Prima Paint Corporation v. Flood & Conklin Mfg. Company

PETITIONER: Prima Paint Corporation
RESPONDENT: Flood & Conklin Mfg. Company
LOCATION: Smith County Jail

DOCKET NO.: 343
DECIDED BY:
LOWER COURT: United States Court of Appeals for the Second Circuit

CITATION: 388 US 395 (1967)
ARGUED: Mar 16, 1967
DECIDED: Jun 12, 1967

Facts of the case

Question

Media for Prima Paint Corporation v. Flood & Conklin Mfg. Company

Audio Transcription for Oral Argument - March 16, 1967 in Prima Paint Corporation v. Flood & Conklin Mfg. Company

Earl Warren:

Number 343 Prima-Paint-Corporation petitioner versus Flood and Conklin Manufacturing Company.

Mr. Herzog.

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.