Law Applied 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.
By virtue of § 34 of the Judiciary Act of 1789,1 state law expressed in constitutional and statutory form was regularly applied in federal courts in diversity actions to govern the disposition of such cases. But, in Swift v. Tyson,2 Justice Story for the Court ruled that state court decisions were not laws within the meaning of § 34 and though entitled to respect were not binding on federal judges, except with regard to matters of a “local nature,” such as statutes and interpretations thereof pertaining to real estate and other immovables, in contrast to questions of general commercial law as to which the answers were dependent not on “the decisions of the local tribunals, but in the general principles and doctrines of commercial jurisprudence.” 3 The course of decision over the period of almost one hundred years was toward an expansion of the areas in which federal judges were free to construct a federal common law and a concomitant contraction of the definition of “local” laws.4 Although dissatisfaction with Swift v. Tyson was almost always present, within and without the Court,5 it was the Court's decision in Black & White Taxicab & Transfer Co. v. Brown & Yellow Taxicab & Transfer Co.6 that brought disagreement to the strongest point and perhaps precipitated the overruling of Swift v. Tyson in Erie Railroad Co. v. Tompkins.7
“It is impossible to overstate the importance of the Erie decision. It announces no technical doctrine of procedure or jurisdiction, but goes to the heart of the relations between the Federal Government and the states, and returns to the states a power that had for nearly a century been exercised by the federal government.” 8 Erie was remarkable in a number of ways aside from the doctrine it announced. It reversed a 96-year-old precedent, which counsel had specifically not questioned; it reached a constitutional decision when a statutory interpretation was available though perhaps less desirable; and it marked the only time in United States constitutional history when the Court has held that it had undertaken an unconstitutional action.9
Tompkins was injured by defendant's train while he was walking along the tracks. He was a citizen of Pennsylvania, and the railroad was incorporated in New York. Had he sued in a Pennsylvania court, state decisional law was to the effect that, because he was a trespasser, the defendant owned him only a duty not to injure him through wanton or willful misconduct;10 the general federal law treated him as a licensee who could recover for negligence. Tompkins sued and recovered in federal court in New York and the railroad presented the issue to the Supreme Court as one covered by “local” law within the meaning of Swift v. Tyson. Justice Brandeis for himself and four other Justices, however, chose to overrule the early case.
First, it was argued that Tyson had failed to bring about uniformity of decision and that its application discriminated against citizens of a state by noncitizens. Justice Brandeis cited recent researches11 indicating that § 34 of the 1789 Act included court decisions in the phrase “laws of the several States.” “If only a question of statutory construction were involved we should not be prepared to abandon a doctrine so widely applied throughout nearly a century. But the unconstitutionality of the course pursued has now been made clear, and compels us to do so.” 12 For a number of reasons, it would not have been wise to have overruled Tyson on the basis of arguable new discoveries.13
Second, the decision turned on the lack of power vested in Congress to prescribe rules for federal courts in state cases. “There is no federal general common law. Congress has no power to declare substantive rules of common law applicable in a State whether they be local in their nature or ‘general,’ be they commercial law or a part of the law of torts. No clause in the Constitution purports to confer such a power upon the federal courts.” 14 But having said this, Justice Brandeis made it clear that the unconstitutional assumption of power had been made not by Congress but by the Court itself. “[W]e do not hold unconstitutional § 34 of the Federal Judiciary Act of 1789 or any other Act of Congress. We merely declare that in applying the doctrine this Court and the lower courts have invaded rights which in our opinion are reserved by the Constitution to the several States.” 15
Third, the rule of Erie replacing Tyson is that “[e]xcept in matters governed by the Federal Constitution or by Acts of Congress, the law to be applied in any case is the law of the State. Whether the law of the State shall be declared by its Legislature in a statute or by its highest court in a decision is not a matter of federal concern.” 16
Since 1938, the effect of Erie has first increased and then diminished, as the nature of the problems presented changed. Thus, the Court at first indicated that not only were the decisions of the highest court of a state binding on a federal diversity court, but also decisions of intermediate appellate courts17 and courts of first instance,18 even where the decisions bound no other state judge except as they were persuasive on their merits. It has now retreated from this position, concluding that federal judges are to give careful consideration to lower state court decisions and to old, perhaps outmoded decisions, but that they must find for themselves the state law if the state's highest court has not spoken definitively within a period that would raise no questions about the continued viability of the decision.19 In the event of a state supreme court reversal of an earlier decision, the federal courts are, of course, bound by the later decision, and a judgment of a federal district court, correct when rendered, must be reversed on appeal if the state's highest court in the meantime has changed the applicable law.20 In diversity cases that present conflicts of law problems, the Court has reiterated that the district court is to apply the law of the state in which it sits, so that in a case in State A in which the law of State B is applicable, perhaps because a contract was made there or a tort was committed there, the federal court is to apply State A's conception of State B's law.21
The greatest difficulty in applying the Erie doctrine has been in cases in which issues of procedure were important.22 The process was initiated in 1945 when the Court held that a state statute of limitations, which would have barred suit in state court, would bar it in federal court, although as a matter of federal law the case still could have been brought in federal court.23 The Court regarded the substance-procedure distinction as immaterial. “[S]ince 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.” 24 The standard to be applied was compelled by the “intent” of Erie, which “was to insure that, in all cases where a federal court is exercising jurisdiction solely because of the diversity of citizenship of the parties, 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.” 25 The Court's application of this standard created substantial doubt that the Federal Rules of Civil Procedure had any validity in diversity cases.26
But, in two later cases, the Court contracted the application of Erie in matters governed by the Federal Rules. Thus, in the earlier case, the Court said that “outcome” was no longer the sole determinant and countervailing considerations expressed in federal policy on the conduct of federal trials should be considered; a state rule making it a question for the judge rather than a jury of a particular defense in a tort action had to yield to a federal policy enunciated through the Seventh Amendment of favoring juries.27 Some confusion has been injected into consideration of which law to apply—state or federal – in the absence of a federal statute or a Federal Rule of Civil Procedure.28 In an action for damages, the federal courts were faced with the issue of the application either of a state statute, which gave the appellate division of the state courts the authority to determine if an award is excessive or inadequate if it deviates materially from what would be reasonable compensation, or of a federal judicially created practice of review of awards as so exorbitant that it shocked the conscience of the court. The Court determined that the state statute was both substantive and procedural, which would result in substantial variations between state and federal damage awards depending whether the state or the federal approach was applied; it then followed the mode of analysis exemplified by those cases emphasizing the importance of federal courts reaching the same outcome as would the state courts,29 rather than what had been the prevailing standard, in which the Court balanced state and federal interests to determine which law to apply.30 Emphasis upon either approach to considerations of applying state or federal law reflects a continuing difficulty of accommodating “the constitutional power of the states to regulate the relations among their citizens . . . [and] the constitutional power of the Federal Government to determine how its courts are to be operated.” 31 Additional decisions will be required to determine which approach, if either, prevails. The latter ruling simplified the matter greatly. Erie is not to be the proper test when the question is the application of one of the Rules of Civil Procedure; if the rule is valid when measured against the Enabling Act and the Constitution, it is to be applied regardless of state law to the contrary.32
Although it seems clear that Erie applies in nondiversity cases in which the source of the right sued upon is state law,33 it is equally clear that Erie is not applicable always in diversity cases whether the nature of the issue be substantive or procedural. Thus, it may be that there is an overriding federal interest which compels national uniformity of rules, such as a case in which the issue is the appropriate rule for determining the liability of a bank which had guaranteed a forged federal check,34 in which the issue is the appropriate rule for determining whether a tortfeasor is liable to the United States for hospitalization of a soldier and loss of his services35 and in which the issue is the appropriate rule for determining the validity of a defense raised by a federal officer sued for having libeled one in the course of his official duties.36 In such cases, when the issue is found to be controlled by federal law, common or otherwise, the result is binding on state courts as well as on federal.37 As a result, notwithstanding Justice Brandeis's oft-quoted statement that there is “no federal general common law,” 38 there are areas of law where “federal judges may appropriately craft the rule of decision.” 39 Nonetheless, because legislative power is vested in Congress, federal common law plays a “necessarily modest role” 40 under the Constitution, and such common lawmaking must at a minimum be “necessary to protect uniquely federal interests.” 41
- The section provided that “the laws of the several states, except where the constitution, treaties, or statutes of the United States shall otherwise require or provide, shall be regarded as rules of decision in trials at common law in the courts of the United States in cases where they apply.” 1 Stat. 92. With only insubstantial changes, the section now appears as 28 U.S.C. § 1652. For a concise review of the entire issue, see C. Wright, Handbook of the Law of Federal Courts ch. 9 (4th ed. 1983).
- 41 U.S. (16 Pet.) 1 (1842). The issue in the case was whether a pre-existing debt was good consideration for an indorsement of a bill of exchange so that the endorsee would be a holder in due course.
- 41 U.S. at 19. The Justice concluded this portion of the opinion: “The law respecting negotiable instruments may be truly declared in the language of Cicero, adopted by Lord Mansfield in Luke v. Lyde, 2 Burr. R. 883, 887, to be in great measure, not the law of a single country only, but of the commercial world. Nun erit alia lex Romae, alia Athenis; alia munc, alia posthac, sed et apud omnes gentes, et omni tempore una eademque lex obtenebit.” Id. The thought that the same law should prevail in Rome as in Athens was used by Justice Story in DeLovio v. Boit, 7 F. Cas. 418, 443 (No. 3776) (C.C.D. Mass. 1815). For a modern use, see United States v. Jefferson County Bd. of Educ., 372 F.2d 836 (5th Cir. 1966); 380 F.2d 385, 398 (5th Cir. 1967) (dissenting opinion).
- The expansions included Lane v. Vick, 44 U.S. (3 How.) 464 (1845) (wills); City of Chicago v. Robbins, 67 U.S. (2 Bl.) 418 (1862), and Baltimore & Ohio R.R. v. Baugh, 149 U.S. 368 (1893) (torts); Yates v. City of Milwaukee, 77 U.S. (10 Wall.) 497 (1870) (real estate titles and rights of riparian owners); Kuhn v. Fairmont Coal Co., 215 U.S. 349 (1910) (mineral conveyances); Rowan v. Runnels, 46 U.S. (5 How.) 134 (1847) (contracts); Lake Shore & M.S. Ry. v. Prentice, 147 U.S. 101 (1893). It was strongly contended that uniformity, the goal of Justice Story's formulation, was not being achieved, in great part because state courts followed their own rules of decision even when prior federal decisions were contrary. Frankfurter, Distribution of Judicial Power Between Federal and State Courts, 13 Cornell L.Q. 499, 529 n.150 (1928). Moreover, the Court held that, although state court interpretations of state statutes or constitutions were to be followed, federal courts could ignore them if they conflicted with earlier federal constructions of the same statute or constitutional provision, Rowan v. Runnels, 46 U.S. (5 How.) 134 (1847), or if they had been rendered after the case had been tried in federal court, Burgess v. Seligman, 107 U.S. 20 (1883), thus promoting lack of uniformity. See also Gelpcke v. City of Debuque, 68 U.S. (1 Wall.) 175 (1865); Williamson v. Berry, 49 U.S. (8 How.) 495 (1850); Pease v. Peck, 59 U.S. (18 How.) 595 (1856); Watson v. Tarpley, 59 U.S. (18 How.) 517 (1856).
- Extensions of the scope of Tyson frequently were rendered by a divided Court over the strong protests of dissenters. E.g., Gelpcke v. City of Debuque, 68 U.S. (1 Wall.) 175 (1865); Lane v. Vick, 44 U.S. (3 How.) 464 (1845); Kuhn v. Fairmont Coal Co., 215 U.S. 349 (1910). In Baltimore & Ohio R. Co. v. Baugh, 149 U.S. 368, 401–04 (1893), Justice Field dissented in an opinion in which he expressed the view that Supreme Court disregarding of state court decisions was unconstitutional, a view endorsed by Justice Holmes in Black & White Taxicab & Transfer Co. v. Brown & Yellow Taxicab & Transfer Co., 276 U.S. 518, 533 (1928) (dissenting opinion), and adopted by the Court in Erie Railroad Co. v. Tompkins, 304 U.S. 64 (1938). Numerous proposals were introduced in Congress to change the rule.
- 276 U.S. 518 (1928). B. & W. had contracted with a railroad to provide exclusive taxi service at its station. B. & Y. began operating taxis at the same station and B. & W. wanted to enjoin the operation, but it was a settled rule by judicial decision in Kentucky courts that such exclusive contracts were contrary to public policy and were unenforceable in court. Therefore, B. & W. dissolved itself in Kentucky and reincorporated in Tennessee, solely in order to create diversity of citizenship and enable itself to sue in federal court. It was successful and the Supreme Court ruled that diversity was present and that the injunction should issue. In Mutual Life Ins. Co. v. Johnson, 293 U.S. 335 (1934), the Court, in an opinion by Justice Cardozo, appeared to retreat somewhat from its extensions of Tyson, holding that state law should be applied, through a “benign and prudent comity,” in a case “balanced with doubt,” a concept first used by Justice Bradley in Burgess v. Seligman, 107 U.S. 20 (1883).
- 304 U.S. 64 (1938). Judge Friendly has written: “Having served as the Justice's [Brandeis’] law clerk the year Black & White Taxicab & Transfer Co. v. Brown & Yellow Taxicab & Transfer Co. came before the Court, I have little doubt he was waiting for an opportunity to give Swift v. Tyson the happy dispatch he thought it deserved.” H. Friendly, Benchmarks 20 (1967).
- C. Wright, Handbook of the Law of Federal Courts 355 (4th ed. 1983). See Judge Friendly's exposition, In Praise of Erie—And of the New Federal Common Law, in H. Friendly, Benchmarks 155 (1967).
- 304 U.S. at 157–64, 171 n.71.
- This result was obtained in retrial in federal court on the basis of Pennsylvania law. Tompkins v. Erie Railroad Co., 98 F.2d 49 (3d Cir. 1938), cert. denied, 305 U.S. 637 (1938).
- Erie Railroad Co. v. Tompkins, 304 U.S. 64, 72–73 (1938), citing Warren, New Light on the History of the Federal Judiciary Act of 1789, 37 Harv. L. Rev. 49 84–88 (1923). See C. Wright, Handbook of the Law of Federal Courts 353 (4th ed. 1983).
- 304 U.S. at 77–78 (footnote citations omitted).
- Congress had re-enacted § 34 as § 721 of the Revised Statutes, citing Swift v. Tyson in its annotation, thus presumably accepting the gloss placed on the words by that ruling. But note that Justice Brandeis did not think even the re-enacted statute was unconstitutional. 304 U.S. at 79–80. See H. Friendly, Benchmarks 161–163 (1967). Perhaps a more compelling reason of policy was that stated by Justice Frankfurter rejecting for the Court a claim that the general grant of federal question jurisdiction to the federal courts in 1875 made maritime suits cognizable on the law side of the federal courts. “Petitioner now asks us to hold that no student of the jurisdiction of the federal courts or of admiralty, no judge, and none of the learned and alert members of the admiralty bar were able, for seventy-five years, to discern the drastic change now asserted to have been contrived in admiralty jurisdiction by the Act of 1875. In light of such impressive testimony from the past the claim of a sudden discovery of a hidden latent meaning in an old technical phrase is surely suspect.”
“The history of archeology is replete with the unearthing of riches buried for centuries. Our legal history does not, however, offer a single archeological discovery of new, revolutionary meaning in reading an old judiciary enactment. [Here, the Justice footnotes: ‘For reasons that would take us too far afield to discuss, Erie Railroad Co. v. Tompkins, 304 U.S. 64 (1938), is no exception.’] The presumption is powerful that such a far-reaching, dislocating construction as petitioner would now have us find in the Act of 1875 was not uncovered by judges, lawyers or scholars for seventy-five years because it is not there.” Romero v. International Terminal Operating Co., 358 U.S. 354, 370–371 (1959).
- 304 U.S. at 78. Justice Brandeis does not argue the constitutional issue and does not cite either provisions of the Constitution or precedent beyond the views of Justices Holmes and Field. Id. at 78–79. Justice Reed thought that Article III and the Necessary and Proper Clause might contain authority. Id. at 91–92 (Justice Reed concurring in the result). For a formulation of the constitutional argument in favor of the Brandeis position, see H. Friendly, Benchmarks 167–171 (1967). See also Bernhardt v. Polygraphic Co. of America, 350 U.S. 198, 202, 208 (1956); Hanna v. Plumer, 380 U.S. 460, 471–472 (1965).
- 304 U.S. at 79–80.
- 304 U.S. at 78. Erie applies in equity as well as in law. Ruhlin v. New York Life Ins. Co., 304 U.S. 202 (1938).
- West v. American Tel. & Tel. Co., 311 U.S. 223 (1940); Six Companies of California v. Joint Highway District, 311 U.S. 180 (1940); Stoner v. New York Life Ins. Co., 311 U.S. 464 (1940).
- Fidelity Union Trust Co. v. Field, 311 U.S. 169 (1940).
- King v. Order of Commercial Travelers of America, 333 U.S. 153 (1948); Bernhardt v. Polygraphic Co. of America, 350 U.S. 198, 205 (1956) (1910 decision must be followed in absence of confusion in state decisions since there were “no developing line of authorities that cast a shadow over established ones, no dicta, doubts or ambiguities . . . , no legislative development that promises to undermine the judicial rule” ). See also Commissioner v. Estate of Bosch, 387 U.S. 456, 465 (1967).
- Vanderbark v. Owens-Illinois Glass Co., 311 U.S. 538 (1941); Huddleston v. Dwyer, 322 U.S. 232 (1944); Nolan v. Transocean Air Lines, 365 U.S. 293 (1961).
- Klaxon Co. v. Stentor Manufacturing 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).
- Interestingly enough, 1938 marked what seemed to be a switching of positions vis-a-vis federal and state courts of substantive law and procedural law. Under Tyson, federal courts in diversity actions were free to formulate a federal common law, while they 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.
- Guaranty Trust Co. v. York, 326 U.S. 99 (1945).
- 326 U.S. at 108–09.
- 326 U.S. at 109.
- Cohen v. Beneficial Industrial 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 applicable 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. Merchants 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).
- Byrd v. Blue Ridge Rural Elec. Coop., 356 U.S. 525 (1958).
- Gasperini v. Center for Humanities, Inc., 518 U.S. 415 (1996). The decision was five-to-four, so that the precedent may or may not be stable for future application.
- E.g., Guaranty Trust Co. v. York, 326 U.S. 99 (1945).
- E.g., Byrd v. Blue Ridge Rural Elec. Coop., 356 U.S. 525 (1958).
- 19 C. Wright, A. Miller & E. Cooper, Federal Practice and Procedure § 4511, at 311 (2d ed. 1996).
- Hanna v. Plumer, 380 U.S. 460 (1965).
- Maternally Yours v. Your Maternity Shop, 234 F.2d 538, 540 n.1 (2d Cir. 1956). The contrary view was implied in Levinson v. Deupree, 345 U.S. 648, 651 (1953), and by Justice 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 National Bank, 306 U.S. 103 (1939).
- Clearfield Trust Co. v. United States, 318 U.S. 363 (1943). See also National Metropolitan Bank v. United States, 323 U.S. 454 (1945); D'Oench, Duhme & Co. v. FDIC, 315 U.S. 447 (1942); United States v. Standard Rice Co., 323 U.S. 106 (1944); United States v. Acri, 348 U.S. 211 (1955); Ivanhoe Irrigation District v. McCracken, 357 U.S. 275 (1958); Bank of America Nat’l Trust & Savings Ass'n v. Parnell, 352 U.S. 29 (1956). But see United States v. Yazell, 382 U.S. 341 (1966). But see O'Melveny & Myers v. FDIC, 512 U.S. 79 (1994).
- 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).
- Howard v. Lyons, 360 U.S. 593 (1959). Matters concerned with our 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 Technologies Corp., 487 U.S. 500 (1988).
- Free v. Bland, 369 U.S. 663 (1962); Yiatchos v. Yiatchos, 376 U.S. 306 (1964).
- See Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78 (1938).
- See Rodriguez v. FDIC, 140 S. Ct. 713, 717 (2020).
- 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, 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).
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