Drews Dist. v. Silicon Gaming

• Decision Date: 02 March 2001
• Docket Number: No. 00-1643,00-1643
• Citation: 245 F.3d 347
• Parties: (4th Cir. 2001) DREWS DISTRIBUTING, INCORPORATED,Plaintiff-Appellee, v. SILICON GAMING, INCORPORATED, Defendant-Appellant. Argued:
• Court: U.S. Court of Appeals — Fourth Circuit

Page 347

245 F.3d 347 (4th Cir. 2001)

DREWS DISTRIBUTING, INCORPORATED,Plaintiff-Appellee, v. SILICON GAMING, INCORPORATED, Defendant-Appellant.

No. 00-1643

UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT

Argued: March 2, 2001

Decided: March 29, 2001

Appeal from the United States District Court for the District of South Carolina, at Spartanburg. G. Ross Anderson, Jr., District Judge.

(CA-99-4070-7-13)

COUNSEL ARGUED: Thomas Louis Stephenson, NEXSEN, PRUET, JACOBS & POLLARD, L.L.P., Greenville, South Carolina, for Appellant. Robert L. Widener, MCNAIR LAW FIRM, P.A., Columbia, South Carolina, for Appellee. ON BRIEF: Benjamin E. Nicholson, V, MCNAIR LAW FIRM, P.A., Columbia, South Carolina, for Appellee.

Before WILKINSON, Chief Judge, MOTZ, Circuit Judge, and Cynthia H. HALL, Senior Circuit Judge of the United States Court of Appeals for the Ninth Circuit, sitting by designation.

Reversed and remanded by published opinion. Judge Motz wrote the opinion, in which Chief Judge Wilkinson and Senior Judge Hall joined.

OPINION

DIANA GRIBBON MOTZ, Circuit Judge:

This appeal arises from a dispute over the purchase of video gambling machines. We must determine the scope of an arbitration provision in a distribution contract between the manufacturer and distributor of the machines. That provision requires the parties to arbitrate "any controversy or claim" that is "related to" the distribution contract. The district court held the present dispute not arbitrable because it grew out of an earlier agreement between the parties that was expressly excluded from the reach of the distribution contract's merger clause. Finding that the present dispute is clearly "related to" the distribution contract, we reverse.

I.

Drews Distributing, Inc. (Drews) distributes, and Silicon Gaming, Inc. (SGI) manufactures, video gambling machines. On March 31, 1998, Drews and SGI entered into a business proposal, whereby they agreed that Drews would become a distributor of SGI's "Odyssey" video gambling machine. The proposal provided that Drews and SGI would "enter into Silicon Gaming's distribution agreement, the provisions of which will be negotiated and mutually agreed upon," and stated that the proposal itself "is subject to" the parties "entering into a mutually acceptable distribution agreement." As part of the proposal, Drews purchased twenty demonstration machines.

During the summer of 1998, SGI shipped an additional 200 machines to Drews. In a letter dated December 21, 1998, and signed by both parties (the Letter Agreement), they agreed to the terms of sale of these machines. The Letter Agreement provides that: 1) the parties will draft and execute an exclusive distributor agreement; 2) upon execution of that distributor agreement, Drews will wire SGI one million dollars in partial payment for the 200 machines; 3) the parties will mutually agree to additional changes and enhancements to the machines by February 17, 1998 [sic]; and 4) upon delivery of the updated hardware and enhancements, Drews will wire the outstanding balance for the 200 machines.

A few weeks later, on January 15, 1999, the parties entered into the contemplated "Distributor Agreement." In addition to setting forth the terms governing the parties' commercial dealings, the Distributor Agreement contains an arbitration clause, which provides that "any controversy or claim arising out of or related to this Agreement, or the breach hereof, will be settled by arbitration." It also contains a merger or integration clause, which states that:

This Agreement, with the exception of the Letter Agreement signed and dated December 21, 1998 by SGI and Drew[sic] Distributing, Inc., including all Exhibits to this Agreement, which are hereby incorporated by reference, represents the entire agreement between the parties relating to its subject matter and supersedes all prior representations, discussions, negotiations, and agreements, whether written or oral.

Drews paid SGI one million dollars upon the execution of the Distributor Agreement. However, Drews ultimately refused to pay SGI the balance owed on the 200 machines, claiming that SGI did not adjust the machines for the South Carolina market and neglected to inform Drews of an outstanding intellectual property issue. Additionally, in the interim, the South Carolina legislature had determined that this type of gaming machine would soon be illegal in the state. On October 25, 1999, SGI filed a demand for arbitration with the American Arbitration Association seeking to recover from Drews the balance of the cost of the 200 machines.

On December 10, 1999, before arbitration and during ongoing settlement negotiations, Drews filed this action against SGI in the federal court. The complaint -invoking only the terms of the Letter Agreement -alleges fraud, breach of contract accompanied by a fraudulent act, and negligent misrepresentation and requests declarations canceling the Letter Agreement and denying arbitrability of the dispute. Drews also moved to stay arbitration. SGI responded with a motion to dismiss or stay the federal action.

The district court ordered the arbitration stayed. The court reasoned that the present controversy arose under the Letter Agreement, not the Distributor Agreement, and because the merger clause in the Distributor Agreement assertedly "except[ed]" the Letter Agreement from the "subject matter" of the Distributor Agreement the controversy was not "related to" the Distributor Agreement and so"not subject to arbitration." SGI now appeals.

II.

The Federal Arbitration Act, 9 U.S.C. S 1 (1994), embodies a federal policy favoring arbitration. Thus, "as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration." Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983). Of course, whether a party has agreed to arbitration is a matter of contract interpretation and "a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." United Steelworkers of Am. v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582 (1960). However "the heavy presumption of arbitrability requires that when the scope of the arbitration clause is open to question, a court must decide the question in favor of arbitration." Peoples Sec. Life Ins. Co. v. Monumental Life Ins. Co., 867 F.2d 809, 812 (4th Cir. 1989). A court should not deny a request to arbitrate an issue "unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute." Warrior & Gulf Navigation Co., 363 U.S. at 582-83.

In the case at hand, the arbitration clause in the Distributor Agreement is a "broad" one, covering as it does"any controversy or claim arising out of or related to" that agreement. See Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 398 (1967) (recognizing as "broad" a clause requiring arbitration of"[a]ny controversy or claim arising out of or relating to" the agreement); International Paper Co. v. Schwabedissen Maschinen & Anlagen GMBH, 206 F.3d 411, 416 n.3 (4th Cir. 2000) (recognizing as "broad" an arbitration clause requiring arbitration of "[a]ny dispute arising out of the Contract"); see also J. J. Ryan & Sons v. Rhone Poulenc Textile, S.A., 863 F.2d 315, 321 (4th Cir. 1988).

Notwithstanding the strong federal policy favoring arbitration and the breadth of the arbitration clause in the Distributor Agreement, Drews maintains that the present dispute is not arbitrable because it grows out of the Letter Agreement, which contains no arbitration provision. Drews points to its complaint noting that it invokes causes of action in tort or arising out of the Letter Agreement and does not rely on the Distributor Agreement. But the reach of an arbitration clause is not restricted to those causes of action brought under the contract containing the clause, unless the parties draft a clause so restricted in scope. See J.J. Ryan, 863 F.2d at 319 (arbitrability determined by examination of "the factual allegations underlying the claim . . . regardless of the label assigned to the claim"). Nor can a party retroactively restrict or eliminate its contractual obligation to arbitrate a dispute by fashioning a limited complaint.

In this case, the parties contractually agreed to arbitrate "any controversy or claim" between them "arising out of or related to" the Distributor Agreement; that remains their obligation. It is immaterial that the present dispute grew out of the Letter Agreement, which contains no arbitration clause, if the dispute also "relates to" the Distributor Agreement. See, e.g., Kvaerner ASA v. Bank of Tokyo-Mitsubishi, Ltd., 210 F.3d 262, 265 (4th Cir. 2000) (dispute growing out of contract with no arbitration clause, but which stated parties had "rights and remedies" under another contract with such a clause, is...