Bernhardt v. Polygraphic Company of America/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, 58 S.Ct. 817, 82 L.Ed. 1188, the arbitration provision of the contract was governed by Vermont law and that the law of Vermont makes revocable an agreement to arbitrate 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, 2 Cir., 218 F.2d 948. The case is here on a petition for certiorari which we granted, 349 U.S. 943, 75 S.Ct. 873, 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, 9 U.S.C.A. §§ 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; and § 3 provides for a stay of actions in the federal courts of issues referable to arbitration under those contracts. 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 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.

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 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. of Delaware v. Westchester Service Corp., 293 U.S. 449, 55 S.Ct. 313, 79 L.Ed. 583, 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 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, 44 S.Ct. 336, 337, 68 L.Ed. 696. 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., 2 Cir., 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 were with a right to recover that owes its existence to one of the States, not to the United States. The federal court enforces 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 procedure, the federal court enforcing a state-created right in a diversity case is, as we said in Guaranty Trust Co. of New York v. York, 326 U.S. 99, 108, 65 S.Ct. 1464, 1469, 89 L.Ed. 2079, in substance 'only another court of the State.' The federal court therefore may not 'substantially affect the enforcement of the right as given by the State.' Id., 326 U.S. 109, 65 S.Ct. 1470. If the federal court allows arbitration where the state court would disallow it, the outcome of litigation might depend on the court-house where suit is brought. For the remedy by arbitration, whatever its merits or shortcomings, substantially affects the cause of action created by the State. The nature of the tribunal where suits are tried is an important part of the parcel of rights behind a cause of action. The change from a court of law to an arbitration panel may make a radical difference in ultimate result. Arbitration carries no right to trial by jury that is guaranteed both by the Seventh Amendment and by Ch. 1, Art. 12th, of the Vermont Constitution. Arbitrators do not have the benefit of judicial instruction on the law; they need not give their reasons for their results; the record of their proceedings is not as complete as it is in a court trial; and judicial review of an award is more limited than judicial review of a trial-all as discussed in Wilko v. Swan, 346 U.S. 427, 435-438, 74 S.Ct. 182, 186, 188, 98 L.Ed. 168. We said in the York case that 'The nub of the policy that underlies Erie R. Co. v. Tompkins is that for the same transaction the accident of a suit by a non-resident litigant in a federal court instead of in a State court a block away, should not lead to a substantially different result.' 326 U.S. at 109, 65 S.Ct. 1470. There would in our judgment be a resultant discrimination if the parties suing on a Vermont cause of action in the federal court were remitted to arbitration, while those suing in the Vermont court could not be.

The District Court found that if the parties were in a Vermont court, the agreement to submit to arbitration would not be binding and could be revoked at any time before an award was made. He gave as his authority Mead's Adm'x v. Owen, 83 Vt. 132, 135, 74 A. 1058, and Sartwell v. Sowles, 72 Vt. 270, 277, 48 A. 11, decided by the Supreme Court of Vermont. In the Owen case the court, in speaking of an agreement to arbitrate, held that ' * *  * either party may revoke the submission at any time before the publication of an award.' 83 Vt. at page 135, 74 A. at page 1059. That case was decided in 1910. But it was agreed on oral argument that there is no later authority from the Vermont courts, that no fracture in the rules announced in those cases has appeared in subsequent rulings or dicta, and that no legislative movement is under way in Vermont to change the result of those cases. Since the federal judge making those findings is from the Vermont bar, we give special weight to his statement of what the Vermont law is. See MacGregor v. State Mutual Life Assur. Co., 315 U.S. 280, 62 S.Ct. 607, 86 L.Ed. 846; Township of Hillsborough, Somerset County, New Jersey v. Cromwell, 326 U.S. 620, 630, 66 S.Ct. 445, 451, 90 L.Ed. 358; Steele v. General Mills, 329 U.S. 433, 439, 67 S.Ct. 439, 442, 91 L.Ed. 402. We agree with him that if arbitration could not be compelled in the Vermont courts, it should not be compelled in the Federal District Court. Were the question in doubt or deserving further canvass, we would of course remand the case to the Court of Appeals to pass on this question of Vermont law. But, as we have indicated, there appears to be no confusion in the Vermont decisions, no developing line of authorities that casts a shadow over the established ones, no dicta, doubts or ambiguities in the opinions of Vermont judges on the question, no legislative development that promises to undermine the judicial rule. We see no reason, therefore, to remand the case to the Court of Appeals to pass on this question of local law.

Respondent argues that since the contract was made in New York and the parties contracted for arbitration under New York law, New York arbitration law should be applied to the enforcement of the contract. A question of conflict of laws is tendered, a question that is also governed by Vermont law. See Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477. It is not clear to some of us that the District Court ruled on that question. We mention it explicitly so that it will be open for consideration on remand of the cause to the District Court.

The judgment of the Court of Appeals is reversed and the cause is remanded to the District Court for proceedings in conformity with this opinion.

Reversed and remanded.