In Bernhardt v. Polygraphic Company of America, Inc., the U.S. Supreme Court addressed whether a federal court sitting in diversity should apply state law or federal common law to determine if an arbitration clause in a contract is enforceable. The plaintiff, Bernhardt, was employed by the defendant company and his employment contract contained an arbitration clause. After being laid off due to alleged disability, he sued for wrongful termination under Vermont's workers' compensation statute but the company sought to compel arbitration per their agreement. The lower courts applied federal common law which favored enforcement of such clauses and dismissed his suit. The Supreme Court reversed this decision on appeal stating that Erie Railroad Co v Tompkins required application of state substantive law (which did not favor enforcing such clauses) rather than creating new federal common laws when hearing cases based on diversity jurisdiction - where parties are from different states or countries - as it interferes with state rights over local matters and creates unnecessary conflicts between state and federal courts.

In the dissenting opinion for Bernhardt v. Polygraphic Company of America, Inc., Justice Felix Frankfurter argued that the case should have been decided based on Vermont law rather than federal common law. He believed that since both parties were from different states and had agreed to resolve their disputes in accordance with Vermont law, it was inappropriate for the Court to apply a federal rule instead. Furthermore, he expressed concern about the potential implications of this decision on state rights and autonomy in contract enforcement matters. He also disagreed with majority's interpretation of "Erie doctrine", stating that it does not require application of state substantive rules when they conflict with federal procedural ones but rather calls for respect towards state laws unless there is a compelling reason otherwise.