350 U.S. 198 (1956), 49, Bernhardt v. Polygraphic Co. of America, Inc.

Docket Nº:No. 49
Citation:350 U.S. 198, 76 S.Ct. 273, 100 L.Ed. 199
Party Name:Bernhardt v. Polygraphic Co. of America, Inc.
Case Date:January 16, 1956
Court:United States Supreme Court
 
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350 U.S. 198 (1956)

76 S.Ct. 273, 100 L.Ed. 199

Bernhardt

v.

Polygraphic Co. of America, Inc.

No. 49

United States Supreme Court

Jan. 16, 1956

Argued December 5, 1955

CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Syllabus

Petitioner's action against respondent in a Vermont state court, for damages for the discharge of petitioner under an employment contract, was removed to the Federal District Court on grounds of diversity of citizenship. The contract had been made in New York, where both parties resided at the time, and provided that the parties would submit any dispute to arbitration under New York law, but petitioner had later become a resident of Vermont, where he was to perform his duties. Respondent's motion for a stay of the proceedings so that the controversy could go to arbitration in New York was denied by the District Court, which ruled that the arbitration provision of the contract was governed by Vermont law and that, under Vermont law, the agreement to arbitrate was revocable any time before an award was actually made. The Court of Appeals reversed.

Held: the judgment of the Court of Appeals is reversed, and the cause is remanded to the District Court. Pp. 199-205.

1. The provision of § 3 of the United States Arbitration Act for stay of the trial of an action until arbitration has been had does not apply to all arbitration agreements, but only to those covered by §§ 1 and 2 of the Act (those relating to maritime transactions and those involving interstate or foreign commerce), and there is no showing that the contract here involved is in either of those classes. Pp. 200-202.

2. The differences between arbitration and judicial determination of a controversy substantially affect the cause of action arising under state law, and make the doctrine of Erie R. Co. v. Tompkins, 304 U.S. 64, applicable. Pp. 202-204.

3. If, in this case, arbitration could not be compelled in the Vermont state courts, it should not be compelled in the Federal District Court. Pp. 204-205.

4. In the circumstances of this case, there is no reason to remand the case to the Court of Appeals to pass on the question of local law. P. 205.

5. On remand of the cause to the District Court, there will be open for consideration the question whether New York arbitration

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law should be applied to the enforcement of the contract -- a question of conflict of laws governed by Vermont law and on which it is not clear that the District Court ruled. P. 205.

21 F.2d 948 reversed and remanded.

DOUGLAS, J., lead opinion

MR. JUSTICE DOUGLAS delivered the opinion of the Court.

This suit, removed from a Vermont court to the District Court on grounds of diversity of citizenship, was brought for damages for the discharge of petitioner under an employment contract. At the time the contract was made, petitioner was a resident of New York. Respondent is a New York corporation. The contract was made in New York. Petitioner later became a resident of Vermont, where he was to perform his duties under the contract, and asserts his rights there.

The contract contains a provision that, in case of any dispute, the parties will submit the matter to arbitration under New York law by the American Arbitration Association, whose determination "shall be final and absolute." After the case had been removed to the District Court, respondent moved for a stay of the proceedings so that the controversy could go to arbitration in New York. The motion alleged that the law of New York governs the question whether the arbitration provision of the contract is binding.

The District Court ruled that, under Erie R. Co. v. Tompkins, 304 U.S. 64, the arbitration provision of the contract was governed by Vermont law, and that the law of Vermont makes revocable an agreement to arbitrate

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at any time before an award is actually made. The District Court therefore denied the stay, 122 F.Supp. 733. The Court of Appeals reversed, 218 F.2d 948. The case is here on a petition for certiorari which we granted, 349 U.S. 943, because of the doubtful application by the Court of Appeals of Erie R. Co. v. Tompkins, supra.

A question under the United States Arbitration Act, 43 Stat. 883, as amended, 61 Stat. 669, 9 U.S.C. §§ 1-3, lies at the threshold of the case. Section 2 of that Act makes "valid, irrevocable, and enforceable" provisions for arbitration in certain classes of contracts,1 and § 3 provides for a [76 S.Ct. 275] stay of actions in the federal courts of issues referable to arbitration under those contracts.2 Section 2 makes "valid, irrevocable, and enforceable" only two types of contracts: those relating to a maritime transaction and those involving commerce. No maritime transaction is involved here. Nor does this contract evidence "a transaction involving commerce" within the meaning of § 2 of the Act. There is no showing that petitioner

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while performing his duties under the employment contract was working "in" commerce, was producing goods for commerce, or was engaging in activity that affected commerce within the meaning of our decisions.3

The Court of Appeals went on to hold that, in any event, § 3 of the Act stands on its own footing. It concluded that, while § 2 makes enforceable arbitration agreements in maritime transactions and in transactions involving commerce, § 3 covers all arbitration agreements even though they do not involve maritime transactions or transactions in commerce. We disagree with that reading of the Act. Sections 1, 2, and 3 are integral parts of a whole. To be sure, § 3 does not repeat the words "maritime transaction" or "transaction involving commerce," used in §§ 1 and 2. But §§ 1 and 2 define the field in which Congress was legislating. Since § 3 is a part of the regulatory scheme, we can only assume that the "agreement in writing" for arbitration referred to in § 3 is the kind of agreement which §§ 1 and 2 have brought under federal regulation. There is no intimation or suggestion in the Committee Reports that §§ 1 and 2 cover a narrower field than § 3. On the contrary, S.Rep. No. 536, 68th Cong., 1st Sess., p. 2, states that § 1 defines the contracts to which "the bill will be applicable." And H.R. Rep. No. 96, 68th Cong., 1st

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Sess., p. 1, states that one foundation of the new regulating measure is "the Federal control over interstate commerce and over admiralty." If respondent's contention is correct, a constitutional question might be presented. Erie R. Co. v. Tompkins indicated that Congress does not have the constitutional authority to make the law that is applicable to controversies in diversity of citizenship cases. Shanferoke Coal & Supply Corp. v. Westchester Service Corp., 293 U.S. 449, applied the Federal Act in a diversity case. But that decision antedated Erie R. Co. v. Tompkins, and the Court did not consider the larger question presented here -- that is, whether arbitration touched on substantive [76 S.Ct. 276] rights, which Erie R. Co. v. Tompkins held were governed by local law, or was a mere form of procedure within the power of the federal courts or Congress to prescribe. Our view, as will be developed, is that § 3, so read, would invade the local law field. We therefore read § 3 narrowly to avoid that issue. Federal Trade Commission v. American Tobacco Co., 264 U.S. 298, 307. We conclude that the stay provided in § 3 reaches only those contracts covered by §§ 1 and 2.

The question remains whether, apart from the Federal Act, a provision of a contract providing for arbitration is enforceable in a diversity case.

The Court of Appeals, in disagreeing with the District Court as to the effect of an arbitration agreement under Erie R. Co. v. Tompkins, followed its earlier decision of Murray Oil Products Co. v. Mitsui & Co., 146 F.2d 381, 383, which held that

Arbitration is merely a form of trial, to be adopted in the action itself, in place of the trial at common law: it is like a reference to a master, or an "advisory trial" under Federal Rules of Civil Procedure. . . .

We disagree with that conclusion. We deal here with a right to recover that owes its existence to one of the States, not to the United States. The federal court enforces

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the state-created right by rules of procedure which it has acquired from the Federal Government and which therefore are not identical with those of the state courts. Yet, in spite of that difference in...

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