Bernhardt v. Polygraphic Co. of Am. - 350 U.S. 198, 76 S. Ct. 273 (1956)

Rule:

What law governs the arbitration clause of an employment contract made with a New York corporation in New York while the employee was a resident of New York, and sued upon in a federal court in Vermont, in which state the employee later became a resident and was to perform his duties, is a question of conflict of laws, as to which the federal court must follow the law of Vermont.

Facts:

Plaintiff Bernhardt entered in New York into an employment contract containing an arbitration clause, his employer, respondent herein, Polygraphic Company of America, Inc. was a New York corporation. The contract was made in New York. The plaintiff became a Vermont resident, where he was to perform his duties under the contract. 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. The present action for damages for the plaintiff's discharge was commenced in a Vermont state court and removed to the Federal District Court on grounds of diversity of citizenship. Respondent moved for a stay of the proceedings so that the controversy could go to arbitration. The motion alleged that the law of New York governs the question whether the arbitration provision of the contract is binding. Petitioner argued that an arbitration provision in his employment agreement with respondent did not bar his federal court diversity suit for wrongful discharge, as governing Vermont law allowed such a provision to be revoked prior to an arbitration award. The district court denied the motion on the ground that under Erie R. Co. v Tompkins the arbitration agreement was governed by Vermont law and under that law was revocable at any time before an award was made. The district court therefore denied the stay but the court of appeals reversed. Petitioner then sought review of the judgment of the court of appeals which ruled that an arbitration provision in petitioner's employment agreement with respondent required a stay in petitioner's federal court diversity suit for wrongful discharge.

Issue:

Did the court of appeal err in ruling that an arbitration provision in petitioner's employment agreement with respondent required a stay in petitioner's federal court diversity suit for wrongful discharge?

Answer:

Yes.

Conclusion:

The Court reversed court of appeals judgment that an arbitration provision in petitioner's employment agreement with respondent required a stay in petitioner's federal diversity suit for wrongful discharge. The case was remanded to the district court for further proceedings. The Supreme Court agreed, saying that the United States Arbitration Act (Act), 9 U.S.C.S. §§ 1-3, incorporated into the contract's arbitration provision, was ineffective. While the Act made certain arbitration provisions enforceable, it was inapplicable here because petitioner's duties under the agreement did not affect commerce. The court further held that the Act, which allowed for stays in court proceedings when arbitration was pending, did not expressly condition the § 3 stay to transactions in commerce was immaterial as each section was part of the field for which Congress was legislating. The Court concluded that in diversity cases, federal procedural law, but local substantive law, was to have been applied. Thus, petitioner's state-created right to recover for discharge was merely enforced by federal procedure, and the outcome did not differ from that of a state court proceeding.