ArtIII.S2.C1.18.7 Conflicts-of-Law and Procedural Rules in Diversity Cases

Article III, Section 2, Clause 1:

The judicial Power shall extend to all Cases, in Law and Equity, arising under this Constitution, the Laws of the United States, and Treaties made, or which shall be made, under their Authority;—to all Cases affecting Ambassadors, other public Ministers and Consuls;—to all Cases of admiralty and maritime Jurisdiction; to Controversies to which the United States shall be a Party;—to Controversies between two or more States; between a State and Citizens of another State, between Citizens of different States,—between Citizens of the same State claiming Lands under Grants of different States, and between a State, or the Citizens thereof, and foreign States, Citizens or Subjects.

In diversity jurisdiction cases that present conflicts-of-law issues—that is, in cases in which the laws of two or more states could apply to the dispute—the Court has reiterated that the district court is to apply the conflict-of-law rules of the state in which it sits. In other words, in a federal court case in State A in which the law of State B applies under State A’s conflict-of-law rules, perhaps because a contract was made in State B or a tort was committed there, the federal court is to apply State A’s conception of State B’s law.1

The greatest difficulty in applying the Erie doctrine, which generally directs federal courts sitting in diversity to apply state substantive law but federal procedural law, has been in cases in which the distinction between substantive and procedural rules is blurred.2 In 1945, in Guaranty Trust Co. of New York v. York, the Court held that a state statute of limitations, which was at times deemed a matter of “procedure” but would have barred suit in state court, applied to bar the case in federal court.3 The Court regarded the substance-procedure distinction as immaterial. Instead, “since a federal court adjudicating a state-created right solely because of the diversity of citizenship of the parties is for that purpose, in effect, only another court of the State, it cannot afford recovery if the right to recover is made unavailable by the State nor can it substantially affect the enforcement of the right as given by the State.” 4 This outcome-determinative standard, the Court explained, was compelled by Erie’s “intent,” which was to ensure that, in all cases where a federal court is exercising jurisdiction solely because of the parties’ diverse citizenship, “the outcome of the litigation in the federal court should be substantially the same, so far as legal rules determine the outcome of a litigation, as it would be if tried in a State court.” 5

The Supreme Court’s application of the outcome-determinative standard created substantial doubt that the Federal Rules of Civil Procedure were valid in diversity jurisdiction cases.6 In 1965, however, the Court, in Hanna v. Plumer, limited the standard’s application in matters governed by the Federal Rules.7 Under Hanna and its progeny, the outcome-determinative standard is not the proper test when the question is the application of one of the Federal Rules of Civil Procedure. Instead, if the rule is valid under the Rules Enabling Act—which authorizes the Supreme Court to prescribe general rules of practice and procedure and rules of evidence for the federal courts—and the Constitution, it is to be applied regardless of state law to the contrary.8

Some uncertainty remains as to which law to apply—state or federal—in the absence of a federal statute or a Federal Rule of Civil Procedure. In Byrd v. Blue Ridge Rural Electric Cooperative, Inc., the Supreme Court said that “outcome” was no longer the sole determinant, and that countervailing considerations expressed in federal policy on the conduct of federal trials should be considered.9 Under this balancing standard, the Court held that a state rule that requires a judge (rather than a jury) to decide whether a particular defense applied in a tort action had to yield to a federal policy favoring juries, as reflected by the Seventh Amendment.10

Later, in Gasperini v. Center for Humanities, Inc., the Supreme Court considered whether to apply a state statute—which gave state appellate courts the authority to determine if a damages award is excessive or inadequate if it deviates materially from what would be reasonable compensation—or a federal court-created practice of reviewing awards to determine whether they were so exorbitant that it shocked the conscience of the court.11 The Court first determined that the state statute was both substantive and procedural, and that substantial variation in damage awards would result depending on whether the state or the federal approach was applied.12 It then followed the mode of analysis under York, emphasizing the importance of federal courts reaching the same outcome as would the state courts,13 rather than what had been the prevailing standard under Byrd, in which the Court balanced state and federal interests to determine which law to apply.14 The Court’s evolving approach to deciding whether state or federal law applies in these cases reflects a continuing difficulty of accommodating “the constitutional power of the states to regulate the relations among their citizens” on the one hand, and “the constitutional power of the federal government to determine how its courts are to be operated” on the other hand.15

Although it seems clear that Erie applies in non-diversity cases in which the source of the right sued upon is state law,16 it is also evident that Erie is not always applicable in diversity cases, regardless of whether the issue is substantive or procedural. For instance, it may be that there is an overriding federal interest that compels national uniformity of rules, such as a case involving the appropriate rule for determining a bank’s liability for guaranteeing a forged federal check;17 whether a tortfeasor is liable to the United States for hospitalization of a soldier and loss of his services;18 or the validity of a defense raised by a federal officer sued for allegedly committing libel in the course of his official duties.19 In such cases, when the issue is controlled by federal law, common or otherwise, the result is binding on state as well as on federal courts.20 As a result, notwithstanding Justice Brandeis’s oft-quoted statement that there is “no federal general common law,” 21 there are areas of law where “federal judges may appropriately craft the rule of decision.” 22 Nonetheless, because legislative power is vested in Congress, federal common law plays a “necessarily modest role” 23 under the Constitution; such common lawmaking must be “necessary to protect uniquely federal interests.” 24

Klaxon Co. v. Stentor Mfg. Co., 313 U.S. 487 (1941); Griffin v. McCoach, 313 U.S. 498 (1941); Wells v. Simonds Abrasive Co., 345 U.S. 514 (1953); Nolan v. Transocean Air Lines, 365 U.S. 293 (1961). back
Notably, courts in diversity actions were free to formulate a federal common law, but were required by the Conformity Act, § 5, 17 Stat. 196 (1872), to conform their procedure to that of the state in which the court sat. Erie then ruled that state substantive law was to control in federal court diversity actions, while by implication matters of procedure in federal court were subject to congressional governance. Congress authorized the Court to promulgate rules of civil procedure, 48 Stat. 1064 (1934), which it did in 1938, a few months after Erie was decided. 302 U.S. 783. back
326 U.S. 99 (1945). back
Id. at 108–09. back
Id. at 109. back
Cohen v. Beneficial Indus. Loan Corp., 337 U.S. 541 (1949) (state rule making unsuccessful plaintiffs liable for all expenses and requiring security for such expenses as a condition of proceeding in federal court); Woods v. Interstate Realty Co., 337 U.S. 535 (1949) (state statute barring foreign corporation not qualified to do business in the state applies in federal court); Ragan v. Merchs. Transfer & Warehouse Co., 337 U.S. 530 (1949) (state rule determinative when an action is begun for purposes of statute of limitations applicable in federal court although a Federal Rule of Civil Procedure states a different rule). back
Hanna v. Plumer, 380 U.S. 460 (1965). back
See Burlington N. R. Co. v. Woods, 480 U.S 1, 5–8 (1987); Bus. Guides, Inc. v. Chromatic Comm’ns Enterps., Inc., 498 U.S. 533, 551–52 (1991); Shady Grove Orthopedic Assocs. v. Allstate Ins. Co., 559 U.S. 393, 398–401 (2010). back
356 U.S. 525 (1958). back
Id. at 537–38. back
518 U.S. 415 (1996). back
Id. at 428–31. back
E.g., Guar. Tr. Co. v. York, 326 U.S. 99,108–09 (1945). back
E.g., Byrd v. Blue Ridge Rural Elec. Coop., 356 U.S. 525 (1958). back
19 Wright & Miller, Federal Practice and Procedure: jurisdiction and Related Matters § 4511 (3d. ed. Apr. 2021). back
See Maternally Yours v. Your Maternity Shop, 234 F.2d 538, 540 n.1 (2d Cir. 1956) (noting, in a case in which the court exercises supplemental jurisdiction over a state law unfair competition claim, that “the Erie doctrine applies, whatever the ground for federal jurisdiction, to any issue or claim which has its source in state law” ). The contrary view was implied in Levinson v. Deupree, 345 U.S. 648, 651 (1953), and by Justice Robert Jackson in D’Oench, Duhme & Co. v. FDIC, 315 U.S. 447, 466–67, 471–72 (1942) (concurring opinion). See Wichita Royalty Co. v. City Nat’l Bank, 306 U.S. 103 (1939). back
Clearfield Tr. Co. v. United States, 318 U.S. 363 (1943). See also Nat’l Metro. Bank v. United States, 323 U.S. 454 (1945); D’Oench, Duhme & Co., 315 U.S. 447; United States v. Standard Rice Co., 323 U.S. 106 (1944); United States v. Acri, 348 U.S. 211 (1955); Ivanhoe Irrigation Dist. v. McCracken, 357 U.S. 275 (1958); Bank of Am. Nat’l Tr. & Sav. Ass’n v. Parnell, 352 U.S. 29 (1956). But see United States v. Yazell, 382 U.S. 341 (1966); O’Melveny & Myers v. FDIC, 512 U.S. 79 (1994). back
United States v. Standard Oil Co., 332 U.S. 301 (1947). Federal law applies in maritime tort cases brought on the “law side” of the federal courts in diversity cases. Pope & Talbot v. Hawn, 346 U.S. 406 (1953). back
Howard v. Lyons, 360 U.S. 593 (1959). Matters concerned with foreign relations also are governed by federal law in diversity. Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398 (1964). Federal common law also governs a government contractor defense in certain cases. Boyle v. United Techs. Corp., 487 U.S. 500 (1988). back
Free v. Bland, 369 U.S. 663 (1962); Yiatchos v. Yiatchos, 376 U.S. 306 (1964). back
See Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78 (1938). back
See Rodriguez v. FDIC, No. 18-1269, slip op. at 4 (U.S. Feb. 25, 2020). back
Id. back
Texas Indus., Inc. v. Radcliff Materials, Inc., 451 U.S. 630, 640 (1981) (quoting Banco Nacional de Cuba, 376 U.S. at 426) (internal quotation marks omitted); see also, e.g., Rodriguez, 140 S. Ct. at 717–18 (concluding that a federal common law rule inappropriately developed by the lower courts concerning allocation of a refund to an affiliated group of corporations did not implicate any significant federal interests, and did not necessitate discarding the application of state law with respect to the tax dispute). back