district court's dismissal of this action, § 16(b) is not applicable to this appeal. Thus, this court has jurisdiction pursuant to 28 U.S.C. § 1291.

B. The Motion to Dismiss

The district court granted the defendants' motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b). The district court held that (1) dismissal of the claims against both defendants was required by the ADR Clause of the 1994 Agreement and (2) dismissal of the claims against Sentinel was dictated by the Forum-Selection Clause included in all of the agreements. We will review the two bases for dismissal sequentially and de novo. 2

1. Dismissal Based on the ADR Clause

The district court held that provisions of the 1994 Agreement required the dismissal of all of Security's claims. On appeal Security does not dispute the dismissal of its claims arising out of the 1994 Agreement. Thus, the specific issue before us is whether the district court erred in holding that the 1994 Agreement was applicable to claims relating to products supplied under earlier contracts.

The district court relied on two clauses of the 1994 Agreement in dismissing pre-1994 claims: p 13, the ADR Clause, and p 19, the merger or integration clause. Paragraph 13 provides that "[t]he parties shall follow these dispute resolution processes in connection with all disputes, controversies or claims ... arising out of or relating to the Products furnished pursuant to this Agreement or acts or omissions of Distributor or AT & T under this Agreement...." J.A. at 78. The "Agreement" referred to in this paragraph is the 1994 Agreement, and thus this provision plainly refers to disputes related to products delivered under the 1994 Agreement. However, the district court determined that, as a result of p 19, the ADR Clause also governs disputes arising under previous agreements. Paragraph 19, titled "Entire Agreement" provides as follows:

The terms and conditions contained in this Agreement supersede all prior oral or written understanding[s] between the parties, and constitute the entire agreement between them concerning the subject matter of this Agreement. This Agreement shall not be modified or amended except by a writing signed by the party to be charged.

J.A. at 81.

We conclude that disputes arising under the pre-1994 contracts are not governed by the ADR Clause of the 1994 Agreement. First, it is clear that p 13 alone does not reach disputes relating to products shipped under earlier agreements. Applicable to disputes "arising out of or relating to the Products furnished" under the 1994 Agreement, this ADR provision is very broad in scope and certainly reaches all claims raised by Security with respect to the 1994 Agreement. See AT&T Corp. v. Vision One Security Sys., 914 F.Supp. 392, 397-98 (S.D.Cal.1995). However, this breadth of scope does not extend over time. Paragraph 12 specifies that the term of the agreement is twelve months, and p 13 does not purport to reach disputes related to pre-1994 agreement products.

Second, it is inappropriate to read the p 19 merger clause as superseding prior annual contracts. Merger clauses are routinely incorporated in agreements in order to signal to the courts that the parties agree that the contract is to be considered completely integrated. A completely integrated agreement must be interpreted on its face, and thus the purpose and effect of including a merger clause is to preclude the subsequent introduction of evidence of preliminary negotiations or of side agreements in a proceeding in which a court interprets the document. See 2 FARNSWORTH ON CONTRACTS § 7.3 at 215-25.

Ignoring the universally understood purpose of this boilerplate clause, the district court determined that the "subject matter of this Agreement" referred to in p 19 was the entire relationship between the parties...

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