## Facts

- Norman C. Bernhardt sued Polygraphic Company of America, Inc. for damages arising from his discharge under an employment contract.
- The contract was made in New York between Bernhardt (then a New York resident) and Polygraphic (a New York corporation).
- Bernhardt later became a Vermont resident and was to perform his employment duties in Vermont.
- The contract contained an arbitration clause requiring disputes to be arbitrated under New York law before the American Arbitration Association, with the award stated to be final.
- The action was filed in Vermont state court and removed to federal district court based on diversity jurisdiction.
- The employer sought a stay of the federal action to require arbitration in New York.

## Issues

1. Whether the Federal Arbitration Act’s stay provision (§ 3) applied to this employment contract’s arbitration clause.
2. Whether, in a diversity case where the FAA does not apply, Erie requires the federal court to apply state law governing the enforceability of agreements to arbitrate.
3. Whether a federal court sitting in diversity may compel arbitration (or stay litigation for arbitration) when the forum state’s courts would not.
4. On remand, whether Vermont conflict-of-laws rules required application of New York arbitration law to the clause’s enforceability.

## Decision

- The Supreme Court reversed the Second Circuit and remanded to the district court.
- The Court held the FAA did not apply because the contract was not shown to be a maritime transaction or a contract involving commerce.
- The Court held that, in the absence of FAA coverage, Erie required applying state law because the arbitration-versus-litigation choice materially affects enforcement of state-created rights.
- The Court stated that if arbitration could not be compelled in Vermont state court, it likewise could not be compelled in federal court sitting in diversity.
- The Court left open on remand whether Vermont choice-of-law principles required applying New York arbitration law.

## Legal Principles

- FAA § 3 authorizes a stay only for disputes referable to arbitration under contracts within the FAA’s coverage; absent a showing of maritime transaction or a transaction involving commerce, the FAA does not govern.
- In diversity cases not governed by the FAA, the enforceability of an arbitration agreement is substantive for Erie purposes because arbitration can alter the forum and features of adjudication affecting outcomes.
- A federal court in diversity may not compel arbitration (or stay for arbitration) if the forum state’s courts would not compel arbitration on the same claim.
- Choice-of-law questions about which state’s arbitration law governs are decided using the forum state’s conflict-of-laws rules.

## Conclusion

The Court limited FAA-based stays to contracts shown to involve maritime transactions or commerce and held that, when the FAA does not apply, federal diversity courts must follow state law on arbitration enforceability and may not compel arbitration unavailable in the forum state’s courts, subject to state choice-of-law analysis on remand.


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