ArtIII.S2.C1.18.6 State Law in Diversity Cases and the Erie Doctrine

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.

Because a federal court’s subject matter jurisdiction in diversity cases is predicated upon the fact that the opposing litigants are from different states, rather than upon questions of federal law, a foundational question in these cases is which law—federal or state—should apply. In the 1938 decision Erie Railroad Co. v. Tompkins,1 the Supreme Court set forth what is now commonly known as the Erie doctrine, which generally requires a federal court to apply state substantive law, unless the matter before it is governed by federal law. In so holding, Erie repudiated a prior body of jurisprudence based upon the Court’s 1842 decision in Swift v. Tyson.2 As legal commentators have noted, “[p]robably no Supreme Court decision rendered during the twentieth century has had as significant an impact on the distribution of judicial power between the federal government and the states as has [Erie].” 3

In both Swift and Erie, the Supreme Court considered Section 34 of the Judiciary Act of 1789, which provided that “[t]he laws of the several states” should generally apply in federal courts unless applicable federal laws require otherwise.4 In Swift, Justice Joseph Story ruled for the Court that state court decisions were not “laws” within the meaning of Section 34.5 Thus, while such state decisions were entitled to respect, they were generally not binding on federal judges except with regard to matters of a “local nature,” such as statutory interpretations pertaining to real estate and other things of permanent locality.6 For nearly a century after Swift, the Court issued a series of decisions that expanded the areas in which federal judges were free to construct a federal common law, while restricting the definition of “local” laws.7

Although there was some dissatisfaction with Swift, 8 it was the Supreme Court’s decision in Black & White Taxicab & Transfer Co. v. Brown & Yellow Taxicab & Transfer Co.9 that brought disagreement on these choice-of-law issues to its apex. In Black & White, a Kentucky corporation that sought the application of more favorable federal common law was permitted to create diversity jurisdiction by reincorporating in another state, even though the only change made to the corporation was its state of incorporation; the corporation’s name, officers, shareholders, and location of the business all remained the same.10 A Court majority, over a strong dissent by Justice Oliver Wendell Holmes,11 found no collusion and upheld diversity jurisdiction. The resulting application of federal common law allowed the corporation to prevail on its claims when it would have otherwise lost under state law had it sued in state court.12 Perhaps more than any other decision, Black & White precipitated Erie’s overruling of Swift.13

In Erie, a citizen of Pennsylvania sued a railroad incorporated in New York for injuries caused by the defendant’s train while the plaintiff was walking along the tracks.14 Relevant Pennsylvania law, according to the defendant, would have limited the railroad’s liability because the plaintiff was a trespasser, while applicable federal common law would permit him to recover for negligence as a licensee who was allowed on the premise.15 After the plaintiff sued and recovered in a New York federal court, the railroad appealed, eventually presenting the issue to the Supreme Court as to whether the matter concerned a question of “local” law under Swift.16

Writing for the Court in Erie, Justice Louis Brandeis overruled Swift. He explained that the Swift rule failed to bring about uniformity of decisions as intended.17 Moreover, its application prompted those seeking to avail themselves to more favorable federal rules to create diversity jurisdiction, resulting in discrimination against citizens of a state by noncitizens.18 Justice Brandeis further concluded the Swift rule was also unconstitutional because “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,” and “[n]o clause in the Constitution purports to confer such a power upon the federal courts.” 19 Justice Brandeis also clarified that the unconstitutional assumption of power was 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.” 20

As legal commentators have observed:

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.21

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.

The precise constitutional basis of Erie has been the subject of debate, however, with the Court at times seemingly distancing itself from Erie’s constitutional holding.22 Nonetheless, in the years since the decision, the Court has reaffirmed the constitutional basis of Erie under which “neither Congress nor the federal courts can, under the guise of formulating rules of decisions for federal courts, fashion rules which are not supported by a grant of federal authority contained in Article I or some other section of the Constitution; in such areas state law must govern because there can be no other law.” 23 Erie ultimately appears to derive from the federalism principles embodied in the Tenth Amendment, which limits the federal government, including Congress and the federal courts, to the authority delegated to it by the Constitution and reserves those powers not so delegated to the states or to the people.24

Since the Supreme Court’s landmark 1938 decision, Erie Railroad Co. v. Tompkins,25 the Court’s jurisprudence on federal courts’ application of state law in diversity cases has evolved. At first, the Supreme Court indicated that federal courts sitting in diversity were bound by state court decisions even when such decisions were not binding on other state judges. That is, federal courts sitting in diversity must follow not only the decisions of the highest court of a state, but also decisions of intermediate appellate courts26 and courts of first instance.27 The Court subsequently concluded that federal judges are to give careful consideration to lower state court decisions, but they generally must construe the state law themselves if the state’s highest court has not spoken definitively on the question.28 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 subsequently changed the applicable law.29

304 U.S. 64, 80 (1938). back
41 U.S. (16 Pet.) 1 (1842). back
19 Wright & Miller, Federal Practice and Procedure: jurisdiction and Related Matters § 4503 (3d. ed. Apr. 2021). back
Section 34 of the Judiciary Act 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 some minor changes, the section now appears as 28 U.S.C. § 1652. back
41 U.S. (16 Pet.) 1, 19 (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. back
Id. Justice Story concluded: “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.” Id. The idea that the same law should prevail in Rome as in Athens was also used by Justice Story in DeLovio v. Boit, 7 F. Cas. 418, 443 ( No. 3776) (C.C.D. Mass. 1815). For a more recent use, see United States v. Jefferson Cnty. Bd. of Educ., 380 F.2d 385, 398 (5th Cir. 1967) (dissenting opinion). back
The expansions included: Lane v. Vick, 44 U.S. (3 How.) 464 (1845) (wills); 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 riparian rights); 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 suggested 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. Felix 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 were issued 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). back
Extensions of Swift’s scope were frequently rendered by a divided Court over dissents. 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 Stephen Johnson Field dissented in an opinion in which he expressed the view that the Supreme Court’s disregard 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. back
In Black & White Taxicab & Transfer Co., 276 U.S. 518, Black & White contracted with a railroad to provide exclusive taxi service at the railroad station. Brown & Yellow began operating taxis at the same station, and Black & White wanted to enjoin that operation. It was a settled rule in Kentucky courts that such exclusive contracts were contrary to public policy and were unenforceable in court. Therefore, Black & White dissolved itself in Kentucky and reincorporated in Tennessee, solely to create diversity of citizenship and enable the company to sue in federal court. Black & White’s effort was successful, and the Supreme Court ruled that diversity was present and an injunction should issue. In Mutual Life Ins. Co. v. Johnson, 293 U.S. 335 (1934), the Court, in an opinion by Justice Benjamin N. Cardozo, appeared to retreat somewhat from its extensions of Swift, 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 Joseph P. Bradley in Burgess v. Seligman, 107 U.S. 20 (1883). back
Black & White Taxicab & Transfer Co., 276 U.S. at 523. back
Id. at 532 (joined by Justices Brandeis and Stone). Justice Holmes presented his view that Swift had been wrongly decided, but he preferred not to overrule it but instead to “not allow it to spread . . . into new fields.” Id. at 535. back
Id. at 523. back
Judge Henry Friendly wrote: “Having served as [Justice Brandeis’s] 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). back
Erie R.R. Co. v. Tompkins, 304 U.S. 64, 69 (1938). back
Id. at 69–70. back
See id. 70–71. back
Id. at 74–75. back
Id. at 71–77. back
Id. at 78. back
Id. at 79–80. back
Wright & Miller, supra note 3, § 4503. See also In Praise of Erie—And of the New Federal Common Law, in H. Friendly, Benchmarks 155 (1967) back
See Guar. Tr. Co. of N.Y. v. York, 326 U.S. 99, 109 (1945) (referring to the “policy” embodied in Erie as opposed to its constitutional imperative). back
Hanna v. Plumer, 380 U.S. 460, 471–72 (1965). back
See Intro.6.2.3 Federalism and the Constitution. back
304 U.S. 64, 80 (1938). back
See West v. Am. Tel. & Tel. Co., 311 U.S. 223 (1940); Six Cos. of Cal. v. Joint Highway Dist., 311 U.S. 180 (1940); Stonerv. N.Y. Life Ins. Co., 311 U.S. 464 (1940). back
See Fid. Union Tr. Co. v. Field, 311 U.S. 169 (1940). back
King v. Ord. of Com. Travelers of Am., 333 U.S. 153 (1948); Bernhardt v. Polygraphic Co. of Am., 350 U.S. 198, 205 (1956) (1910 decision must be followed in absence of confusion in state decisions because 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). back
Vanderbark v. Owens-Ill. 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). back