Drews Distributing, Incorporated v.  Silicon Gaming, Incorporated

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
 DREWS DISTRIBUTING, INCORPORATED,
Plaintiff-Appellee,
v. No. 00-1643 
SILICON GAMING, INCORPORATED,
Defendant-Appellant. 
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)
Argued: March 2, 2001
Decided: March 29, 2001
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.
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

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Carolina, for Appellee. ON BRIEF: Benjamin E. Nicholson, V,
MCNAIR LAW FIRM, P.A., Columbia, South Carolina, for Appel-
lee.
OPINION
DIANA GRIBBON MOTZ, Circuit Judge:
This appeal arises from a dispute over the purchase of video gam-
bling machines. We must determine the scope of an arbitration provi-
sion in a distribution contract between the manufacturer and
distributor of the machines. That provision requires the parties to arbi-
trate "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 provi-
sions 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 pro-
posal, 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
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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 out-
standing 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 Dis-
tributor 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. Addition-
ally, 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 Ameri-
can Arbitration Association seeking to recover from Drews the bal-
ance of the cost of the 200 machines.
On December 10, 1999, before arbitration and during ongoing set-
tlement negotiations, Drews filed this action against SGI in the fed-
eral 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 declara-
tions canceling the Letter Agreement and denying arbitrability of the
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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 Distribu-
tor 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 arbitra-
tion." SGI now appeals.
II.
The Federal Arbitration Act, 9 U.S.C. § 1 (1994), embodies a fed-
eral 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 Con-
str. 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 arbi-
tration 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 interpreta-
tion 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 Agree-
ment 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");
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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 pro-
vision. 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 retro-
actively 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 con-
troversy or claim" between them "arising out of or related to" the Dis-
tributor 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 con-
tract with no arbitration clause, but which stated parties had "rights
and remedies" under another contract with such a clause, is arbitra-
ble). The question before us is not whether this dispute, as to the pay-
ment for 200 video gambling machines, grows out of the Letter
Agreement or the Distributor Agreement, but rather whether it is "re-
lated to" the Distributor Agreement.
Examination of the factual allegations of the complaint compels the
conclusion that the instant dispute is, in fact, "related to" the Distribu-
tor Agreement. In its complaint, Drews alleges that SGI misrepre-
sented certain facts to entice Drews to purchase the 200 video
gambling machines and "enter into a Distributorship Agreement with
SGI." Although the complaint carefully alleges only fraud in inducing
Drews to enter into the Letter Agreement (and not the Distributor
Agreement), it expressly acknowledges, as it must, that the Letter
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Agreement "contemplated" that the parties would enter into the Dis-
tributor Agreement, which "would control the rights of the parties as
to the sale of these Odyssey machines" and that, in fact, the parties
did enter into this Distributor Agreement less than a month later, on
January 15, 1999. Moreover, the Letter Agreement, which Drews
maintains provides the sole contractual basis for this controversy,
explicitly conditions Drews’ obligation to purchase the video gam-
bling machines on the execution of the Distributor Agreement.
Indeed, the record reveals that the Distributor Agreement governs all
sales of SGI machines to Drews, including those encompassed by the
Letter Agreement.1 Hence, it is plain that the present suit — a dispute
over payment for 200 video gambling machines — "relates to" the
Distributor Agreement.
Nevertheless, Drews contends, and the district court found, that
Drews’ claims are not arbitrable. That conclusion relies on the merger
clause in the Distributor Agreement, which provides:
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 maintains that this clause "carved out" the Letter Agreement
from all of the terms of the Distributorship Agreement, including its
arbitration clause. The district court agreed, holding that the merger
clause’s statement that the Distributor Agreement "represents the
1Even the very first twenty demonstration machines Drews purchased
from SGI, under the business proposal, were conditioned on the terms of
the contemplated Distributor Agreement. Drews’ CEO stated in a March
30, 1997 letter to SGI that "Drews also understands that the purchase of
the demonstration units is final and non-cancelable, but that the terms
and conditions of sale specified in the Silicon Gaming, Inc. Distributor
Agreement apply to this purchase." Thus, it was apparently understood
from the inception of this business relationship that all disputes would be
governed by the forthcoming Distributor Agreement.
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entire agreement between the parties relating to its subject matter"
resulted in the clause "except[ing] the Letter Agreement from the sub-
ject matter of the Distributor Agreement."
This reading of the merger clause turns the clause on its head. The
purpose of this merger clause, like any merger or integration clause,
is to clarify that the contract in which it is contained is the parties’
entire agreement. In this case, the parties excepted the Letter Agree-
ment from the sweep of the merger clause because Drews still owed
SGI money under the Letter Agreement. By excepting the Letter
Agreement from the merger clause the parties acknowledged the pre-
existing obligation in the Letter Agreement. Thus, they excepted the
Letter Agreement in order to prevent it from being superceded by the
Distributor Agreement, but they did not except the Letter Agreement
from the subject matter of the Distributor Agreement. To hold other-
wise would endow the integration clause with a meaning well beyond
the purpose of such clauses — simply to make plain that the contract
contained the entire agreement of the parties.
Security Watch Inc. v. Sentinel Sys. Inc., 176 F.3d 369 (6th Cir.
1999), on which the district court relied, is not to the contrary. Indeed,
it is entirely consistent with the result we reach. In that case, the par-
ties entered into seven annual contracts governing the sale of products
in seven successive years. The first six annual contracts contained no
arbitration clause; the seventh, the 1994 contract, provided for arbitra-
tion of claims "arising out of or relating to the Products furnished pur-
suant to this Agreement or acts . . . under this Agreement." Id. at 372.
The earlier contracts did not state, or even suggest, that they were
conditioned on execution of the 1994 contract. The Sixth Circuit held
that the arbitration clause only controlled disputes relating to products
shipped and acts done under the 1994 contract and did "not reach dis-
putes relating to products shipped under earlier agreements." Id.2 In
contrast, here the term of the Distributor Agreement is not limited to
twelve months, its arbitration clause is not restricted to disputes relat-
2Tellingly, the Security Watch court expressly rejected, as we do, the
contention that the merger clause in the 1994 contract could be read to
have other than its "universally understood purpose" of "signal[ing] to
the courts that the parties agree that the contract is to be considered com-
pletely integrated." Id.
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ing to "products furnished" or "acts under . . . this Agreement," and
the Letter Agreement expressly states that the obligation to purchase
the 200 gambling machines is conditioned on execution of the Dis-
tributor Agreement.
For these reasons, we must reverse the district court’s order staying
arbitration and remand with directions that the case proceed to arbitra-
tion in accordance with the parties’ agreement.3
REVERSED AND REMANDED
3In a footnote, the district court stated that a stay of arbitration was
also warranted because "SGI’s affidavit would at best only create an
issue of fact as to the coverage of the arbitration clause . . . . As such,
Drews would be entitled to a jury trial on the issue of whether there was
an agreement to arbitrate claims related to the Letter Agreement." The
Federal Arbitration Act provides for a right to a jury trial when "the mak-
ing of the arbitration agreement or the failure, neglect, or refusal to per-
form the same be in issue." 9 U.S.C. § 4 (1994). However, "[a] party
resisting arbitration cannot obtain a jury trial merely by demanding one;
rather he bears the burden of showing that he is entitled to a jury trial
under § 4 of the [Act]". Doctor’s Assoc. v. Stuart, 85 F.3d 975, 983 (2d
Cir. 1996) (internal quotation marks omitted). "To establish a genuine
issue entitling a party to a jury trial, ‘an unequivocal denial that the
agreement [to arbitrate] had been made [is] needed, and some evidence
should [be] produced to substantiate the denial.’" Id. at 984. (quoting
Interbras Cayman Co. v. Orient Victory Shipping Co., 665 F.2d 4, 7 (2d
Cir. 1981)). Here, no party "unequivocal[ly] den[ies]" that an "agreement
to arbitrate has been made." Their sole disagreement is as to the scope
of that agreement. Thus, a jury trial to resolve this issue would contra-
vene the Federal Arbitration Act.
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