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Bernhardt v. Polygraphic Co. of America, Inc.

Supreme Court of the United States · 1956 · Civil Procedure

Civil ProcedureErie doctrineArbitrationDiversity jurisdictionErieGuaranty Trust v. YorkFederal Arbitration ActFAA Section 3

Facts

The suit sought damages for petitioner's discharge under an employment contract. The contract, made in New York between New York parties, provided that disputes would be submitted to arbitration under New York law before the American Arbitration Association and that the determination would be final and absolute. Petitioner later became a Vermont resident, where he was to perform his duties and where he asserted his rights. After removal to federal court, respondent sought a stay so the dispute could be arbitrated in New York.

Issue

Whether Section 3 of the Federal Arbitration Act authorizes a stay pending arbitration for this employment contract in a diversity case when the contract does not involve a maritime transaction or a transaction involving commerce, and, if not, whether a federal court sitting in diversity may nonetheless compel arbitration when the forum state's law would not.

Rule

Sections 1, 2, and 3 of the Federal Arbitration Act are integral parts of a single regulatory scheme, so Section 3's stay provision reaches only arbitration agreements in maritime transactions or contracts evidencing transactions involving commerce. In a diversity case involving a state-created right, a federal court may not apply arbitration in a way that substantially affects enforcement of the right differently from the forum state's courts, because arbitration is substantive for Erie purposes when the state court would not compel it.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Nora Kim, a resident of Oregon, sued Cascade Field Services, Inc., a Washington corporation, in federal court in Portland after removal from Oregon state court. She seeks damages under a purely local consulting contract to supervise a vineyard near Salem, and the contract contains a written clause requiring arbitration in Seattle. No party shows that the contract relates to a maritime transaction or to work in or affecting interstate commerce.

Cascade moves to stay the federal action under § 3 of the Federal Arbitration Act pending arbitration. How should the court rule?

Explanation. The majority read §§ 1, 2, and 3 of the FAA as an integrated scheme. Section 3 is not a free-standing stay provision for all written arbitration agreements; it reaches only agreements in contracts covered by §§ 1 and 2, namely maritime transactions and contracts evidencing transactions involving commerce. Because the hypothetical gives no showing that the contract falls within either covered class, the stay should be denied.