This article considers how to resolve two issues when the litigation is in federal court: (1) when do we apply federal law instead of state law, and (2) when applying state law, how do we decide which substantive state laws to apply.
Erie Railroad v. Tompkins
394 U.S. 64 (1938).
Question
Whether state or federal common law applies.
Rule
If the issue is substantive, then the courts are to apply the substantive law of the states (not federal law). Additionally, if the state has not resolved the issue, then the federal court is to predict how the state would resolve the issue (an Erie guess). This will be considered the state law until the state directly addressed the issue.
Holding
There is no such thing as federal common law for substantive issues. Because this is a substantive issue, the ruling is reversed and remanded to determine what the outcome would have been under state law.
Facts
Thompkins was injured in Pennsylvania while walking on a footpath near to the railroad tracks. He claims that as he was walking on the footpath late at night, what appeared to be a door hanging from a train car was open which caused the injury when it made contact.
Thompkins then filed the lawsuit in the federal district court in New York, where Erie Railroad was incorporated. At issue in this case is whether federal general common law or Pennsylvania state law applies. If federal common law applied, then Thompkins was walking on a walkway where he had license to be there. If Pennsylvania law applied, then Thompkins was a trespasser where the railroad had no responsibility to look for unknown trespassers (although the law here was disputed).
On trial and initial appeal, the court determined that federal common law applied which allowed the plaintiff to recover.
Analysis
There are constitutional issues with saying there is a federal common law to resolve substantive issues. First, Congress does not have the authority to create local law for the states so the court also does not have the ability to do so. Aside from the constitutional issues, there are policy reasons why there should be no federal common law for substantive issues. First, to avoid forum shopping; second, to avoid unequal remedies to diverse parties.
Additional Notes
The crux of the issue in Erie is to determine whether the issue is procedural or substantive. Most of the time, this is quite clear, but there are circumstances where the Court is trying to decide a gray area. In this kind of situation, the court is likely to find the federal rule applies, unless it substantially alters to the outcome of the case.
What do you do if there is a conflict between state and federal procedural law? First, determine whether there is a true conflict. If there is a true conflict, consider the sources of law:
- Federal Constitution – Will always win.
- Federal Statutes – Will win if the statute is constitutional. The statute is considered constitutional if it is arguably procedural (meaning congress had the authority to pass it on a rational basis).
- Rules of Civil Procedure, Evidence, or Appeal – Apply the rules if it is in accordance with the Rules Enabling Act and the Constitution. In other word, is this procedural? If so, then it will win.
- Federal Decisional Rules or Custom. This analysis is two-fold. First, consider the twin aims (does the federal rule incentivize forum shopping? and would application discriminate against non-diverse cases?). If a violation of the twin aims, apply the state law. Second, as an exception, you can balance the “affirmative countervailing considerations concerning an essential characteristic of federal court system and a strong federal policy.”
Erie and Choice of Law
Klaxon Co. v. Stentor Electric Manufacturing Co.
313 U.S. 487 (1941).
Question
Whether federal district courts are to apply the choice of law rules of the state in which they sit.
Rule
Yes, federal district courts are to apply the choice of law rules of the state in which they sit.
Holding
Delaware’s choice of law rules were not considered in making the decision, reversed to consider Delaware’s laws.
Facts
In this case, the respondent (domiciled in New York) had transferred its entire business to the petitioner (domiciled in Delaware), in return for a contract that the petitioner would use its best efforts to continue the manufacture and sale of parts originally built and designed by the respondent in New York. Ten years later, the respondent said the petitioner had failed to live up to this contract and filed a lawsuit in Delaware where they won $100,000. Seeking the to add interest to the judgment in accordance with a New York law, the respondent filed a motion for the interest, which was granted.
Analysis
At federal court, the trial level applied the First Restatement and failed to consider the choice of law methodology of the states. Choice of law is substantive. Thus, applying Erie, substantive law needs to consider the state’s substantive law.
Erie and Choice of Forum
Choice of forum is often altered depending on the right to transfer and whether there is a choice of forum clause within a contract.
Ferens v. John Deere Co.
494 U.S. 516 (1989).
Question
Whether the Van Dusan rule where a transfer from a proper forum (by a defendant) carries the choice of law principles from that forum, also applies to the plaintiff.
Rule and Holding
Yes, when there is a transfer from a proper forum the choice of law principles also transfers regardless of whether the motion was made by the defendant or plaintiff.
Facts
Ferens was injured in Pennsylvania by a piece of equipment purchased from John Deere. John Deere was incorporated in Delaware and the principal place of business is Illinois; however, the principal place of business at the time of the incident was Mississippi.
Ferens filed a lawsuit in the federal district court in Pennsylvania, but failed to bring any tort claims within the two year statute of limitations period. Instead, the lawsuit was based on contract and warranty claims which had a longer limitations period. Later, Ferens filed another lawsuit in the federal district court in Mississippi for tort, which had a six year statute of limitations period. Then, applying 28 U.S.C. 1404(a), Ferens transferred the case from Mississippi to Pennsylvania where the court then consolidated the cases. The purpose was clearly to apply Mississippi statute of limitations while keeping Pennsylvania law.
At trial and appeal, the cases were consolidated in Pennsylvania, but the court refused to apply the Mississippi statute of limitations.
Analysis
The purpose of Van Dusan was three-fold: (1) transfer from a proper forum “should not deprive parties of state-law advantages that exist absent diversity jurisdiction[;]” (2) limit forum shopping; and (3) decisions regarding transfer from a proper forum should be made based on convenience instead of a change of law. According to the majority, all three of these interests are supported by allowing the plaintiff to transfer and keep the choice of law.
However, the dissent argues that these interests are not supported by allowing the plaintiff to transfer. Most primarily, the dissent is concerned about the plaintiff picking and choosing several inconvenient forums then transferring them to a convenient forum with the intent to create a conglomerate of law most beneficial to the plaintiff.
Erie and Judgments
Semtex Int’l Inc. v. Lockheed Martin Corp.
531 U.S. 497 (2001).
Question
“[W]hether the claim-preclusive effect of a federal judgment dismissing a diversity action on statute-of-limitations grounds is determined by the law of the State in which the federal court sits.”
Holding
Reversed and remanded for Maryland to hear the case.
Facts
The plaintiff filed in a California state court for breach of contract. Then the defendant removed to the federal court in California (based on diversity). This claim was then dismissed “on the merits” “with prejudice” because the statute of limitations had expired. Then the plaintiffs filed in Maryland state court based on a longer statute of limitations. However, the Maryland court dismissed because the previous dismissal was on the merits with prejudice.
Analysis
Here, the defendants are arguing the claim is precluded by Rule 41 (involuntary dismissal). However, Rule 41 never mentions that the claim is precluded, allowing the claim to be filed in a court other than the one that dismissed it. Having no guiding influence, the Court is free to make the rule.
