Originally from Law and Practice of Arbitration - 4th Edition

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1. Initial Steps toward "Federalization"

The FAA was enacted during the era of Swift v. Tyson.1 The decision in Swift v. Tyson provided that federal courts hearing state law cases on a diversity basis were bound by state court opinions only when the cases before them involved the construction of state constitutions or statutes. When such provisions were not involved, the federal courts were free to devise their own rules of decision independently of state court rulings. Erie Railroad Co. v. Tompkins2 overruled Swift v. Tyson, providing that "there is no general federal common law,"3 and that "Congress has no power to declare substantive rules of common law applicable in a state, whether they be local in their nature or general, whether they be commercial law or a part of the law of torts."4 In effect, Erie reversed the prior doctrine by requiring federal courts, in cases of diversity jurisdiction, to apply state law except when the controversy was governed by the U.S. Constitution or a significant Act of Congress.

Viewing the enactment of the FAA from the perspective of Erie, the question became whether the federal law on arbitration--providing for the enforceability of arbitration agreements and awards--was merely a set of procedural regulations or legislation that created substantive rights and was, therefore, binding upon the federal courts in all cases. More specifically, in a diversity of citizenship case involving predominantly state interests, could the provisions of the FAA dislodge the application of a less favorable or perhaps contrary (but otherwise controlling) state statute or decisional law?

Under Erie, the courts could have envisaged the displacement of applicable state law on arbitration as an impermissible preemptive application of general federal common law. The application of state arbitration laws by federal courts sitting in diversity could have fragmented any national consensus on arbitration and undermined the FAA’s clear mandate to make arbitration an autonomous and viable alternative adjudicatory process. Another view of the federalism dimension of the FAA in diversity cases, however, could be advanced.