such agreement could not be pleaded in bar of the action; nor would such an agreement be ground for a stay of proceedings until arbitra-tion was had.”20 Cohen and Bernheimer’s next push
I NTENDED S COPE OF THE FAA
In the 1920s, Julius Cohen and Charles Bernheimer outlined a three-step plan to promote arbitration: first pass a state statute, then secure federal law to cover interstate and foreign commerce and admiralty, and finally obtain a treaty with foreign countries They had already proven successful in New York, where Cohen—general counsel for the New York State Chamber of Commerce—and Bernheimer, who chaired the Chamber’s arbitration committee, helped win the first modern state arbitration statute That statute made all arbitration agreements enforceable, including agreements to arbitrate future disputes; previously, a party could back out of arbitration any time before the award, and courts would not enforce the agreement, whether it covered future disputes or an existing dispute submitted to arbitration.
Cohen and Bernheimer were strong believers in the efficacy of arbitration, convinced that it could reliably resolve disputes Although they were justifiably proud of their success in New York, they sought to extend arbitration’s reach so that its awards would be enforceable beyond the state's borders.
An arbitration clause formed when a New York party contracts with a resident of another state may not be enforced in the other state's courts if that state lacks a similar arbitration framework More importantly, cross-state enforceability hinges on how state laws interact with federal arbitration statutes, with federal law often shaping or overriding local prohibitions to determine whether the agreement will be honored in practice.
16 Arbitration of Interstate Commercial Disputes: Hearing of S 1005 and H.R 646
Before the J Comm of Subcomms on the Judiciary, 68th Cong 16 (1924) [hereinafter
Joint Hearings] (statement of Julius Cohen)
17 See generally I AN R M ACNEIL , A MERICAN A RBITRATION L AW 28, 34-37 (1992) Pro- fessor Macneil defines “modern” arbitration statutes as those that make agreements to ar- bitrate future disputes irrevocable Id at 15
18 See W ESLEY A S TURGES , A T REATISE ON C OMMERCIAL A RBITRATION AND A WARDS
Under diversity jurisdiction, any enforcement attempt in federal court would fail because federal courts would not enforce the arbitration agreement Both federal and state courts have long followed the ancient English-law rule that a written agreement to arbitrate would not be enforced in equity, and if an action at law were brought, the arbitration agreement could not be pleaded in bar of the action, nor would it justify a stay of proceedings until arbitration had occurred.
Cohen and Bernheimer pursued a three‑part strategy: first, to win congressional passage of a federal law making arbitration agreements enforceable in federal courts; second, to have the National Conference of Commissioners on Uniform State Laws draft a Uniform Arbitration Act that states could adopt, extending enforceability to state courts; and third, to secure a treaty with other nations to enforce international arbitration agreements and awards.
The Federal Arbitration Act was drafted largely by Julius Cohen, modeled on the New York statute In their campaign to make arbitration agreements enforceable in federal court, Bernheimer and Cohen played complementary roles—Bernheimer organized support from national business organizations, while Cohen led the legal effort.
At the joint hearings of the Senate and House subcommittees, Bernheimer argued that his statement is backed by 73 commercial organizations that, by formal vote, approved the bill before the committee He presented the practical business case for arbitration: it saves time, saves trouble, saves money; it preserves business friendships and raises business standards.
It maintains business honor, prevents unnecessary litigation, and eliminates the law’s delay by relieving our courts.” 25
According to the Senate Report (Senate Report No 68-536, 1924), an arbitration agreement could be revoked by either party at any time before the award, and this ability to retract would render the arbitration agreements ineffectual, because the party aggrieved by the other party’s refusal to carry out the agreement would be left without an adequate remedy.
21 See Joint Hearings, supra note 16, at 16
Long before the New York arbitration statute was enacted, Cohen laid the groundwork with the 1918 publication of Commercial Arbitration and the Law Under Bernheimer’s leadership, the New York Chamber of Commerce joined forces with the New York State Bar Association to advance the issue As influential advocates, Cohen and Bernheimer helped secure the passage of an arbitration statute in New Jersey after New York’s statute was adopted, reflecting a coordinated effort to promote arbitration law across states.
See M ACNEIL , supra note 17, at 28, 31, 42-43
24 Joint Hearings, supra note 16, at 7-8
Cohen sought to persuade Congress of the legal value of arbitration by submitting a brief that became part of the congressional record to show why enforceable arbitration agreements could remedy current problems in the legal system He argued that although courts had historically refused to enforce arbitration clauses, such refusals reflected an anachronistic law that Congress had the power to correct, and he emphasized that adopting this legislation would serve public policy by aligning the law with a more efficient, reliable means of dispute resolution.
Cohen argued that the proposed statute targeted three evils in the litigation system: long delays caused by congested courts and excessive motion practice, the high costs of litigation, and the failure to reach a decision regarded as just Businessmen demanded solutions that were simpler, faster, and cheaper, and an arbitration act that would render arbitration agreements enforceable would address all three In his brief, Cohen stressed that the plan was straightforward and limited: it would govern only procedural aspects in federal courts and would not disturb state law.
The statute as drawn establishes a procedure in the Federal courts for the enforcement of arbitration agreements
Each State retains the sovereign right to decide, under its own laws, which contracts may exist and which may not Determining whether a contract exists is a question of the substantive law of the jurisdiction in which the contract was formed.
Enforceability of an arbitration agreement rests on procedural law and is determined by the law of the jurisdiction where the remedy is sought In practical terms, the decision hinges on the applicable procedural rules of the court or forum adjudicating the dispute, meaning that the remedy-seeking jurisdiction ultimately governs whether the arbitration clause will be enforced.
Cohen emphasized that because the statute was procedural, it would not “infringe upon the provinces or prerogatives of the
Rather, he argues there is no intention to use federal power to coerce an individual state into an unwilling submission to arbitration enforcement, and the statute cannot have that effect; federal authority is not intended to compel states or override their sovereignty in arbitration matters.
As cited at 40, one of Cohen’s fellow reformers, Alexander Rose, who represented a precursor of the American Arbitration Association at the Joint Hearings of The Arbitration Society of America, echoed Cohen’s call for federal legislation.
The Impact of Erie v Tompkins
There are several stages in the transformation of the original FAA into the expansive statute it is today A critical turning point was in
Prima Paint Corp v Flood & Conklin Manufacturing Co., 92 where the Court had to decide, post-Erie, whether a federal court could ap- ply the FAA in a diversity case Cases leading up to Prima Paint show a development moving logically but not inevitably to the result in that decision
Erie Railroad Co v Tompkins (1938) held that there is no general federal common law, so in diversity cases federal courts must apply the substantive law of the state where they sit, while continuing to apply federal procedural rules The decision overruled Swift v Tyson, which had allowed a federal court with diversity jurisdiction to apply an unwritten, general common law of the United States rather than the law of the state Under Swift, nonstatutory law was treated as a unitary “transcendental body of law outside of any particular State” and a “brooding omnipresence” of Reason, with federal courts free to ascertain what Reason, and therefore what Law, required.
Under Erie, the FAA, which was considered a procedural statute, would still be applicable in a diversity case In Guaranty Trust Co of
New York v York clarifies the Erie doctrine by rejecting the idea that the choice between state and federal law turns on labeling a rule as substantive or procedural The controlling criterion is outcome determinacy: if applying federal law would produce a different result from applying state law, the federal court must apply state law to ensure consistent outcomes.
97 Guar Trust Co of N.Y v York, 326 U.S 99, 102-03 (1945) (quoting Black & White Taxicab & Transfer Co v Brown & Yellow Taxicab & Transfer Co., 276 U.S 518,
Faced with whether a federal court’s order to arbitrate would be outcome-determinative, the Supreme Court in Bernhardt v Polygraphic Co of America considered a wrongful-discharge claim that had been removed to federal court in Vermont on diversity grounds to decide if the Federal Arbitration Act (FAA) applied to enforce the parties’ arbitration agreement Vermont law at the time appeared to allow revocation of an arbitration agreement before an award If the FAA applied, a court could stay judicial proceedings to permit arbitration to proceed The central question—whether the FAA or Vermont law governed this diversity case—was squarely before the Court However, the Court initially dodged the issue by holding that the employment contract did not fall within Section 2 of the FAA because it was not a contract evidencing a transaction involving commerce, and it therefore denied the stay of proceedings provided by Section 3.
Act 104 because section 3 proceedings were only available for contracts which fit under section 2 Thus, since the FAA was inapplicable, Ver- mont law applied, making the arbitration agreement unenforceable 105
The Court could have stopped there, but it did not It proceeded to analyze whether, apart from the Federal Act, an arbitration clause in a contract is enforceable in a diversity case.
This is curious, since apart from the Federal Act, federal courts had not been willing to enforce arbitration agreements Yet the Court appeared to be considering whether, in the absence of FAA applicability, a judge-made federal procedural rule could require arbitration in a diversity case despite a contrary state rule In assessing whether the decision to require arbitration would be outcome-determinative, the Court emphasized the differences between arbitration and litigation, noting that the shift from a court of law to an arbitration panel can make a radical difference in the ultimate result.
107 For a fuller discussion of this point, see Schwartz, supra note 70, at 33
The choice of tribunal—the forum where a dispute is heard—is a fundamental part of the rights that attach to a cause of action Arbitration does not confer a right to a jury trial, a protection guaranteed by the Seventh Amendment and related constitutional provisions In short, the nature of the adjudicatory body directly affects the procedural guarantees available to parties and the way a dispute is resolved.
Arbitrators do not receive judicial instruction on the law and need not disclose their reasoning, so under the Vermont Constitution the federal rule record would be outcome-determinative and would require applying a conflicting state arbitration rule; thus a federal court could not compel arbitration in a diversity action where a state rule conflicted with a judge-made federal rule However, because that conclusion was not essential to the case’s holding, it was dicta and did not establish that the Federal Arbitration Act (FAA) could not apply in diversity cases Nevertheless, Justice Frankfurter, in his concurrence, argued that differences between arbitration and litigation can affect the outcome of a case, and therefore the FAA should not apply in diversity contexts.
The Federal Arbitration Act (FAA) was designed to ensure enforcement of arbitration agreements in diversity cases, and its effectiveness would be undermined if a state like New York, which required arbitration agreements to be enforced, could not enforce those agreements in federal court against a party from a state like Vermont that permitted revocation Although the Supreme Court in Bernhardt sidestepped the issue by ruling the contract at issue was not covered by the FAA, it was only a matter of time before the question of FAA applicability in a diversity case involving a contract in interstate commerce would arise Eleven years later, the Court confronted that question in Prima Paint.
Prima Paint
P RIMA P AINT ’ S E XPANSIVE P ROGENY : M OSES H C ONE AND S OUTHLAND
Although Prima Paint stopped short of declaring the Federal Arbitration Act (FAA) a substantive statute applicable in state courts, sixteen years later Moses H Cone Memorial Hospital v Mercury Construction Corp clarified the FAA’s reach by reinforcing federal enforcement of arbitration agreements and shaping how state-law defenses interact with arbitration clauses.
In Construction Corp., the Court, in dicta and without citing any authority, asserted that the FAA created a body of federal substantive law governing arbitrability and that the FAA governs in both state and federal courts.
In Moses H Cone Memorial Hospital v Mercury Construction Corp., the hospital sued a construction company in state court The construction company petitioned in federal court to compel arbitration under Section 4 of the Federal Arbitration Act The district court stayed the federal suit pending resolution of the state court action, but the United States Court of Appeals, sitting en banc, reversed the stay and remanded to the district court for entry of an arbitration order.
149 See supra notes 62-70 and accompanying text
Justice Black, in his dissent in Prima Paint, argues that the Court has not held—and appears not to decide—that the body of federal substantive law created by federal judges under the Arbitration Act must be applied by state courts He cautions that a ruling requiring such application would, in his view, flout the framers’ intent in enacting the Arbitration Act.
Justice O’Connor’s dissent in Southland Corp v Keating argues that the Prima Paint decision avoided endorsing the idea that the Arbitration Act imposes substantive policies on all contracts within its reach, regardless of whether the case is heard in state or federal court She emphasizes that Prima Paint’s reasoning is limited to arbitrability and does not establish a universal, contracts-wide substantive policy for arbitration Legal scholars like Paul M Bator and colleagues have cited this point to highlight the narrow scope of Prima Paint’s holding Understanding this distinction helps explain how arbitration law interacts with both state and federal court systems and when arbitration clauses are enforceable.
AL , H ART & W ECHSLER ’ S T HE F EDERAL C OURTS AND THE F EDERAL S YSTEM 731-32 (2d ed 1973)))
Under the Federal Arbitration Act, federal law governs arbitration in both state and federal courts Section 2 declares a liberal federal policy favoring arbitration agreements, superseding any contrary state substantive or procedural policies The effect is to establish a body of federal substantive law of arbitrability that applies to any arbitration agreement within the Act’s coverage The Supreme Court’s decision centered on abstention: whether the federal suit should be stayed in deference to parallel state-court litigation It answered in the negative, holding that the district court’s stay of the federal action had thwarted the federal policy favoring arbitration.
Congress clearly intended to move the parties into arbitration as quickly and easily as possible, and the stay thus frustrated the statutory policy of rapid and unobstructed enforcement of arbitration agreements Although this sufficed to decide the case, the Court inexplicably declared that Section 2 of the Federal Arbitration Act creates substantive law and that it applies in both state and federal courts.
Although the Court emphasized a strong federal policy favoring arbitration, the legislative history offers no basis for this claim The 1925 Congress never indicated that arbitration should be preferred over judicial resolution of disputes; it simply made arbitration of commercial and maritime agreements enforceable in federal court because, until 1925, such agreements had essentially been revocable at will by the parties At no point did anyone argue that arbitration was an overall superior method of resolving disputes Rather, Congress was persuaded that where merchants were concerned, arbitration provided a less expensive option that should be made available to those who voluntarily agreed to this alternative The Act, therefore, would provide enforcement of agreements to arbitrate However, there appears to be no basis for Justice Brennan to state that.
Section 2 embodies a congressional endorsement of a liberal federal policy favoring arbitration agreements, signaling a strong tilt toward arbitration in federal policy The Arbitration Act further provides that, under federal law, any doubts about the scope of arbitrable issues should be resolved in favor of arbitration, broadening the reach of arbitration agreements.
The arbitration policy in question appears to be a judiciary-made construct One possible explanation is that the Court may have indiscriminately superimposed onto the FAA a national labor policy favoring collective bargaining agreements Indeed, just a few years after the Court made the above statements in Moses H Cone, the Court in Mitsubi-
155 Id at 14 (organizing its “analysis by examining the abstention doctrine in its vari- ous forms”)
159 See supra notes 18-19 and accompanying text
160 Moses H Cone, 460 U.S at 24 (emphasis added)
161 Id at 24-25 shi Motors Corp v Soler Chrysler-Plymouth, Inc 162 cited not only
Moses H Cone is cited for the view that doubts about arbitrability should be resolved in favor of arbitration; to bolster that claim and address concerns about Cone's authority, the labor-arbitration decision United Steelworkers v Warrior and Gulf Navigation Co is invoked.
Cone In the Steelworker case, the Court, interpreting section 301 of the Labor Management Relations Act, stated,
Under Section 301, the judicial inquiry is narrowly limited to whether the reluctant party agreed to arbitrate the specific grievance A court should compel arbitration of that grievance only if the arbitration clause can reasonably be interpreted to cover the dispute; if the clause cannot reasonably be interpreted to include the asserted dispute, the order to arbitrate should be denied.
Doubts should be resolved in favor of coverage 165
The policy characterized as federal policy for the FAA actually sits in the labor-law domain, where national objectives favor arbitration of collective bargaining agreements to prevent strikes, reduce worker violence, preserve labor peace, and promote industrial stabilization Those labor-law justifications do not pertain to the FAA, which simply states that arbitration of commercial and maritime disputes can be a workable alternative to litigation.
Under the Arbitration Act, federal law requires that any doubt about the scope of arbitrable issues be resolved in favor of arbitration, a rule drawn from the decision in Moses H Cone Lumber Co v Firestone Tire & Rubber Co (460 U.S 24–25).
Schwartz argues that there is not only a nationalist pull of federal labor law toward the FAA, but also that civil rights–oriented judicial nationalism may have driven Justice Brennan to make the sweeping statements described in Schwartz, supra note 70, at 41.
T HE S UPREME C OURT ’ S N EW A RCHITECTURE FOR THE FAA
By treating the FAA as a substantive statute applicable in both state and federal courts, the Court effectively severed it from its historical context and rarely revisited its legislative history In doing so, the justices not only ignored the historical backdrop but also diminished its relevance for guiding later interpretations.
Justice O’Connor, in her dissent in Southland Corp v Keating (1984), explained that history establishes conclusively that the 1925 Congress viewed the FAA as a procedural statute applicable only in federal courts.
Congress believed, largely from the federal power to control the jurisdiction of the federal courts.” Id
Under 9 U.S.C § 3, when a suit is brought in any federal court and the court is satisfied that the dispute is referable to arbitration under an arbitration agreement, the court must stay the trial of the action The stay lasts until arbitration has been had in accordance with the terms of the agreement, delaying further court proceedings while the arbitration proceeds This provision ensures respect for arbitration agreements and prevents duplicative litigation by allowing the arbitration process to address the dispute before the court resumes with the case.
(2000) Section 4 provides in pertinent part: “A party aggrieved by the alleged failure of another to arbitrate under a written agreement for arbitration may petition any United
States district court which, save for such agreement, would have jurisdiction under Title
28, in a civil action or in admiralty of the subject matter of a suit arising out of the contro- versy between the parties, for an order [compelling arbitration].” Id § 4
211 See Allied-Bruce Terminix Cos v Dobson, 513 U.S 265, 291 (1995) (Thomas, J., dissenting) (“[T]he reason that § 2 does not give rise to federal-question jurisdiction is that it was enacted as a purely procedural provision.”)
212 See E SKRIDGE , supra note 147, at 42
In Southland, Justice O’Connor, in dissent, argued that the majority ignored or recast earlier precedent that aligned with the intent of the enacting Congress Instead, the Court relied on its own recently created precedent to completely rewrite the statute and construct a framework defined by the court’s own approach.