Bernhardt v. Polygraphic Co. of America, Inc.

1956-01-16

Headline: Court limits federal arbitration enforcement and blocks use of the federal arbitration stay in diversity suits unless contracts involve maritime activity or interstate commerce, preserving state control over arbitration rules.

Holding: The Court held that the Federal Arbitration Act’s stay rule (§3) applies only to contracts involving maritime activity or interstate commerce under §§1–2, and that federal courts in diversity cases must follow state law about arbitration enforceability.

Real World Impact:

Restricts use of the federal arbitration stay in diversity cases unless contract involves interstate commerce or maritime activity.
Requires federal courts to follow state law on whether arbitration can be enforced in diversity suits.
Leaves resolution of which state law applies to lower courts on remand.

Topics: arbitration agreements, federal vs state law, diversity cases, employment contracts

Summary

Background

A former employee sued a New York company for damages after being discharged under an employment contract. The contract, made in New York, included an arbitration clause calling for arbitration under New York law by the American Arbitration Association. The employee later lived in Vermont and the case was moved from a Vermont court to a federal court because the parties were citizens of different States (a "diversity" case).

Reasoning

The Court considered whether the federal Arbitration Act requires a federal court to stay a case and send it to arbitration even when the contract does not involve maritime activity or interstate commerce. The Court said the Act’s sections must be read together and that its stay provision (§3) applies only to contracts covered by the Act’s §§1–2 (maritime or commerce contracts). The Court also said that in diversity cases federal courts must respect state-created rights and state law about remedies. Because forcing arbitration can change the substantive outcome of a case, a federal court sitting in a diversity case cannot compel arbitration where the state law would not.

Real world impact

Practically, the decision means federal judges hearing diversity cases should apply the state law that governs whether an arbitration agreement is enforceable, and the federal arbitration stay cannot be used broadly when the contract has no interstate-commerce or maritime link. The Supreme Court reversed the Court of Appeals and sent the case back to the District Court to proceed under this guidance.

Dissents or concurrances

Justices Frankfurter and Harlan agreed with the result but would have sent the case to the Court of Appeals to decide Vermont law; Justice Burton dissented, arguing arbitration is a permissible form of trial and should have been enforced.