PRIMA PAINT v. FLOOD & CONKLIN
Legal provision: 9 U.S.C. 1
Argument of Robert P. Herzog
Chief Justice Earl Warren: Number 343 Prima-Paint-Corporation petitioner versus Flood and Conklin Manufacturing Company.
Mr. Robert P. Herzog: Mr. Chief Justice, may it please the Court.
A milestone in constitutional law was reached by this Court in 1938 when it held in Erie against Tompkins Railroad Company that in cases involving disputes between citizens of different states the Federal Court hearing such a case will settle the case on the basis of the applicable state substantive law.
This ruling was made to inform uniformity, that we show uniformity of decision in litigation.
This case brings again the problem of Erie before this Court and in particularly, it's application to the Federal Arbitration Act and contracts concerning that Act in litigation between citizens.
The facts in this case are that these bodies entered into a contract, an employment contract, which contained the an arbitration clause.
The petitioners subsequently discovered or alleged that it had been fraudulently induced to make this agreement.
The petitioner instituted an action in the Court below in the Southern District of New York alleging equitable fraud and sought a recession of the contract.
The jurisdiction of the Court below was based solely upon diversity of the parties and jurisdictional amount.
The respondent had immediately prior to the institution of this action demanded arbitration pursuant to the statutes and laws of the State of New York, Section 7503(c) of the New York State Civil Rules and Procedure.
The Respondent additionally has disputed throughout these proceedings the factual allegations of fraud made by the petitioner.
These factual allegations pertinent here is that the petitioner would have never made this contract, had it had not been for the representation by the respondent that it was a solvent corporation?
Seven days after the respondent and petitioner made this contract the respondent filed a voluntary petition in Chapter 11 in the District Court of New Jersey, and suffered a receivership of its property.
In fact the agreement which was signed on October 7th had been accelerated at the request of the respondent, and seven days later a Chapter 11 proceeding suit and receivership.
In the federal action, which the petitioner brought motions were made simultaneously with its institution.
A motion was made by the petitioner under the Federal Rules of Civil Procedure to stay the demand for arbitration.
This was required because New York Law or under the Law of New York petitioner would have been substantively prevented from challenging the validity of the contract.
The respondent made a cross motion to stay the Federal action and on the other hand compelled arbitration pursuant to the arbitration clause contained in the contract.
Thus the essential question presented here is what tribunal in the first instance is going to investigating the site, a preliminary threshold question of fraud, will it be a Court of Law or it will be an arbitration panel.
The differences I don't think are pertinent at the moment because this Court in Bernhardt and in Wilko v. Swan has gone into the radical difference between arbitration in a Court of Law and the substantial effect that each tribunal can have on the result and outcome of the course of action.
The courts below in this matter have uniformly applied the precedent established by Judge Medina in the Second Circuit in the case of Robert Lawrence Company versus Devonshire Fabrics.
This case is incidentally is in conflict with decisions in the Sixth and Ninth Circuit and has been criticized by the First Circuit for some of its proposition.
Judge Medina in the Lawrence case, and I should say the courts below invoking the Robert Lawrence proposition against the petitioner here relegated the petitioner as a matter of federal substantive law to the arbitration panel.
The question of the very validity and existence of this contract and whether the petitioner would have made and entered it was therefore to be decided by the arbitrators under the clause in the contract.
This proposition of law is contrary to the Law of state of New York where this diversity action was prosecuted.
Now Judge Medina reached this result by the following legal reasoning in the Lawrence case.
The reason that the Federal Arbitration Act created national substantive law and to support this substantive -- national substantive law because it would conflict or clash with the Erie doctrine, he devised a doctrine of separability of the causes of the contract.
He reasoned that Congress intended or referred to in an Arbitration Act as an agreement to arbitrate that, that meant the very clause.
Through this reasoning he claimed that the contract to arbitrate was separable provision and therefore if you do not allege a fraud as to the clause, then a fraud as to any portion of the agreement, no matter what materiality it had, no matter what the reliances, you are relegated to the informal tribunal of arbitration, notwithstanding the contrary state law which Judge Medina recognized at that time at 1960 to be that a fraud permeates the entire agreement and a fraud as to any other portion of the agreement would therefore -- therefore the whole agreement would fall completely.
The second reasoning, he said it was clearly constitutional and the petitioner says that this result of Judge Medina's which conflicts with the Erie principle is obviously unconstitutional, in that you put a premium on the fact that these parties were of diverse citizenship and that further you encourage forum shopping and all the resultant wrongs that Erie sought to correct and third, petitioner asserts that Judge Medina notwithstanding Section 4 which set up a whole procedure for a preliminary hearing on the question of validity of contract said as a matter of law and we feel that he violated the whole intent of Congress in cutting out this problem of a hearing effectively the only hearing you can have under Judge Medina's proposition is if you alleged fraud as the arbitration clause, you don't allege any such fraud, any other issues for the arbitrators.
We submit that Judge Medina's legal reasoning is erroneous and conflict with -- except to constitutional limitations announced by this Court.
Now a preliminary question, we recognize and which is one of the issues here is that in order for the Federal Arbitration Act to apply in the first instance, the Court my preliminarily make a determination that the contract evidence as a transaction and interstate commerce or a maritime transaction which is not the issue here.
The petitioner maintains that this contract is a mere employment contract and the contract speaks for itself and for that reason, I will not venture in to this point, I think the briefs are adequate on it.
But we continue to say and we move to the second proposition assuming this Court were to find that this case is not four squared in point with Bernhardt versus Polygraphic Company of the United States.
That decision of 1956 written by Mr. Justice Douglas held that Section 3 was not to be construed by Second Circuit as to be so broad as to reach all contracts and that Section 2 was definition on its scope and that therefore Section 3 could only reach those contracts defined in Section 2.
This Court speaking through Mr. Justice Douglas specifically pointed out that we hold this way to avoid the constitutional implications.
We hold that this a Bernhardt case, it's an employment contract it's not a transaction, it's not a contract evidencing a transaction in interstate commerce.
Notwithstanding that if the contract were assumed to be in commerce and the Federal Arbitration Act to be applicable, we feel that the Court further erred below in concluding that the Federal Arbitration Act created national substantive law.
There is no intent of Congress specified in this Act, either in the act itself or in any of the sub-committee hearings and in the writings of contemporary authors.
In fact, quite the opposite, the hearings in the Congressional record allude to this Act as being procedural and relating to the law of remedy.
We further maintain that this Court in the Bernhardt case has already indicated that Section 2 was procedural, when it said it was definitional in scope.
We further point out to the Court that all the other sections of the Federal Arbitration Act 1 through 14, I should say 3 through 14 are procedural in all of their application and could not possibly be legally construed to have an substantive effect.
We therefore feel -- now one other point I'd like to make in 1924 just prior to the passage of the Federal Arbitration Act, the Court passed a decision down on this Red Cross Line case by Mr. Justice Brandeis, in that case Mr. Brandeis for the first time established that contracts containing arbitration clauses and arbitration agreements themselves were valid and created a perfect obligation.
In 1925, we believe the Congress relied on the precedent to the Red Cross case and therefore when Congress created the Federal Arbitration Act and specifically referred to in Section 2, the Act that -- the section of the Act that we are looking at, we say that they didn't intend to create substantive rights because these existed because of the Red Cross -- the Red Cross Line case.
The validity of a contract was now the law of the land; we therefore say that Congress was merely roaring a procedural statute to enforce what was now an existing right, that is the right to have arbitration contracts recognized as valid and not an ouster of Judicial Court jurisdiction.
For more --
Justice Abe Fortas: Just hold on, can I ask you this question?
I suppose it's essential in your case to establish that New York Law would permit you access to the courts rather than remitting you to the arbitration.
Mr. Robert P. Herzog: That's correct Mr. Justice Fortas.
Justice Abe Fortas: And is there a difference between you and your adversary as to what New York Law is on this subject?
To say to you that my attention has been called to application of case of application of Amphenol Corporation 266 New York supplement, second, 768 that was later affirmed in the appellant division, is quite a recent case and that states New York Law to be in accordance with Judge Medina's announcement that is to say that in this sort of a situation even though you are relying on fraud and inducement you've got to got arbitrated.
Are you are familiar with that?
Mr. Robert P. Herzog: Yes.
Justice Abe Fortas: I haven't seen it cited in the brief.
Mr. Robert P. Herzog: I didn't cite it in the reply brief but I know it is distinguishable as are the other cases, when the facts of the case are pierced out.
Appendix A to the reply has a recent 1965 unpublished opinion by Judge Inzer Wyatt of the Southern District of New York in which all these cases were analyzed by the district judge.
The only case cited in these proceedings by the Circuit Court, was in the Circuit Court of Appeals was fabrics and Judge --
Justice Abe Fortas: In this case?
Mr. Robert P. Herzog: That's right, the only New York case and Judge Wayte concludes that fabrics if not distinguishable then the decision must be considered with great -- that's appendix 8A in the reply brief Your Honor.
It says the fabrics is not -- if not so distinguishable then the decision must be considered with great deference to be wrong, now this was the sole New York case relied on--
Justice Abe Fortas: That's still another case.
Mr. Robert P. Herzog: Yes, Your Honor but to get you --
Justice Abe Fortas: That is a case in 200 New York something in an earlier case.
Mr. Robert P. Herzog: Yes, Your Honor.
Now this decision of Wayte, of Judge Wayte goes through all the cases, all the material cases and stands for the proposition that New York Law is unchanged and still is, that recession for fraud vitiates the entire agreement.
We submit that the Amphenol case is not distinguishable Your Honor is certainly not the law as an inferior Court decision it's only an appellate provision.
Justice Abe Fortas: It was approved by the appellate division.
Mr. Robert P. Herzog: Yeah, but the highest court here is the Court of Appeals which has annunciated the (Inaudible) which is discussed at length in Judge Wyatt decision which is a part of the appendix and we say that this Court, the Federal Courts must look to the highest Court of the State in order to determine what its precedent is.
It maybe and this is to be conceded, it may be the New York law is slowly changing, this Court even changes the law, but at the present time and in the context of this case, New York law is contrary.
Justice Abe Fortas: In the Amphenol case, Justice (Inaudible) distinguishes the (Inaudible) case.
Mr. Robert P. Herzog: That is correct.
Justice Abe Fortas: He says that in that case there's very narrow arbitration clause.
Mr. Robert P. Herzog: Well, the petitioner relies on the analysis of (Inaudible) which Judge Waytt sets forth there.
It was a 3:4 decision, but he has a very incisive analyzation of that case and shows that the action can be practically considered -- the decision can be practically considered a unanimous decision because addictive in the dissenting opinion.
Justice Abe Fortas: And I suppose when we have to rely on what you had said a moment ago that is to say that maybe some movement in New York Law.
Mr. Robert P. Herzog: There may be Your Honor, but I want to point out that the Lawrence case which is the precedent, here the petitioner is seeking to revoke or overturn in 1960 Judge Medina admitted in the record in the decision that New York Law was contrary and use that as an assumption arriving at its decision.
The petitioner maintains that if you look at all this procedural discussion, the intent of the Congress, the hearings, the writers, the fact that the legislation originated out of the judiciary committees of both houses obviously perhaps Article 3 legislation, although Article 1 may have been used for the commerce, course used to buttress this legislation and thus give it a broader legislative base.
If you read Bernhardt and the decisions of this Court and the other sections of the Federal Arbitration Act plus a Red Cross Line, we conclude that it's only susceptible of one conclusion that this Act is procedural in it's application where diversity of citizenship applies.
Even though the Act evidences a contract in interstate commerce.
By reaching this conclusion, the Court again avoids any constitutional problem that Erie would present.
Justice Abe Fortas: (Inaudible)
Mr. Robert P. Herzog: Yes, Your Honor, it was.
Justice Abe Fortas: (Inaudible)
Mr. Robert P. Herzog: I believe only three or four had Arbitration Acts New Jersey, New York and perhaps one of them.
Justice Abe Fortas: (Inaudible)
Mr. Robert P. Herzog: No, Your Honor the Arbitration Act that Congress passed was patented on the New York Act which had been passed five years earlier.
The New York Courts have characterized the Act when it was being constitutional and the cases cited, -- slip my mind at any rate that the Act was remedial on its application and procedure.
Congress now passed this act under the sponsorship of the American Bar Association in an attempt to try and permit citizens in the various states to have the same procedural remedies that the states returning to these are regular tribunals of arbitration and particularly and it was more important in the commercial centers of this country.
Arbitration, if you look at the expansion of it expanded sort of West, its thoughts in the urban centers and then goes throughout the country.
So New York possibly being a principle urban center and New Jersey and various other states rapidly fell into law and passing arbitration acts at the insistence of their citizens for whatever commercial needs they needed.
And Congress was persuaded of course to undertake similar legislations so there would be problem -- pardon me no problem in the Federal Court coming up with perhaps different results.
We say Congress even recognized there that in a sense to have different system of procedure might work wrongs but we say it was procedural, and it's wholly procedure and even Judge Medina in the Lawrence case and the other lower Courts have held that the Federal arbitration has independent Federal basis for jurisdiction and this is essentially the Erie problem, we're coming to because if you hold it substantive and apply Erie and New York and Oregon the cases involving procedure certain parts of the procedural laws can have substantive outcome on a litigation.
We are going to find a situation where the opposite of Erie occurs.
It's not the fact that you are diverse citizen that works so wrong, it's the fact that the contract is between citizens of the same states, the new two New Yorkers that have an that have arbitration and fraud will vitiate it have a different result.
A hypothetical would be, if I contract with my opponent here to ship interstate goods to California and it's under $10,000, there is no independent right to get into Court and we arbitrate and an attempt to arbitrate is made in New York, I have worked in New York law to my favor and the contract falls under current law.
But if we were diverse citizens, if he was a Jersey resident we could then forum shop and pick our Court, go into the Federal Court and a different result would follow if you follow Judge Medina's Lawrence holding.
Therefore we say the proper rule of law to apply to this type of litigation is a rule of common law or the state common law that fraud vitiates the entire agreement.
Now, we say the Congress intended to because they saved this in Section 2 of the Act.
The section says that arbitration agreements are valid save upon such grounds as exist at lower end equity for the revocation there of.
Justice Byron R. White: What would you think if the state statute said arbitration agreements shall not be enforceable?
Mr. Robert P. Herzog: I would say that, that is a policy of the state and its citizens to (Inaudible).
Justice Byron R. White: And then you have a transaction affecting commerce and the contract calling for arbitration and one of the party sues the other in a contest of dispute to enforce arbitration.
In the Federal Court, in the state that has the statute.
Mr. Robert P. Herzog: I would say that the Federal Court should apply the state law because --
Justice Byron R. White: And they are not enforced --
Mr. Robert P. Herzog: That's correct your honor I don't believe that the Court applying the common law of the state can possibly be considered invidious restraint on interstate commerce, if we the commerce –-
Justice Byron R. White: Are you saying that Congress doesn't have the power to require arbitration agreements to be enforced in transactions effect of commerce.
Mr. Robert P. Herzog: Well, I think Congress may have but they didn't intend it, when they framed this act.
The Act is not as drafted as to permit.
Justice Byron R. White: That they shall be valid and enforceable.
Mr. Robert P. Herzog: Well that means that they are revocable but it doesn't mean that they are well, I should say that they are not revocable that they are valid and I say that the state Court that the Federal Court sitting in such a situation your honor, must find it must apply the state law and then perhaps in those cases a policy decision what we have to be made as to whether the contract is to be deemed valid because of the commerce powers or the powers the Congress to regulate contracts touching on these or to determine that this was not the intent of Congress to legislate into this area and to deem it that the state law to apply and the contract will thus be move forward as far as the arbitration cause concerned.
Justice Byron R. White: What if the Court decided that this statute was to be construed as meaning that Congress really didn't intend to enforce arbitration contracts in interstate transaction despite provisions of local law you would -- would you, is part of your position that that is an unconstitutional.
Mr. Robert P. Herzog: Well, I would say if you are going to find a constitutional basis that it was article 1 the Commerce Clause, and that the Act was then substantive, you than run into the Erie doctrine in where you are going to have the situation that non citizens are going to have a different result as opposed to litigation involving diversity of citizens.
And so I think it's equally objectionable.
Further than that you have to find a preemption of the Act and you're going to have to enforce this unique separability doctrine that Judge Medina imposed and thus throw out the whole concept of the intrical nature of a contract.
Justice Byron R. White: And nobody suggests that Erie means that a dependent in the diversity suit may not invoke a federal statute as a defense.
Mr. Robert P. Herzog: Well, with the preemption doctrine Your Honor you could then claim that the Court could then find that the state law was preempted to the extent of the federalization of the arbitration and that thus the contract, the arbitration clause itself was valid, irrevocable and enforceable.
Justice Byron R. White: There is a question -- very much different here is that, what we --.
Mr. Robert P. Herzog: Yes, I think so there is no national policy involved sir in this case, Lincoln Mills and the other cases will come under the NLRA and the Labor Acts in which there was a strong national policy.
Here the only, there is no restraint on commerce being imposed.
Justice Byron R. White: Now is that's supposed to be -- one simply said the labor contracts are to be enforceable but (Inaudible) enforced.
This contract, this statute says, arbitration agreements will be enforced.
Mr. Robert P. Herzog: Yes, but we still feel that there was that the rational differences that there is a concurrent power here between the state Congress and arbitration didn't want to outlaw all interstate, all state contacts with commerce -- they just wanted to prevent restrains that would impede the free flow of commerce and we don't see how this policy of holding the Federal Act that the state law is applicable can be considered impeding of commerce.
It's merely relegating you to a Court either a Court in the first instance to the try the issue of fraud or the arbitrators and we feel that the substantial difference between arbitration and a Court of law should have this preliminary threshold question, the existence, the meeting of a mind, there certainly can't be an arbitration contract if there is no meeting of the mind.
If Your Honor please, I'd like to reserve the balance of my time for rebuttal.
Chief Justice Earl Warren: Mr. Coleman.
Argument of Martin A. Coleman
Mr. Martin A. Coleman: Mr. Chief Justice, May it please this honorable Court.
The question before this Court is one of congressional intent, did Congress intend to enact a national law of governing arbitration agreements in contracts involving interstate commerce.
If this Court finds affirmatively on that question, we've then reached a second question as to whether the second circuit properly applied the national law.
We submit that the approach taken to the problem by the second circuit is the correct approach.
Congress endorsed the policy of arbitration, it spoke, it wanted to make arbitration available for the businessman who simply cannot afford the delays and the expense which litigation afford him.
Whether we like it or not the commercial litigation these days is the luxury for the wealthy.
A small businessman needs speed and he cannot afford the money or the time for the lengthy litigation process.
Congress recognized this, it made arbitration available.
Section 2 of the Act speaks to interstate commerce and admiralty.
In other words it speaks to the full substantive powers of Congress in those areas and only in those areas.
Congress said that arbitration agreements shall be valid, irrevocable and enforceable.
In answer to Mr. Justice Fortas as to whether the result of this case might or might not be the same in New York law, we believe there is a conflict, but we believe -- we believe there is a conflict in the decisions but the latest decision which is affirmance by the appellate division would seem to indicate that New York state law would send this matter to arbitration.
Justice Abe Fortas: In the Amerteron case.
Mr. Martin A. Coleman: Yes sir, but I submit that that's irrelevant, because had this case come out of the state of Vermont which as this Court found in Bernhardt would not have sent it to arbitration.
The matter should still go to arbitration, it's -- in other words its Federal law that the Court looks to, not the state court.
Justice Abe Fortas: Except that it's kind of a lot of argument about nothing if the result would be the same under the national law or the state law.
Mr. Martin A. Coleman: Your Honor that's exactly right, and in our brief in opposition to granting of certiorari in this case we pointed that out.
That in this particular case, we think it is an argument about nothing.
Justice Potter Stewart: Yeah but that's -- you would concede that is not crystal clear, the law of New York is not crystal clear.
Mr. Martin A. Coleman: Certainly, certainly the Court of Appeals has not yet spoken.
Justice Potter Stewart: And as far as the Court of Appeals has spoken, it's spoken the other way.
Mr. Martin A. Coleman: That is correct, well they clearly haven't spoken the other way, it spoke to an arbitration agreement which was not nearly as to this point.
Justice Potter Stewart: Of a different time.
Mr. Martin A. Coleman: And it's under that arbitration agreement, the parties did not agree to sent through it to the arbitrator, that's what it said.
Justice Byron R. White: What Courts of Appeals agree with the Second Circuit?
Mr. Martin A. Coleman: Excuse me sir.
Justice Byron R. White: What Courts of Appeals agree with the Second Circuit?
Mr. Martin A. Coleman: Well, since Robert Lawrence was decided the Third Circuit explicitly endorsed it, the Fifth Circuit endorsed it although they endorsed it in a case which was then reversed by this Court on other grounds, that's the Mosley case.
In Mosley, this Court found that the fraud went to the arbitration agreement itself.
If it did not the Fifth Circuit would have followed this.
The Sixth Circuit we believe supports the exact same result.
The Sixth Circuit in American Airlines which came down three or four weeks --
Justice Byron R. White: So there are several others who have very expressly disagreed with it?
Mr. Martin A. Coleman: Since the decision in Robert Lawrence came down in 1959 the First Circuit questioned it in a case where it really didn't matter because they sent the matter to arbitration anyway.
Justice Byron R. White: What about the Ninth Circuit?
Mr. Martin A. Coleman: The Ninth Circuit has not spoken since Robert Lawrence Your Honor.
Justice Byron R. White: Has any circuit disagreed with Robert Lawrence before of course?
Mr. Martin A. Coleman: Not to my knowledge Your Honor.
And the lower courts, the Federal District court throughout --
Justice Byron R. White: There was conflict on what Robert Lawrence was granted.
Mr. Martin A. Coleman: Yes, well, yes that is correct when Robert Lawrence was granted the Ninth Circuit had previously said that they were --
Justice Byron R. White: Now they changed their mind about that.
Mr. Martin A. Coleman: Well, they never -- apparently, they never had another case dealing with the question one way or the other.
Justice Byron R. White: So there is an outstanding concept in the Second and Ninth Circuit.
Mr. Martin A. Coleman: And the ninth that is correct, that is correct.
I might point out however that when the Ninth Circuit decided to apply California law, again it really didn't matter because California does have an arbitration statute.
So that it wasn't the situation where the question was do you go to arbitration under Federal law or don't you under state law.
I don't think that they gave the matter indifference as much consideration as they should have.
Justice Byron R. White: How do you get the federal court to enforce an interstate arbitration agreement in accordance with the Federal Arbitration Act?
Mr. Martin A. Coleman: The only way you get into Federal Court is under Title 28 which includes of course diversity of citizenship.
If there is no diversity and if you are not in Federal court for other reason such as a Federal contract you do not get into the Federal --
Justice Byron R. White: Well why is that?
If you think that Arbitration Act is substantive, it gives people the formative rights of raising a federal question.
Mr. Martin A. Coleman: You mean in order to get into Federal court, well if I may answer you in a roundabout way, I like to --
Justice Byron R. White: The statute here and that this was a diversity case, in fact the plaintiff didn't plead in the Federal question, but you pleaded a -- well you pleaded Federal defense.
Mr. Martin A. Coleman: That's correct.
Justice Byron R. White: Now what if that had been turn around would you, why could you – you sued in the Federal court, if the Federal question to enforce your arbitration.
Mr. Martin A. Coleman: No, Section 4 of the Act, which is the section that allows a Federal court to order arbitration, seems to state quite clearly that you need grounds other than the arbitration act to get into the Federal court, but I don't think that meets our problem.
Justice Potter Stewart: The suit they brought against you in the state court.
Mr. Martin A. Coleman: That's exactly --
Justice Potter Stewart: But it was certainly fair --
Mr. Martin A. Coleman: Yes sir, we say we could have and we say that there is no problem of forum shopping because the state courts --
Justice Potter Stewart: Could you have gone into the state courts and asked it on the basis of --
Mr. Martin A. Coleman: This is definitely our contention that the state courts will now have to apply this Federal law because Congress exercised its commerce power --
Justice Potter Stewart: It compliments to what we have held is the case of (Inaudible)
Mr. Martin A. Coleman: Exactly, exactly.
Now, the problems in this case are problems which come about because we have a statute enacted in 1925 long before Congress or anyone else thought about hearing.
The Act however was clearly intended to apply to diversity cases in the Federal court.
Section 2 of the Act in making all agreements to arbitrate in contracts involving interstate commerce valid, irrevocable, enforceable provides for no exceptions to that, all agreements.
What little legislative history --
Justice Byron R. White: Yet you don't well seem to argue in your brief or discuss the question whether or not this particular contract under the commerce law, whether this is commerce, this employment commission.
Mr. Martin A. Coleman: Yes, Sir, we do mention this in our brief.
Justice Byron R. White: You mentioned it, I don't see any development.
Mr. Martin A. Coleman: We really --
Justice Byron R. White: I would think you are fair and would make almost any employment contract with any industrial company in interstate commerce contract.
Mr. Martin A. Coleman: Mr. Justice Douglas we do not argue that we have an employment contract here, this is a characterization put on the contract by petitioner not by us.
Justice Byron R. White: I know but I think you take your position, I don't see how we could avoid calling that almost any employment contract with any company like General Electric, DuPont.
Mr. Martin A. Coleman: No sir, no sir.
Justice Byron R. White: In interstate commerce.
Mr. Martin A. Coleman: No sir, because this is not an employment contract we have, what we have here --
Justice Byron R. White: I know it isn't but I'd say if we take your position I don't see how we can help taking the next one, what would be the distinction?
Mr. Martin A. Coleman: The distinction --
Justice Byron R. White: If your case had an employment -- my employment contract with General Electric, you must --
Mr. Martin A. Coleman: All right in my case I filled assets and those assets were located in number of the states, those assets were the lists of my customers.
I agreed to give consulting services in transferring the servicing of those assets from New Jersey to Baltimore, Maryland.
Now the Second Circuit in their opinion said that beyond her adventure, this is a contract involving interstate commerce.
After all we did have customer lists in many, many states.
The record doesn't indicate how many, it just said several states and then we sold them.
Justice Hugo L. Black: Did the contract state law building?
Mr. Martin A. Coleman: No sir it did not.
Justice Hugo L. Black: Did it give the right that I understand that many contracts here in New York, order who made the contract to accept service on part of other people who lived in other states.
Mr. Martin A. Coleman: No sir it does not.
This is a fully –-
Justice Hugo L. Black: If that is kind of law in New York in order you have arbitration agreement followed thereafter and we tear it out having abandoned a new contract was made as a trainee in fact for a man located in the state of Washington, is that a part of the law of New York?
Mr. Martin A. Coleman: Your Honor, I don't know, but I would hope it's not.
Justice Hugo L. Black: Well, I think maybe you will find it here.
Mr. Martin A. Coleman: However, however here --
Justice Hugo L. Black: Except that some sense being provided for by the person to whom the contract was made, a person living in California or even in China, I won't say China, but other eastern countries.
Mr. Martin A. Coleman: Well, Your Honor I believe you are referring to this National Equipment Rental case of this court two or three years ago.
But that is not our situation --
Justice Hugo L. Black: But that is the Law of New York.
Mr. Martin A. Coleman: Well, that was the law of this court --
Justice Hugo L. Black: Was that -- it was clearly not written by Judge Medina.
Mr. Martin A. Coleman: The National Equipment Rental case Your Honor is a case of this court in 1964, where in a 5:4 decision, the court upheld a clause in a form contract where a Michigan Farmer authorized somebody in New York to accept service for him for a --
Justice Hugo L. Black: And the relative of the President of the company, the contract was made excepted to serve.
Mr. Martin A. Coleman: That's correct, that is a holding of this court in a five to four --
Justice Hugo L. Black: That is under arbitration law of New York.
Mr. Martin A. Coleman: No sir, no sir that was not under arbitration law that was to avail oneself of the courts of New York.
Justice Hugo L. Black: Of the courts –- but wasn't an arbitration, it was not an arbitration?
Mr. Martin A. Coleman: Was not an arbitration, it was litigation.
Justice Hugo L. Black: But they have had arbitrations done in the same way it happened in New York under its law.
Mr. Martin A. Coleman: I don't know of that Your Honor, I would say, I would say if they did, I wouldn't be happy with it.
I think that if a party agrees to arbitrate he has to agree knowingly, willingly he has to know exactly what he is doing.
Justice Hugo L. Black: Why does he have to agree, why couldn't New York have the law that all occasions rising out of interstate commerce.
Now the arbitrary, I am not referring to the board.
Mr. Martin A. Coleman: Well, that would be taking away a person's right to, I think they would be denying a person a constitutional right to go to court.
Nobody, nobody has to arbitrate unless he agreed to and then that I think you have to keep in mind -- Now this is a big step, if you have not agreed to arbitrate or if you can even say I didn't even know the clause was in the contract and if you can demonstrate that, then t we would have a different case, but we have a case where we had attorneys on both sides, we had a fully negotiated contract when we got to the arbitration clause, we took the broadest clause known to the bar and then we made changes in the clause.
We made changes to provide before whom the arbitration would be, so that at least one of the arbitrators must be an attorney, another must be an accountant where we tampered with the clause to provide that the costs of arbitration would be shared equally no matter what the arbitrators did.
When we agreed to arbitrate, we knew precisely what we were doing.
Justice Hugo L. Black: They made pretty strong provisions in the law which get powers from the old doctrine that a person could not in advance of a law suit waive his right to have a trial in court.
Mr. Martin A. Coleman: That is correct, that was the common law here, the common law for as far as I know from the ancient days before this republic had a hostility to arbitration on the theory that it divested the courts of its jurisdiction.
Justice Hugo L. Black: Which it does.
Mr. Martin A. Coleman: Which it does and the common law in the few states today which do not have arbitration statutes is still that way.
But Congress passed this statute in derogation of the common law and in the statute.
Justice Hugo L. Black: Which was subjected to charges that was unconstitutional.
Mr. Martin A. Coleman: The statute—
Justice Hugo L. Black: Wasn't it?
Mr. Martin A. Coleman: I don't believe so Your Honor.
Justice Hugo L. Black: Wasn't it in the Erie?
Mr. Martin A. Coleman: Erie did not speak to this statute to the arbitration.
Justice Hugo L. Black: I am talking about the Congressional enactment.
Mr. Martin A. Coleman: The Congressional enactment.
Justice Hugo L. Black: That arbitrational law.
Mr. Martin A. Coleman: That arbitration has to my knowledge which maybe incomplete as to my knowledge never been challenged as unconstitutional.
The New York statute when that was enacted in 1920 was challenged in the New York Courts as unconstitutional and the New York Courts upheld it because, because the important thing you have to keep in mind with arbitration is that it's entirely voluntary, if you don't want to arbitrate, you don't have to arbitrate.
But once you've agreed to arbitrate --
Justice Hugo L. Black: You could think about that in event of the contract being made or a law suit having arisen.
Mr. Martin A. Coleman: That is right, well, if you first have to wait for a dispute to arise before you agreed on whether or not you will arbitrate it is usually to the advantage of one party, not to arbitrate because he is in no hurry for a quick result.
Arbitration to have any effectiveness must make agreements to arbitrate future disputes irrevocable and the point is that Congress did this, the Act, the Act couldn't be clearer, Section 2--
Justice Hugo L. Black: Not any doubt about that --
Mr. Martin A. Coleman: And I do not believe that in this case we are challenging the Act as unconstitutional, petitioner argues that the Act runs up against Erie problems we don't believe it does.
We don't believe it does because the Act was clearly intended to apply to diversity cases that's in the legislative history of the Act, that's in the law review articles written at that time by attorneys who are members of committees which sponsored the act --
Justice Potter Stewart: Tell me Mr. Coleman, as you said earlier that you couldn't get into Federal Court really on the basis that the Act itself, I gather that's because of that phrase that is Section 4, say for such agreement.
Mr. Martin A. Coleman: Yes sir.
Justice Potter Stewart: Well that, is that tied against your proposition?
Mr. Martin A. Coleman: I don't believe, no I don't believe --
Justice Potter Stewart: What does that clause mean?
You couldn't get into the court --
Mr. Martin A. Coleman: We couldn't get into --
Justice Potter Stewart: The court without an agreement -- without an arbitration given to this context.
Mr. Martin A. Coleman: That's correct.
Justice Potter Stewart: In this context you can't get in without--
Mr. Martin A. Coleman: So you need to see any two things, you need the arbitration agreement or you need three things, you need the arbitration agreement, you need a contract in interstate commerce and you need diversity of citizenship to get into the Federal Court, without the diversity --
Justice Potter Stewart: Why would the Congress say, if this, if I think we have already -- we have positioned it that this creates a Federal right.
Mr. Martin A. Coleman: That is correct.
Justice Potter Stewart: And that it's a right that has to be applied by state court.
Mr. Martin A. Coleman: Absolutely.
Justice Potter Stewart: And yet you conceive that because of this language you can't get into the Federal Court merely on that basis to enforce that Federal right.
Mr. Martin A. Coleman: Well, there you are Your Honor, you have with arbitration -- you have something--
Justice Potter Stewart: Well I mean --
Mr. Martin A. Coleman: Quite unique.
Justice Potter Stewart: Why did Congress do that?
Why would Congress have created a Federal right of a substantive nature and enforceable in a state court and yet not based on the agreement itself enforceable to the federal law?
Mr. Martin A. Coleman: Well, I don't, -- I frankly don't think the Congress when it passed this law gave – thought one way or the other as to its applications to the state.
Justice Potter Stewart: Is there any, is there any history why that's safe with agreement --?
Mr. Martin A. Coleman: No sir, I know of no reason.
Your Honor, in my few remaining minutes I have agreed to yield them to Mr. Aksen of the American Arbitration Association who is here to say a few words to the court.
Thank you very much.
Argument of Gerald Aksen
Mr. Gerald Aksen: Mr. Chief Justice, May it please the court.
Chief Justice Earl Warren: Mr. Aksen.
Mr. Gerald Aksen: Please the court.
Amicus wishes to make clear in this case that it has a no opinion whatsoever with reference to the facts whether or not interstate commerce is involved.
Amicus is terribly concerned the effect, the decision of this court would have on commercial arbitration in this country.
It is also terribly concerned with the attitude of the courts for the concept of a voluntary arbitration, which must be severely differentiated from compulsory arbitration, which exists in this country only to a very, very limited extent.
Outside of the State of Pennsylvania and the railway labor cases we do not have compulsory arbitration in this country.
We are speaking about here --
Justice Hugo L. Black: Is there an association favor.
Mr. Gerald Aksen: No sir, the arbitration--
Justice Hugo L. Black: Is your association the one that worked to get the original arbitration law for its members?
Mr. Gerald Aksen: No sir, the arbitration association was formed the year after the arbitration statute was passed.
This Act was enacted January 1, 1926; the arbitration association was formed in March of 1926.
Justice Hugo L. Black: Had it not been an association before?
Mr. Gerald Aksen: No sir.
Justice Hugo L. Black: It was entirely new.
Mr. Gerald Aksen: This was an entirely new association formed in 1926 after the enactment of the Federal Act.
The associations that sponsored this law will be found at the back of the amicus brief.
There are 122, that we were able to locate today from our files and records of 1923, 24 and 25, all business concerns and Chambers of Commerce throughout almost every state in the United States at the time.
Justice Hugo L. Black: That was the organization (Inaudible) through the Congress.
Mr. Gerald Aksen: That is correct Your Honor.
Justice Hugo L. Black: It is supposed the business then and Chamber of Commerce to do business in interstate fashion.
Mr. Gerald Aksen: Exactly correct.
It is interesting for us to note that this Court very forcefully 1957 and 1960, set forth a national policy on labor arbitration, they had no difficulty with that, we are now faced with the crossroads in American history, but whether or not the common law hostility will now once and for all be discarded.
Congress made it perfectly clear in 1920, this has been observed by one justice.
There were only two states in 1920 that had a provision which made arbitration agreements valid, irrevocable and enforceable.
It will be an absurdity to think that all these business organizations wanted a law which would enforce only a state created right of two states.
Justice Hugo L. Black: May I ask in your association what state law is set to govern in the form you provide –
Mr. Gerald Aksen: The rules provide Your Honor at the moment in this case we're referring to the commercial arbitration rules, that unless the law provides for the contrary.
Justice Hugo L. Black: The law provides for the contrary.
Mr. Gerald Aksen: Right, that's what the rules specify, unless the law provides for the contrary.
If the law had prohibit arbitration in any state, the arbitration association would not be operating in that particular state.
The association is not merely an administrator of commercial arbitrations, it is the largest single private organization in the country responsible for administering labor arbitration, commercial arbitration and insurance arbitrations.
Justice Hugo L. Black: Does it have anything to do with the provisions that appear in most of the large number of the arbitration contract, that the party agrees that the law of the state of the seller -- of the goods, shall govern?
Mr. Gerald Aksen: Nothing whatsoever Your Honor.
You'll find our clause mentioned on the inside cover of the rules.
It has no specific reference to what law should prevail.
I believe Mr. Justice Black is referring to the clause used generally by the textile industry of the United States because of its history, the textile industry has particularly desired to stay out of court, they have provided --
Justice Hugo L. Black: Referring to contract made in the state of New York by New York business who sell goods to people in districts, states and provide in the contrary that the arbitration governed by the laws of New York and be held at such place as a seller of the goods designate to try the case.
Mr. Gerald Aksen: This is not our preference or our clause in anyway.
The parties wish to put that in the contract, we regard it as an item of negotiation as any other part of the contract, we are assuming we are talking about negotiated contracts, if the buyer refuses to sign that part of the clause, he should attempt to change it, but clearly they voluntarily intend and in the bar case and our interest in this matter is, the arbitration association has sponsored what it considers to be the broadest possible arbitration clause to show the parties attempt to arbitrate every dispute that arises out of that contract unless one party can clearly show that the arbitration agreement itself was fraudulently induced.
We in no way intend to deprive the Court of deciding whether the agreement to arbitrate was itself fraudulently induced, but both Congress in the very Federal Arbitration Act, and the fact of arbitration itself necessitate that the arbitration clause be looked to, to make this determination.
The doctrine of separability is one of constructive intent that must be followed and we hardly recommend that the view endorsed by Lawrence, if commercial arbitration is to exist in this country the way the businessmen desire it.
It is a voluntary contract between two parties, to go to arbitration.
There is no requirement but they put this clause in, they may narrow it in anyway they like, we're not saying to the Court to use this clause or interpret it this way if it's narrow, only where the party is saying, as we claim they say here, as if it was said in haec verba the parties intend to arbitrate everything including fraudulent inducement of the contract, but not fraudulent inducement of the arbitration clause.
Justice Potter Stewart: Mr. Aksen, can you enlighten us on how come they're saying for this agreement language in Section 4?
Mr. Gerald Aksen: I can only recommend the alignment set forth by Judge Medina.
Justice Potter Stewart: And that is?
Mr. Gerald Aksen: Who used it basically to bolster the substantive intent of the law.
Had it been a procedural law only, he said this sentence would not have been necessary.
But this sentence plus the very fact that Section 14, in the law which says this law shall not apply to contracts signed before January 1, 1926 to him completely shows the substantive intent necessary in 1924 before Erie.
Justice Potter Stewart: Your position is then that the Court around the country including the state courts should sanction a, fashioned law with respect to commercial arbitration without any particular legislative guidance or anything else except that the arbitration agreements are enforceable and the court should enforce them in accordance to the rule they make or what?
Mr. Gerald Aksen: Well, it's our position that the Federal Act clearly shows under Federal substantive law, what the attitude of the United States is with regard to arbitration agreements and if in fact, the Act was substantive the states will follow that, and this Court can settle the question now once and for all as it did Lincoln Mills case in 1957.
Justice Byron R. White: So your answer is yes, you should take the same course?
Mr. Gerald Aksen: Yes, Mr. Justice White it is.
It is our opinion that labor arbitration is, despite the fact that it's a substitute for industrial strike, it is nevertheless we administer 5,000 of these cases every year purely a dispute between a grievance and this company.
As a matter of fact many of the disputes between commercial businessmen are quite more important time and in money.
And if one company goes out of business because he can't get a prompt decision, many employees union or not may lose their job as a result.
Justice Potter Stewart: (Inaudible)
Mr. Gerald Aksen: No sir I have no figures on that.
Chief Justice Earl Warren: All right, we'll recess now.