Conflict of Laws in the Federal System
To this point, our discussion has implicitly assumed, by and large, that conflict of laws involves only problems of relations between the states that are resolved in state courts. This chapter considers how conflicts analysis might change when a conflicts issue arises in litigation in federal, rather than state, court. In particular, this chapter considers how the Erie doctrine is used to determine when federal rather than state law applies and, when state law continues to apply, how federal courts resolve the question of which state’s substantive law controls. Part A covers the Erie doctrine as it applies to choice of law and judgment recognition. Part B covers federal common law, considering circumstances where, notwithstanding the Erie doctrine, federal law works to preempt state law that impinges on the harmonious relations between the states
A. The Erie Doctrine
Erie Railroad v. Tompkins
304 U.S. 64 (1938)
Justice BRANDEIS delivered the opinion of the Court.
The question for decision is whether the oft-challenged doctrine of Swift v. Tyson shall now be disapproved.Tompkins, a citizen of Pennsylvania, was injured on a dark night by a passing freight train of the Erie Railroad Company while walking along its right of way at Hughes town in that State. He claimed that the accident occurred through negligence in the operation, or maintenance, of the train; that he was rightfully on the premises as licensee because he was on a commonly used beaten footpath which ran for a short distance alongside the tracks: and that he was struck by something which looked like a door projecting from one of the moving cars. To enforce that claim he brought an action in the federal court for southern New York, which had jurisdiction because the company is a corporation of that State. It denied liability; and the case was tried by a jury.
The Erie insisted that its duty to Tompkins was no greater than that owed to a trespasser. It contended, among other things, that its duty to Tompkins, and hence its liability, should be determined in accordance with the Pennsylvania law; that under the law of Pennsylvania, as declared by its highest court, persons who use pathways along the railroad right of way—that is a longitudinal pathway as distinguished from a crossing—are to be deemed trespassers; and that the railroad is not liable for injuries to undiscovered trespassers resulting from its negligence, unless it be wanton or wilful. Tompkins denied that any such rule had been established by the decisions of the Pennsylvania courts; and contended that, since there was no statute of the State on the subject, the railroad’s duty and liability is to be determined in federal courts as a matter of general law.
The trial judge refused to rule that the applicable law precluded recovery. The jury brought in a verdict of $30,000; and the judgment entered thereon was affirmed by the Circuit Court of Appeals, which held that it was unnecessary to consider whether the law of Pennsylvania was as contended, because the question was one not of local, but of general law and that
upon questions of general law the federal courts are free, in the absence of a local statute, to exercise their independent judgment as to what the law is; and it is well settled that the question of the responsibility of a railroad for injuries caused by its servants is one of general law. Where the public has made open and notorious use of a railroad right of way for a long period of time and without objection, the company owes to persons on such permissive pathway a duty of care in the operation of its trains. It is likewise generally recognized law that a jury may find that negligence exists toward a pedestrian using a permissive path on the railroad right of way if he is hit by some object projecting from the side of the train.
The Erie had contended that application of the Pennsylvania rule was required, among other things, by §34 of the Federal Judiciary Act of September 24, 1789, c.20, 28 U.S.C. §725, which provides:
The laws of the several States, except where the Constitution, treaties, or statutes of the United States 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.
Because of the importance of the question whether the federal court was free to disregard the alleged rule of the Pennsylvania common law, we granted certiorari.
First. Swift v. Tyson held that federal courts exercising jurisdiction on the ground of diversity of citizenship need not, in matters of general jurisprudence, apply the unwritten law of the State as declared by its highest court; that they are free to exercise an independent judgment as to what the common law of the State is—or should be; and that, as there stated by Mr. Justice Story:
[T]he true interpretation of the thirty-fourth section limited its application to state laws strictly local, that is to say, to the positive statutes of the state, and the construction thereof adopted by the local tribunals, and to rights and titles to things having a permanent locality, such as the rights and titles to real estate, and other matters immovable and intraterritorial in their nature and character. It never has been supposed by us, that the section did apply, or was intended to apply, to questions of a more general nature, not at all dependent upon local statutes or local usages of a fixed and permanent operation, as, for example, to the construction of ordinary contracts or other written instruments, and especially to questions of general commercial law, where the state tribunals are called upon to perform the like functions as ourselves, that is, to ascertain upon general reasoning and legal analogies, what is the true exposition of the contract of instrument, or what is the just rule furnished by the principles of commercial law to govern the case.
The Court in applying the rule of §34 to equity cases, in Mason v. United States said: “The statute, however, is merely declarative of the rule which would exist in the absence of the statute.” The federal courts assumed, in the broad field of “general law,” the power to declare rules of decision which Congress was confessedly without power to enact as statutes. Doubt was repeatedly expressed as to the correctness of the construction given §34 and as to the soundness of the rule which it introduced. But it was the more recent research of a competent scholar, who examined the original document, which established that the construction given to it by the Court was erroneous; and that the purpose of the section was merely to make certain that, in all matters except those in which some federal law is controlling, the federal courts exercising jurisdiction in diversity of citizenship cases would apply as their rules of decision the law of the State, unwritten as well as written.
Criticism of the doctrine became widespread after the decision of Black & White Taxicab Co. v. Brown & Yellow Taxicab Co. There, Brown and Yellow, a Kentucky corporation owned by Kentuckians, and the Louisville and Nashville Railroad, also a Kentucky corporation, wished that the former should have the exclusive privilege of soliciting passenger and baggage transportation at the Bowling Green, Kentucky, railroad station; and that the Black and White, a competing Kentucky corporation, should be prevented from interfering with that privilege. Knowing that such a contract would be void under the common law of Kentucky, it was arranged that the Brown and Yellow reincorporate under the law of Tennessee, and that the contract with the railroad should be executed there. The suit was then brought by the Tennessee corporation in the federal court for Western Kentucky to enjoin competition by the Black and White; an injunction issued by the District Court was sustained by the Court of Appeals; and this Court, citing many decisions in which the doctrine of Swift v. Tyson had been applied, affirmed the decree.
Second. Experience in applying the doctrine of Swift v. Tyson had revealed its defects, political and social; and the benefits expected to flow from the rule did not accrue. Persistence of state courts in their own opinions on questions of common law prevented uniformity; and the impossibility of discovering a satisfactory line of demarcation between the province of general law and that of local law developed a new well of uncertainties.
On the other hand, the mischievous results of the doctrine had become apparent. Diversity of citizenship jurisdiction was conferred in order to prevent apprehended discrimination in state courts against those not citizens of the State. Swift v. Tyson introduced grave discrimination by non-citizens against citizens. It made rights enjoyed under the unwritten “general law” vary according to whether enforcement was sought in the state or in the federal court; and the privilege of selecting the court in which the right should be determined was conferred upon the non-citizen. Thus, the doctrine rendered impossible equal protection of the law. In attempting to promote uniformity of law throughout the United States, the doctrine had prevented uniformity in the administration of the law of the State.
The discrimination resulting became in practice far-reaching. This resulted in part from the broad province accorded to the so-called “general law” as to which federal courts exercised an independent judgment. In addition to questions of purely commercial law, “general law” was held to include the obligations under contracts entered into and to be performed within the State, the extent to which a carrier operating within a State may stipulate for exemption from liability for his own negligence or that of his employee; the liability for torts committed within the State upon persons resident or property located there, even where the question of liability depended upon the scope of a property right conferred by the State; and the right to exemplary or punitive damages. Furthermore, state decisions construing local deeds, mineral conveyances, and even devises of real estate were disregarded.
In part the discrimination resulted from the wide range of persons held entitled to avail themselves of the federal rule by resort to the diversity of citizenship jurisdiction. Through this jurisdiction individual citizens willing to remove from their own State and become citizens of another might avail themselves of the federal rule. And, without even change of residence, a corporate citizen of the State could avail itself of the federal rule by reincorporating under the laws of another State, as was done in the Taxicab case.
The injustice and confusion incident to the doctrine of Swift v. Tyson have been repeatedly urged as reasons for abolishing or limiting diversity of citizenship jurisdiction. Other legislative relief has been proposed. 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.
Third. Except 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. And 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. 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. And no clause in the Constitution purports to confer such a power upon the federal courts. As stated by Mr. Justice Field when protesting in Baltimore & Ohio R. Co. v. Baugh, against ignoring the Ohio common law of fellow servant liability:
I am aware that what has been termed the general law of the country—which is often little less than what the judge advancing the doctrine thinks at the time should be the general law on a particular subject—has been often advanced in judicial opinions of this court to control a conflicting law of a State. I admit that learned judges have fallen into the habit of repeating this doctrine as a convenient mode of brushing aside the law of a State in conflict with their views. And I confess that, moved and governed by the authority of the great names of those judges, I have, myself, in many instances, unhesitatingly and confidently, but I think now erroneously, repeated the same doctrine. But, notwithstanding the great names which may be cited in favor of the doctrine, and notwithstanding the frequency with which the doctrine has been reiterated, there stands, as a perpetual protest against its repetition, the Constitution of the United States, which recognizes and preserves the autonomy and independence of the States—independence in their legislative and independence in their judicial departments. Supervision over either the legislative or the judicial action of the States is in no case permissible except as to matters by the Constitution specifically authorized or delegated to the United States. Any interference with either, except as thus permitted, is an invasion of the authority of the State and. to that extent, a denial of its independence.
The fallacy underlying the rule declared in Swift v. Tyson is made clear by Mr. Justice Holmes. The doctrine rests upon the assumption that there is “a transcendental body of law outside of any particular State but obligatory within it unless and until changed by statute,” that federal courts have the power to use their judgment as to what the rules of common law are; and that in the federal courts “the parties are entitled to an independent judgment on matters of general law”:
[B]ut law in the sense in which courts speak of it today does not exist without some definite authority behind it. The common law so far as it is enforced in a State, whether called common law or not, is not the common law generally but the law of that State existing by the authority of that State without regard to what it may have been in England or anywhere else. [T]he authority and only authority is the State, and if that be so, the voice adopted by the State as its own [whether it be of its Legislature or of its Supreme Court] should utter the last word.
Thus the doctrine of Swift v. Tyson is, as Mr. Justice Holmes said, “an unconstitutional assumption of powers by courts of the United States which no lapse of time or respectable array of opinion should make us hesitate to correct.” In disapproving that doctrine we 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.
Fourth. The defendant contended that by the common law of Pennsylvania as declared by its highest court in Falchetti v. Pennsylvania R. Co., 307 Pa. 203, the only duty owed to the plaintiff was to refrain from wilful or wanton injury. The plaintiff denied that such is the Pennsylvania law. In support of their respective contentions the parties discussed and cited many decisions of the Supreme Court of the State. The Circuit Court of Appeals ruled that the question of liability is one of general law; and on that ground declined to decide the issue of state law. As we hold this was error, the judgment is reversed and the case remanded to it for further proceedings in conformity with our opinion.
[A concurring opinion of Justice REED and a dissenting opinion of Justice BUTLER Is omitted.]
Questions and Comments
(1) The Court makes it clear in Erie that it is handing down a constitutional decision. But what clause of the Constitution does the Court interpret in its opinion?
(2) Justice Brandeis’s opinion says at one point: “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.” Much has happened since the Erie decision. Is it likely that today’s Supreme Court would strike down a federal statute purporting to establish rules for liability for injury along the right-of-way of a railroad engaged in interstate commerce? If not, should Erie be overruled because its underlying assumptions have been eroded, or is it possible to uphold Erie even if one assumes that there was federal power to declare substantive law in the case of Tompkins’s injury?
(3) Assuming that Congress constitutionally could have legislated the rules of liability involved in Tompkins’s accident, could Congress have delegated to the Court the task of making up such substantive rules? In Textile Workers Union of America v. Lincoln Mills, 353 U.S. 448 (1957), the Supreme Court was faced with an attack on the constitutionality of §301 of the Taft-Hartley Act, 29 U.S.C. §85 (1976). The basis for the attack was the statute’s purporting to confer jurisdiction on the federal courts for disputes arising between employers and labor unions, even though no substantive rules to govern these disputes were suggested by the legislation. The problem arose because there was no obvious federal-question jurisdiction, and diversity of citizenship was absent. The Court rejected a “protective jurisdiction” theory, which suggested that Congress could give the federal courts jurisdiction in areas of federal concern even though diversity was absent and no specific substantive federal rules of decision were involved. But that did not mean that the statute conferred unconstitutional jurisdiction on the federal courts. Instead, the Court said, Congress must have intended by the grant of jurisdiction in §301 to give the federal courts substantive rulemaking power in the area—in other words, the courts were to develop a federal common law under the Taft-Hartley Act (often by borrowing from state contract law and the like).
(4) In light of Lincoln Mills, supra, could Congress amend the Rules of Decision Act (discussed in Erie as §34 of the Judiciary Act of 1789) to provide that the federal courts can form their own common law? Or is a narrower grant, limited to a single field like labor law, a necessary condition for such a delegation?
(5) If congressional silence on the law concerning Tompkins’s injury is taken as indicating a lack of federal policy in the area, is Erie a true or false conflict case? If it is a false conflict, is the result in Erie (as long as Congress has not legislated) required by the Court’s reasoning in Home Insurance Co. v. Dick? Or is the fact that the accident took place within the geographical borders of the United States enough to take Erie out of the scope of Dick? Does Dick forbid a state to apply its own law when it has no interest or when it has no contact, or when it has neither? Can analogies to the constitutionality of interstate conflicts resolution help at all to sort out the Erie problem?
(6) Much of the Court’s discussion is devoted to the evils of forum-shopping. What’s wrong with forum-shopping, anyway? If a federal judge believes that he or she has come up with the just and proper solution to a particular legal problem, doesn’t it deny justice to the parties to rule to the contrary simply to imitate the state court’s predicted result? Isn’t that behaving as if two wrongs will somehow make a right?
(7) The earlier draft of the Rules of Decision Act discovered by Professor Charles Warren provided: “the Statute law of the several States in force for the time being and their unwritten or common law now in use, whether by adoption from the common law of England, the ancient statutes of the same or otherwise” should be rules of decision in the federal courts. In the legislative process, the quoted phrase was shortened to “laws of the several states.” Warren, New Light on the History of the Federal Judiciary Act of 1789, 37 Harv. L. Rev. 49 (1923). Is it clear that this new phrase is simply a substitute for the earlier language?
Note: Erie and Substance vs. Procedure
As all veterans of Civil Procedure know, the “real” Erie problem is in distinguishing substance vs. procedure. The problem first reared its ugly head in Guaranty Trust Co. v. York, 326 U.S. 99 (1945), where the question was whether to apply a state statute of limitations or federal laches doctrine to a diversity action brought in federal court. The Court assumed that the Erie principle would not apply to issues that are “procedural” rather than “substantive,” presumably for the same reason that that distinction is made in ordinary conflicts cases where the substantive, but not the procedural, law of State B may be applied in the courts of State A. (Recall the double play on this issue in Sampson v. Channell, page 127 supra, where a federal court decided that the burden of proof was “substantive” for Erie purposes and therefore applied the law of the state in which it was sitting—whose law declared the issue “procedural” for conflicts purposes.)
To determine whether an issue is substantive or procedural, Justice Frankfurter produced his well-known outcome-determination test:
[D]oes it significantly affect the result of a litigation for a federal court to disregard a law of a State that would be controlling in an action upon the same claim by the same parties in a State court? [T]he outcome of the litigation in 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.
326 U.S. at 109.
Several subsequent Supreme Court cases have wrestled with Erie and the substance/procedure dichotomy. Perhaps most noteworthy among them is Hanna v. Plumer, 380 U.S. 460 (1965), in which a federal court sitting in diversity confronted the question of whether state or federal rules on personal service applied to the case. The relevant state rule required personal in-hand service on an executor or administrator of an estate, while Federal Rule 4(d)(l) required only one of several options, including leaving service with a person of suitable age and discretion at the defendant’s dwelling place. The federal rule was held to prevail, in part because it did not interfere with the twin aims of Erie: “discouragement of forum-shopping and avoidance of inequitable administration of the laws.” Id. at 468. More fundamentally, however, the Court noted that Erie had never been successfully invoked to void a federal rule. Validity of the federal rules were typically determined under the Rules Enabling Act, 28 U.S.C. §2072 (1958), which empowered the Supreme Court to promulgate rules of procedure for the federal district courts, so long as the rules do “not abridge, enlarge, or modify any substantive right. Under the Enabling Act, the Court asks “whether the rule really regulates procedure—the judicial process for enforcing rights and duties recognized by substantive law and for justly administering remedy and redress for disregard or infraction of them.” Id. at 464 (quoting Sibbach v. Wilson & Co., 312 U.S. 1, 14 (1941). Although that test also turns on a distinction between substance and procedure, “[t]he line between ‘substance’ and ‘procedure’ shifts as the legal context shifts.” Id. at 471. In the context of the federal rules, Congress, the Advisory Committee, and the Supreme Court have all determined that the rules are valid, and that judgment is entitled to significant deference. Thus, a federal rule will be deemed valid, even when it occupies “the uncertain area between substance and procedure,” so long as it is “rationally capable of classification as either.” Id. at 472.
Gasperini v. Center for Humanities, Inc., 518 U.S. 415 (1996), involved the compatibility of (a) a New York state statute that empowered appellate courts to review jury verdicts and to order new trials when the jury’s award “deviates materially from what would be reasonable compensation,” and (b) the federal court’s more lenient practice of reviewing excessive jury verdicts under a “shocks the conscience” standard. The Court first noted that the state statute was motivated by the ‘“substantive” purpose of limiting excessive awards and was “outcome-effective” in the sense that it led to different results than the federal standard. The Court noted that although Hanna modified the mechanical outcome-determination test from Guaranty-Trust by directing that the inquiry should be guided by the twin aims of Erie, under that test too New York’s statute should be deemed substantive.
Because the federal practice stemmed from the Seventh Amendment of the US Constitution, however, the majority took steps to accommodate federal as well as state interests. Specifically, the Court noted that deferential appellate review of a trial court’s denial of a motion to set aside a jury verdict was an “essential characteristic” of the federal court system that was informed by the Seventh Amendment’s reexamination clause, which states that “no fact, tried by a jury, shall be otherwise reexamined in any Court of the United States, than according to the rules of the common law.” To accommodate federal interests, the Court held that federal district courts should apply the state “deviates materially” standard, subject to appellate review under the federal abuse of discretion standard, which was deemed consistent with the reexamination clause. For criticism of Gasperini, see Floyd, Erie Awry: A Comment on Gasperini v. Center for Humanities, Inc., 1997 BYU L. Rev. 267 (1997).
Shady Grove Orthopedic Assocs. v. Allstate Ins. Co., 559 U.S. 393 (2010), involved state and federal rules on class actions. Medical providers filed a putative class action in federal district court against Allstate after the insurer failed to compensate the provider for interest due on overdue claims under New York law. Although that class action was permissible under Federal Rules of Civil Procedure 23, which sets out the prerequisites for bringing a class action in federal courts, a majority of justices concluded that it conflicted with New York law, which prohibits class actions in suits for penalties or statutory minimum damages. A majority of justices also concluded that the federal rather than the state rule should apply in the diversity action. Justice Scalia, writing for four of the justices, reasoned that the Rules Enabling Act, rather than Erie, controls that the validity of a federal rule of procedure, and under the Act the rule is valid so long as it “really regulates procedure.” Under this looser standard set forth in Hanna and other cases, a rule is valid even of it incidentally affects a party’s rights, so long as its regulates only the process for enforcing those rights, and not the rights themselves, the available remedies, or the rules of decision for adjudicating either.
Allstate argued that the New York law was substantive, but this plurality concluded that the nature of the state rule was irrelevant to the inquiry. What mattered was whether the federal rule was substantive or procedural. In a concurring opinion, Justice Stevens thought that the nature of state law could matter. In particular, he thought that a federal procedural rule would have to give way to substantive state law if it is “so intertwined with a state right or remedy that it functions to define the scope of the state created right.” Id. at 423.
Justice Ginsburg authored a dissenting opinion joined by three of her colleagues. She reasoned that the Court’s Erie cases involving federal rules all reflect its efforts to remain within the bounds of both the Rules Enabling Act and the Rules of Decision Act, and the most common way that the Court has steered this course is to read the federal rules narrowly, leaving room for the operation of state law. Consistent with that line of reasoning, Justice Ginsberg argued that Rule 23 should be interpreted as providing considerations that are necessary to class certification but not commanding that a class action remedy is always available. In contrast, the New York statute defines when the remedy is available, and in that sense, it defines the dimensions of the claim itself. By this reasoning, Rule 23 is valid and applies in diversity cases, but New York law also applies, and it works to defeat plaintiff’s ability to maintain a class action.
Questions and Comments
(1) Professor Sedler has noted a relationship between the substance/procedure dichotomy in Erie and conflicts cases:
It is submitted that the Erie outcome test can furnish [a conflicts] guide, for the underlying rationale for the application of the state law in an Erie situation is substantially the same as the rationale for the application of the lex loci in a conflicts situation. The sole purpose of a federal court in a diversity case is to furnish an impartial forum. The only purpose of a court in a conflicts case, once it has decided that it will look to the law of another state, is to serve as a forum of convenience. In each situation the court should use as a model as much of the law of the reference point as will materially affect the outcome. [Emphasis in original.]
Sedler, The Erie Outcome Test as a Guide to Substance and Procedure in the Conflicts of Laws, 37 N.Y.U. L. Rev. 813, 821-822 (1962).
(2) Conflicts learning can be used on Erie cases as well. In Leathers, Erie and Its Progeny as Choice of Law Cases, 11 Hous. L. Rev. 791 (1974), the author suggests that the post-Erie cases can best be analyzed under interest analysis, and that for the most part they turn out to be false conflict cases. The substance-procedure dichotomy as such is rejected because the distinction between the two shifts as the use to which the distinction is being put changes. For other arguments on behalf of cross-fertilization between Erie and interstate conflicts, see Bauer, The Erie Doctrine Revisited: How a Conflicts Perspective Can Aid the Analysis, 74 Notre Dame L. Rev. 1235 (1999); and Weinberg, The Federal-State Conflict of Laws: “Actual” Conflicts, 70 Tex. L. Rev. 1743 (1992).
(3) In a perceptive article, Professor John Ely has cast considerable light on the “Erie problem.” Ely, The Irrepressible Myth of Erie, 87 Harv. L. Rev. 693 (1974). Ely’s thesis is that there are three separate but related questions raised in the various cases that have been identified with the Erie label: First is the Erie principle itself, considered as a constitutional issue. Second is the Rules of Decision Act of 1789, page 510 supra, which provides:
The laws of the several states, except where the Constitution or treaties of the United States or Acts of Congress otherwise require or provide, shall be regarded as rules of decision in civil actions in the courts of the United States, in cases where they apply.
The third is the Rules Enabling Act of 1934, which provides in part:
The Supreme Court shall have the power to prescribe by general rules … the practice and procedure of the district courts.… Such rules shall not abridge, enlarge, or modify any substantive right.…
Disputing what he calls the “enclave” theory of states’ rights—that there are rights reserved to the states other than those which remain after enumerated federal rights—Ely starts with the proposition that the Constitution, by providing for federal jurisdiction, justifies the federal courts in following any rules which are in fact procedural at least in part, even if they have substantive effect. A constitutional limitation in the Erie case was applied there because the rule in question—the standard of care owed by the railroad—was in no sense a procedural matter. The Constitution, however, should stay in the background until Congress prescribes a rule of decision in diversity cases by statute, since the Rules of Decision Act (as interpreted in Erie and York) protects state law as much as the Constitution does. When a federal rule is involved, however, the Rules Enabling Act is the relevant legislation.
The difference between the two acts is this: Outcome determination, properly defined, is the standard for the Rules of Decision Act. (The proper test, Ely says, is whether the litigant will get a different result in state court, playing by state court rules, than he will gel in federal court, playing by the federal rules in question.) Whether a rule affects “substantive” rights, properly defined, is the standard for the Rules Enabling Act. Thus, for example, a federal practice (not embodied in a federal rule) that allowed extensive pre-trial discovery where the same was not allowed in state court would have to be viewed as outcome-determinative and thus forbidden by the Rules of Decision Act (as interpreted by Erie and York). But if the federal practice is made a federal rule, the Rules Enabling Act takes over and allows the rule if it (a) is procedural (it is), and (b) does not abridge substantive rights (it doesn’t, even though it may affect the outcome, since the reason for the state’s failure to have discovery almost undoubtedly represents a judgment about proper procedure, and not how people’s lives should be governed). The Constitution would be satisfied merely by showing that the rule was in part procedural, even if it does affect substantive rights.
Although agreeing with much of Professor Ely’s general analysis. Professor Chayes disagreed with many of his applications in an article entitled The Bead Game, 87 Harv. L. Rev. 741 (1974); followed by Ely, The Necklace, 87 Harv. L. Rev. 753 (1974); followed by Mishkin, The Thread, 87 Harv. L. Rev. 1682 (1974).
1. Erie and Choice of Law
Klaxon Co. v. Stentor Electric Manufacturing Co.
313 U.S. 487 (1941)s
Justice REED delivered the opinion of the Court.
The principal question in this case is whether in diversity cases the federal courts must follow conflict of laws rules prevailing in the states in which they sit.…
In 1918, respondent, a New York corporation, transferred its entire business to petitioner, a Delaware corporation. Petitioner contracted to use its best efforts to further the manufacture and sale of certain patented devices covered by the agreement, and respondent was to have a share of petitioner’s profits. The agreement was executed in New York, the assets were transferred there, and petitioner began performance there although later moved its operations to other states. Respondent was voluntarily dissolved under New York law in 1919. Ten years later it instituted this action in the United States District Court for the District of Delaware, alleging that petitioner had failed to perform its agreement to use its best efforts. Jurisdiction rested on diversity of citizenship. In 1939 respondent recovered a jury verdict of $100,000, upon which judgment was entered. Respondent then moved to correct the judgment by adding interest at the rate of six percent from June 1, 1929, the date the action had been brought. The basis of the motion was the provision in §480 of the New York Civil Practice Act directing that in contract actions interest be added to the principal sum “whether theretofore liquidated or unliquidated.” The District Court granted the motion, taking the view that the rights of the parties were governed by New York law and that under New York law the addition of such interest was mandatory. The Circuit Court of Appeals affirmed and we granted certiorari, limited to the question whether §480 of the New York Civil Practice Act is applicable to an action in the federal court in Delaware.
The Circuit Court of Appeals was of the view that under New York law the right to interest before verdict under §480 went to the substance of the obligation, and that proper construction of the contract in suit fixed New York as the place of performance. It then concluded that §480 was applicable to the case because it is clear by what we think is undoubtedly the better view of the law that the rules for ascertaining the measure of damages are not a matter of procedure at all, but are matters of substance which should be settled by reference to the law of the appropriate state according to the type of case being tried in the forum. The measure of damages for breach of contract is determined by the law of the place of performance; Restatement, Conflict of Laws §413.The court referred also to §418 of the Restatement, which makes interest part of the damages to be determined by the law of the place of performance. Application of the New York statute apparently followed from the court’s independent determination of the “better view” without regard to Delaware law, for no Delaware decision or statute was cited or discussed.
We are of opinion that the prohibition declared in [Erie] against such independent determinations by the federal courts, extends to the field of conflict of laws. The conflict of laws rules to be applied by the federal court in Delaware must conform to those prevailing in Delaware’s state courts.2 Otherwise, the accident of diversity of citizenship would constantly disturb equal administration of justice in coordinate state and federal courts sitting side by side. See [Erie]. Any other ruling would do violence to the principle of uniformity within a state, upon which the [Erie] decision is based. Whatever lack of uniformity this may produce between federal courts in different states is attributable to our federal system, which leaves to a state, within the limits permitted by the Constitution, the right to pursue local policies diverging from those of its neighbors. It is not for the federal courts to thwart such local policies by enforcing an independent “general law” of conflict of laws. Subject only to review by this Court on any federal question that may arise, Delaware is free to determine whether a given matter is to be governed by the law of the forum or some other law.… This Court’s views are not the decisive factor in determining the applicable conflicts rule.… And the proper function of the Delaware federal court is to ascertain what the state law is, not what it ought to be.
Respondent makes the further argument that the judgment must be affirmed because, under the full faith and credit clause of the Constitution, the state courts of Delaware would be obliged to give effect to the New York statute. The argument rests mainly on the decision of this Court in John Hancock Mutual Life Ins. Co. v. Yates, where a New York statute was held such an integral part of a contract of insurance, that Georgia was compelled to sustain the contract under the full faith and credit clause. Here, however, §480 of the New York Civil Practice Act is in no way related to the validity of the contract in suit, but merely to an incidental item of damages, interest, with respect to which courts at the forum have commonly been free to apply their own or some other law as they see fit. Nothing in the Constitution ensures unlimited extraterritorial recognition of all statutes or of any statute under all circumstances. Pacific Employers Insurance Co. v. Industrial Accident Comm’n. The full faith and credit clause does not go so far as to compel Delaware to apply §480 if such application would interfere with its local policy.
Accordingly, the judgment is reversed and the case remanded to the Circuit Court of Appeals for decision in conformity with the law of Delaware.
Questions and Comments
(1) Compare Judge Friendly in Nolan v. Transocean Airlines, 276 F.2d 280, 281 (2d Cir. 1960): “Our principal task … is to determine what New York courts would think California courts would think on an issue about which neither has thought.”
(2) In Klaxon, Justice Reed’s opinion says, at the very end, “The full faith and credit clause does not go so far as to compel Delaware to apply §480 if such application would interfere with its local policy.” What local policy? If the Delaware courts applied New York substantive law to the merits, what is the Delaware policy concerning the assessment of interest after the case has been brought but before judgment has been entered? Traditionally, of course, the interest issue could be called “procedural,” but what is the procedural interest in this interest? A rule granting interest, like New York’s, might discourage delaying tactics by the defendant, but what procedural policy could lie behind a rule denying interest during the suit? Surely it is not too hard to calculate. And is it fair to say, as Justice Reed does, that the question is only one of “incidental” damages, when the amount of interest is 6 percent of $100,000 for ten years?
(3) If the Court’s upholding of the possibility of applying Delaware law means that Delaware has some kind of interest in the issue, doesn’t that make Klaxon a true conflict case with respect to the interest issue? If so, doesn’t that fact put it outside the rationale for Erie developed in note (2) at page 518 supra? In other words, isn’t there a fundamental difference between diversity cases raising issues of internal law and diversity cases raising conflicts issues, because in the former there is only one interested jurisdiction (the state) and a disinterested forum, while in the latter there are two interested jurisdictions (two states) and a disinterested forum? Granting that a federal court may not impose a nonexistent federal interest over an actual state interest, does it follow that a federal court may not choose between two state interests? As a neutral, isn’t the federal court in a better position to choose than are the courts of either state?
(4) If the lack of federal interest or constitutional power is the basis for Erie and you aren’t convinced by the arguments in the previous note, doesn’t the full faith and credit clause remain as a basis for a contrary conclusion in Klaxon?
(5) Even if Klaxon is not constitutionally compelled by Erie principles, it has the virtue, for what it’s worth, of avoiding forum-shopping. Even that latter virtue was absent, however, in Griffin v. McCoach, 313 U.S. 498 (1941), an interpleader action involving claimants in different states. There, because no state had jurisdiction over all the defendants, the action could only be brought in federal court (using the nationwide jurisdiction provided by the federal interpleader act). Without the possibility of suing in state court, there was no danger of forum-shopping. Nonetheless, the Court, following Klaxon, applied Texas conflicts rules, since the action had been brought in a Texas federal court. Even if there are occasional cases like Griffin where neither the constitutional reasoning of Erie nor the desire to avoid forum-shopping are present, are they numerous enough to justify the agonies of developing federal conflicts laws to govern them?
(6) The desire for uniformity and to avoid forum-shopping remain as policies promoted by Erie whether or not its decision is constitutionally mandated. But does Klaxon promote uniformity? At least in the case of a true conflict, isn’t it almost assured that there will be another jurisdiction where suit could have been brought? In other words, don’t recent developments in long-arm jurisdiction make interstate forum-shopping as likely as intrastate forum-shopping? Is one worse than the other? And given the result in Van Dusen v. Barrack (discussed in Ferens, infra), which rules that a case transferred under §1404 will take the transferor state’s law with it, will it be possible to avoid the evils of forum-shopping, whatever they are, with enough regularity to make the quest worthwhile?
(7) Academics have continued to argue that choice of law is an appropriate subject for federal regulation either by statute, see Gottesman, Draining the Dismal Swamp: The Case for Federal Choice of Law Statutes, 80 Geo. L.J. 1 (1991), or by incremental federal common law, see Trautman, Toward Federalizing Choice of Law, 70 Tex. L. Rev. 1715 (1992). One area particularly ripe for federal regulation might be choice of law in complex litigation. In 1993, the American Law Institute proposed to federalize many choice-of-law and choice-of-forum issues that arise in complex litigation in federal court. The introductory notes to Chapter 6 of the 1993 Proposed Final Draft of its Complex Litigation Project recognized the disuniformity between state and federal courts that federalization would create, but suggested the solution of consolidation of state and federal court cases. As to the disuniformity that would then still persist between large complex cases (which would fall under the new federal standard) and smaller litigation (that would fall under Klaxon), “the need to achieve justice among the litigants by assuring the uniform and economical treatment of their dispute justifies this difference.” This choice-of-law proposal was never adopted, and the ALI abandoned it in its Principles of the Law of Aggregate Litigation (2010). The topic is further explored in chapter 10, infra.
(8) If Klaxon were abandoned, what would replace it? In his article promoting comparative impairment, Professor Baxter contemplated that the approach could be developed by federal rather than state courts:
Baseball’s place as the favorite American pastime would not long survive if the responsibilities of the umpire were transferred to the first team member who managed to rule on a disputed event. Responsibility for allocating spheres of legal control among member states of a federal system cannot sensibly be placed elsewhere than with the federal government.… Governmental interests can be identified in choice cases, and the unavoidable allocation of spheres of control ought to be made as those interests dictate by applying the principle of comparative impairment. The process of allocation ought to be committed to the federal government; for the alternative is to place that responsibility, not in the hands of the states, but ad hoc in the hands now of this state, now of that, as determined by promptitude of private party action and the expanding limits of service of process.…
Baxter, Choice of Law and the Federal System, 16 Stan. L. Rev. 1, 23, 33 (1963).
Assuming that eventual federal control over choice-of-law questions is appropriate, is the time yet ripe? How about a less drastic (though perhaps sweeping) approach, in which federal courts would apply state conflicts rules only in cases of true conflicts? See, e.g., Lester v. Aetna Life Ins. Co., 433 F.2d 844 (5th Cir. 1970), cert. denied, 402 U.S. 909 (1971); Day & Zimmerman, Inc. v. Challoner, 423 U.S. 3, 4 (1975).
(9) In Harris v. Polskie Linie Lotnicze, 820 F.2d 1000 (9th Cir.1987), plaintiffs sued LOT, the Polish national airline, after a crash occurring near Warsaw, Poland. The case arose under the Warsaw Convention and jurisdiction was based upon the Foreign Sovereign Immunities Act. In the effort to determine the applicable substantive law, the court stated that usually Klaxon would apply in a Warsaw Convention case, but only where the case was in federal court by reason of diversity of citizenship. Klaxon did not apply where jurisdiction was based on the F.S.I.A. It therefore developed a federal common law of choice of law, influenced by the Second Restatement. Compare Wang Laboratories v. Kagan, 990 F.2d 1126 (9th Cir. 1993) (applying federal rule on enforcement of choice-of-law clause in ERISA case).
Is this an accurate characterization of the range of Klaxon’s applicability? What if a case contains a federal question sufficient to establish jurisdiction, but there are also state law elements in the case? Should the federal court fashion a federal choice-of-law rule to deal with the state law issues? What about the Rules of Decision Act? See Western & Lehman, Is There Life for Erie after the Death of Diversity?, 78 Mich. L. Rev. 311 (1980).
Ferens v. John Deere Co.
494 U.S. 516 (1989)
Justice KENNEDY delivered the opinion of the Court.
Section 1404(a) of Title 28 states: “For the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought.” 28 U.S.C. §1404(a) (1982 ed.). In Van Dusen v. Barrack, 376 U.S. 612 (1964), we held that, following a transfer under §1404(a) initiated by a defendant, the transferee court must follow the choice-of-law rules that prevailed in the transferor court. We now decide that, when a plaintiff moves for the transfer, the same rule applies.
Albert Ferens lost his right hand when, the allegation is, it became caught in his combine harvester, manufactured by Deere & Company. The accident occurred while Ferens was working with the combine on his farm in Pennsylvania.
For reasons not explained in the record, Ferens delayed filing a tort suit, and Pennsylvania’s 2-year limitations period expired. In the third year, he and his wife sued Deere in the United States District Court for the Western District of Pennsylvania, raising contract and warranty claims as to which the Pennsylvania limitations period had not yet run. The District Court had diversity jurisdiction, as Ferens and his wife are Pennsylvania residents, and Deere is incorporated in Delaware with its principal place of business in Illinois.
Not to be deprived of a tort action, the Ferenses in the same year filed a second diversity suit against Deere in the United States District Court for the Southern District of Mississippi, alleging negligence and products liability. Diversity jurisdiction and venue were proper. The Ferenses sued Deere in the District Court in Mississippi because they knew that, under [Klaxon], the federal court in the exercise of diversity jurisdiction must apply the same choice-of-law rules that Mississippi state courts would apply if they were deciding the case. A Mississippi court would rule that Pennsylvania substantive law controls the personal injury claim but that Mississippi’s own law governs the limitation period.
Although Mississippi has a borrowing statute which, on its face, would seem to enable its courts to apply statutes of limitations from other jurisdictions, the State Supreme Court has said that the borrowing statute “only applies where a nonresident [defendant] in whose favor the statute has accrued afterwards moves into this state.” Louisiana & Mississippi R. Transfer Co. v. Long, 159 Miss. 654, 667 (1930). The borrowing statute would not apply to the Ferenses’ action because, as the parties agree, Deere was a corporate resident of Mississippi before the cause of action accrued. The Mississippi courts, as a result, would apply Mississippi’s 6-year statute of limitations to the tort claim arising under Pennsylvania law and the tort action would not be time barred under the Mississippi statute. See Miss. Code Ann. §15-1-49 (1972).
The issue now before us arose when the Ferenses took their forum shopping a step further: having chosen the federal court in Mississippi to take advantage of the State’s limitations period, they next moved, under §1404(a), to transfer the action to the federal court in Pennsylvania on the ground that Pennsylvania was a more convenient forum. The Ferenses acted on the assumption that, after the transfer, the choice-of-law rules in the Mississippi forum, including a rule requiring application of the Mississippi statute of limitations, would continue to govern the suit.
Deere put up no opposition, and the District Court in Mississippi granted the §1404(a) motion. The court accepted the Ferenses’ arguments that they resided in Pennsylvania; that the accident occurred there; that the claim had no connection to Mississippi; that a substantial number of witnesses resided in the Western District of Pennsylvania but none resided in Mississippi; that most of the documentary evidence was located in the Western District of Pennsylvania but none was located in Mississippi; and that the warranty action pending in the Western District of Pennsylvania presented common questions of law and fact.
The District Court in Pennsylvania consolidated the transferred tort action with the Ferenses’ pending warranty action but declined to honor the Mississippi statute of limitations as the District Court in Mississippi would have done. It ruled instead that, because the Ferenses had moved for transfer as plaintiffs, the rule in Van Dusen did not apply. Invoking the 2-year limitations period set by Pennsylvania law, the District Court dismissed their tort action.
The Court of Appeals for the Third Circuit affirmed.…
Section 1404(a) states only that a district court may transfer venue for the convenience of the parties and witnesses when in the interest of justice. It says nothing about choice of law and nothing about affording plaintiffs different treatment from defendants. We touched upon these issues in Van Dusen, but left open the question presented in this case. In Van Dusen, an airplane flying from Boston to Philadelphia crashed into Boston Harbor soon after takeoff. The personal representatives of the accident victims brought more than 100 actions in the District Court for the District of Massachusetts and more than 40 actions in the District Court for the Eastern District of Pennsylvania. When the defendants moved to transfer the actions brought in Pennsylvania to the federal court in Massachusetts, a number of the Pennsylvania plaintiffs objected because they lacked capacity under Massachusetts law to sue as representatives of the decedents. The plaintiffs also averred that the transfer would deprive them of the benefits of Pennsylvania’s choice-of-law rules because the transferee forum would apply to their wrongful-death claims a different substantive rule. The plaintiffs obtained from the Court of Appeals a writ of mandamus ordering the District Court to vacate the transfer.
We reversed.… [W]e held that the Court of Appeals erred in its assumption that Massachusetts law would govern the action following transfer. The legislative history of §1404(a) showed that Congress had enacted the statute because broad venue provisions in federal Acts often resulted in inconvenient forums and that Congress had decided to respond to this problem by permitting transfer to a convenient federal court under §1404(a). We said:
“This legislative background supports the view that §1404(a) was not designed to narrow the plaintiff’s venue privilege or to defeat the state-law advantages that might accrue from the exercise of this venue privilege but rather the provision was simply to counteract the inconveniences that flowed from the venue statutes by permitting transfer to a convenient federal court. The legislative history of §1404(a) certainly does not justify the rather startling conclusion that one might ‘get a change of a law as a bonus for a change of venue.’ Indeed, an interpretation accepting such a rule would go far to frustrate the remedial purposes of §1404(a). If a change in the law were in the offing, the parties might well regard the section primarily as a forum-shopping instrument. And, more importantly, courts would at least be reluctant to grant transfers, despite considerations of convenience, if to do so might conceivably prejudice the claim of a plaintiff who initially selected a permissible forum. We believe, therefore, that both the history and purposes of §1404(a) indicate that it should be regarded as a federal judicial housekeeping measure, dealing with the placement of litigation in the federal courts and generally intended, on the basis of convenience and fairness, simply to authorize a change of courtrooms.” Id., at 635-637 (footnotes omitted).
The quoted part of Van Dusen reveals three independent reasons for our decision. First, §1404(a) should not deprive parties of state-law advantages that exist absent diversity jurisdiction. Second, §1404(a) should not create or multiply opportunities for forum shopping. Third, the decision to transfer venue under §1404(a) should turn on considerations of convenience and the interest of justice rather than on the possible prejudice resulting from a change of law. Although commentators have questioned whether the scant legislative history of §1404(a) compels reliance on these three policies, see Note, Choice of Law after Transfer of Venue, 75 Yale L.J. 90, 123 (1965), we find it prudent to consider them in deciding whether the rule in Van Dusen applies to transfers initiated by plaintiffs. We decide that, in addition to other considerations, these policies require a transferee forum to apply the law of the transferor court, regardless of who initiates the transfer. A transfer under §1404(a), in other words, does not change the law applicable to a diversity case.
The policy that §1404(a) should not deprive parties of state-law advantages, although perhaps discernible in the legislative history, has its real foundation in Erie [supra page 509]. See Van Dusen, 376 U.S., at 637. The Erie rule remains a vital expression of the federal system and the concomitant integrity of the separate States. We explained Erie in Guaranty Trust Co. v. York [supra page 515], as follows:
In essence, the intent of [the Erie] decision 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. The nub of the policy that underlies Erie is that for the same transaction the accident of a suit by a nonresident litigant in a federal court instead of in a State court a block away should not lead to a substantially different result.
In Hanna v. Plumer [supra page 516], we held that Congress has the power to prescribe procedural rules that differ from state-law rules even at the expense of altering the outcome of litigation. This case does not involve a conflict. As in Van Dusen, our interpretation of §1404(a) is in full accord with the Erie rule.
The Erie policy had a clear implication for Van Dusen. The existence of diversity jurisdiction gave the defendants the opportunity to make a motion to transfer venue under §1404(a), and if the applicable law were to change after transfer, the plaintiff’s venue privilege and resulting state-law advantages could be defeated at the defendant’s option. To allow the transfer and at the same time preserve the plaintiff’s state-law advantages, we held that the choice-of-law rules should not change following a transfer initiated by a defendant. Transfers initiated by a plaintiff involve some different considerations, but lead to the same result. Applying the transferor law, of course, will not deprive the plaintiff of any state-law advantages. A defendant, in one sense, also will lose no legal advantage if the transferor law controls after a transfer initiated by the plaintiff; the same law, after all, would have applied if the plaintiff had not made the motion. In another sense, however, a defendant may lose a nonlegal advantage. Deere, for example, would lose whatever advantage inheres in not having to litigate in Pennsylvania, or, put another way, in forcing the Ferenses to litigate in Mississippi or not at all.
We, nonetheless, find the advantage that the defendant loses slight. A plaintiff always can sue in the favorable state court or sue in diversity and not seek a transfer. By asking for application of the Mississippi statute of limitations following a transfer to Pennsylvania on grounds of convenience, the Ferenses are seeking to deprive Deere only of the advantage of using against them the inconvenience of litigating in Mississippi. The text of §1404(a) may not say anything about choice of law, but we think it not the purpose of the section to protect a party’s ability to use inconvenience as a shield to discourage or hinder litigation otherwise proper. The section exists to eliminate inconvenience without altering permissible choices under the venue statutes. This interpretation should come as little surprise. As in our previous cases, we think that “[t]o construe §1404(a) this way merely carries out its design to protect litigants, witnesses and the public against unnecessary inconvenience and expense, not to provide a shelter for … proceedings in costly and inconvenient forums.” Continental Grain Co. v. Barge FBL-585, 364 U.S. 19, 27 (1960). By creating an opportunity to have venue transferred between courts in different States on the basis of convenience, an option that does not exist absent federal jurisdiction, Congress, with respect to diversity, retained the Erie policy while diminishing the incidents of inconvenience.
Applying the transferee law, by contrast, would undermine the Erie rule in a serious way. It would mean that initiating a transfer under §1404(a) changes the state law applicable to a diversity case. We have held, in an isolated circumstance, that §1404(a) may pre-empt state law. See Stewart Organization, Inc. v. Ricoh Corp., 487 U.S. 22 (1988) (holding that federal law determines the validity of a forum selection clause). In general, however, we have seen §1404(a) as a housekeeping measure that should not alter the state law governing a case under Erie. See Van Dusen, supra; see also Stewart Organization, supra, at 37 (Scalia, J., dissenting) (finding the language of §1404(a) “plainly insufficient” to work a change in the applicable state law through preemption). The Mississippi statute of limitations, which everyone agrees would have applied if the Ferenses had not moved for a transfer, should continue to apply in this case.
In any event, defendants in the position of Deere would not fare much better if we required application of the transferee law instead of the transferor law. True, if the transferee law were to apply, some plaintiffs would not sue these defendants for fear that they would have no choice but to litigate in an inconvenient forum. But applying the transferee law would not discourage all plaintiffs from suing. Some plaintiffs would prefer to litigate in an inconvenient forum with favorable
law than to litigate in a convenient forum with unfavorable law or not to litigate at all. The Ferenses, no doubt, would have abided by their initial choice of the District Court in Mississippi had they known that the District Court in Pennsylvania would dismiss their action. If we were to rule for Deere in this case, we would accomplish little more than discouraging the occasional motions by plaintiffs to transfer inconvenient cases. Other plaintiffs would sue in an inconvenient forum with the expectation that the defendants themselves would seek transfer to a convenient forum, resulting in application of the transferor law under Van Dusen. In this case, for example, Deere might have moved for a transfer if the Ferenses had not.
Van Dusen also sought to fashion a rule that would not create opportunities for forum shopping. Some commentators have seen this policy as the most important rationale of Van Dusen, but few attempt to explain the harm of forum shopping when the plaintiff initiates a transfer. An opportunity for forum shopping exists whenever a party has a choice of forums that will apply different laws. The Van Dusen policy against forum shopping simply requires us to interpret §1404(a) in a way that does not create an opportunity for obtaining a more favorable law by selecting a forum through a transfer of venue. In the Van Dusen case itself, this meant that we could not allow defendants to use a transfer to change the law.
No interpretation of §1404(a), however, will create comparable opportunities for forum shopping by a plaintiff because, even without §1404(a), a plaintiff already has the option of shopping for a forum with the most favorable law. The Ferenses, for example, had an opportunity for forum shopping in the state courts because both the Mississippi and Pennsylvania courts had jurisdiction and because they each would have applied a different statute of limitations. Diversity jurisdiction did not eliminate these forum shopping opportunities; instead, under Erie, the federal courts had to replicate them. See Klaxon, 313 U.S., at 496 (“Whatever lack of uniformity [Erie] may produce between federal courts in different states is attributable to our federal system, which leaves to a state, within the limits permitted by the Constitution, the right to pursue local policies diverging from those of its neighbors”). Applying the transferor law would not give a plaintiff an opportunity to use a transfer to obtain a law that he could not obtain through his initial forum selection. If it does make selection of the most favorable law more convenient, it does no more than recognize a forum shopping choice that already exists. This fact does not require us to apply the transferee law. Section 1404(a), to reiterate, exists to make venue convenient and should not allow the defendant to use inconvenience to discourage plaintiffs from exercising the opportunities that they already have.
Applying the transferee law, by contrast, might create opportunities for forum shopping in an indirect way. The advantage to Mississippi’s personal injury lawyers that resulted from the State’s then applicable 6-year statute of limitations has not escaped us; Mississippi’s long limitation period no doubt drew plaintiffs to the State. Although Sun Oil held that the federal courts have little interest in a State’s decision to create a long statute of limitations or to apply its statute of limitations to claims governed by foreign law, we should recognize the consequences of our interpretation of §1404(a). Applying the transferee law, to the extent that it discourages plaintiff-initiated transfers, might give States incentives to enact similar laws to bring in out-of-state business that would not be moved at the instance of the plaintiff.
Van Dusen also made clear that the decision to transfer venue under §1404(a) should turn on considerations of convenience rather than on the possibility of prejudice resulting from a change in the applicable law. We reasoned in Van Dusen that, if the law changed following a transfer initiated by the defendant, a district court “would at least be reluctant to grant transfers, despite considerations of convenience, if to do so might conceivably prejudice the claim of a plaintiff.” 376 U.S., at 636. The court, to determine the prejudice, might have to make an elaborate survey of the law, including statutes of limitations, burdens of proof, presumptions, and the like. This would turn what is supposed to be a statute for convenience of the courts into one expending extensive judicial time and resources. Because this difficult task is contrary to the purpose of the statute, in Van Dusen we made it unnecessary by ruling that a transfer of venue by the defendant does not result in a change of law. This same policy requires application of the transferor law when a plaintiff initiates a transfer.
If the law were to change following a transfer initiated by a plaintiff, a district court in a similar fashion would be at least reluctant to grant a transfer that would prejudice the defendant. Hardship might occur because plaintiffs may find as many opportunities to exploit application of the transferee law as they would find opportunities for exploiting application of the transferor law. If the transferee law were to apply, moreover, the plaintiff simply would not move to transfer unless the benefits of convenience outweighed the loss of favorable law.
Some might think that a plaintiff should pay the price for choosing an inconvenient forum by being put to a choice of law versus forum. But this assumes that §1404(a) is for the benefit only of the moving party. By the statute’s own terms, it is not. Section 1404(a) also exists for the benefit of the witnesses and the interest of justice, which must include the convenience of the court. Litigation in an inconvenient forum does not harm the plaintiff alone. As Justice Jackson said:
Administrative difficulties follow for courts when litigation is piled up in congested centers instead of being handled at its origin. Jury duty is a burden that ought not to be imposed upon the people of a community which has no relation to the litigation. In cases which touch the affairs of many persons, there is reason for holding the trial in their view and reach rather than in remote parts of the country where they can learn of it by report only. There is a local interest in having localized controversies decided at home. There is an appropriateness too, in having the trial of a diversity case in a forum that is at home with the state law that must govern the case, rather than having a court in some other forum untangle problems in conflicts of laws, and in law foreign to itself.
This case involves some considerations to which we perhaps did not give sufficient attention in Van Dusen. Foresight and judicial economy now seem to favor the simple rule that the law does not change following a transfer of venue under §1404(a). Affording transfers initiated by plaintiffs different treatment from transfers initiated by defendants may seem quite workable in this case, but the simplicity is an illusion. If we were to hold that the transferee law applies following a §1404(a) motion by a plaintiff, cases such as this would not arise in the future. Although applying the transferee law, no doubt, would catch the Ferenses by surprise, in the future no plaintiffs in their position would move for a change of venue.
Other cases, however, would produce undesirable complications. The rule would leave unclear which law should apply when both a defendant and a plaintiff move for a transfer of venue or when the court transfers venue on its own motion. The rule also might require variation in certain situations, such as when the plaintiff moves for a transfer following a removal from state court by the defendant, or when only one of several plaintiffs requests the transfer, or when circumstances change through no fault of the plaintiff making a once convenient forum inconvenient. True, we could reserve any consideration of these questions for a later day. But we have a duty, in deciding this case, to consider whether our decision will create litigation and uncertainty. On the basis of these considerations, we again conclude that the transferor law should apply regardless of who makes the §1404(a) motion.
Some may object that a district court in Pennsylvania should not have to apply a Mississippi statute of limitations to a Pennsylvania cause of action. This point, although understandable, should have little to do with the outcome of this case. Congress gave the Ferenses the power to seek a transfer in §1404(a), and our decision in Van Dusen already could require a district court in Pennsylvania to apply the Mississippi statute of limitations to Pennsylvania claims. Our rule may seem too generous because it allows the Ferenses to have both their choice of law and their choice of forum, or even to reward the Ferenses for conduct that seems manipulative. We nonetheless see no alternative rule that would produce a more acceptable result. Deciding that the transferee law should apply, in effect, would tell the Ferenses that they should have continued to litigate their warranty action in Pennsylvania and their tort action in Mississippi. Some might find this preferable, but we do not. We have made quite clear that “[t]o permit a situation in which two cases involving precisely the same issues are simultaneously pending in different District Courts leads to the wastefulness of time, energy and money that §1404(a) was designed to prevent.” Continental Grain, 364 U.S., at 26.
From a substantive standpoint, two further objections give us pause but do not persuade us to change our rule. First, one might ask why we require the Ferenses to file in the District Court in Mississippi at all. Efficiency might seem to dictate a rule allowing plaintiffs in the Ferenses’ position not to file in an inconvenient forum and then to return to a convenient forum though a transfer of venue, but instead simply to file in the convenient forum and ask for the law of the inconvenient forum to apply. Although our rule may invoke certain formality, one must remember that §1404(a) does not provide for an automatic transfer of venue. The section, instead, permits a transfer only when convenient and “in the interest of justice.” Plaintiffs in the position of the Ferenses must go to the distant forum because they have no guarantee, until the court there examines the facts, that they may obtain a transfer. No one has contested the justice of transferring this particular case, but the option remains open to defendants in future cases. Although a court cannot ignore the systemic costs of inconvenience, it may consider the course that the litigation already has taken in determining the interest of justice.
Second, one might contend that, because no per se rule requiring a court to apply either the transferor law or the transferee law will seem appropriate in all circumstances, we should develop more sophisticated federal choice-of-law rules for diversity actions involving transfers. To a large extent, however, state conflicts-of-law rules already ensure that appropriate laws will apply to diversity cases. Federal law, as a general matter, does not interfere with these rules. See Sun Oil, 486 U.S., at 727-729. In addition, even if more elaborate federal choice-of-law rules would not run afoul of Klaxon and Erie, we believe that applying the law of the transferor forum effects the appropriate balance between fairness and simplicity.
For the foregoing reasons, we conclude that Mississippi’s statute of limitations should govern the Ferenses’ action. We reverse and remand for proceedings consistent with this opinion.
Justice SCALIA, with whom Justice BRENNAN, Justice MARSHALL, and Justice BLACKMUN join, dissenting.
The question we must answer today is whether 28 U.S.C. §1404(a) (1982 ed.) and the policies underlying Klaxon—namely, uniformity within a State and the avoidance of forum shopping—produce a result different from Klaxon when the suit in question was not filed in the federal court initially, but was transferred there under §1404(a) on plaintiff’s motion. In Van Dusen, we held that a result different from Klaxon is produced when a suit has been transferred under §1404(a) on defendant’s motion. Our reasons were two. First, we thought it highly unlikely that Congress, in enacting §1404(a), meant to provide defendants with a device by which to manipulate the substantive rules that would be applied. That conclusion rested upon the fact that the law grants the plaintiff the advantage of choosing the venue in which his action will be tried, with whatever state-law advantages accompany that choice. A defensive use of §1404(a) in order to deprive the plaintiff of this “venue privilege,” id., at 634, would allow the defendant to “‘get a change of law as a bonus for a change of venue,’” id., at 636 (citation omitted), and would permit the defendant to engage in forum shopping among States, a privilege that the Klaxon regime reserved for plaintiffs. Second, we concluded that the policies of Erie and Klaxon would be undermined by application of the transferee court’s choice-of-law principles in the case of a defendant-initiated transfer, because then “the ‘accident’ of federal diversity jurisdiction” would enable the defendant “to utilize a transfer to achieve a result in federal court which could not have been achieved in the courts of the State where the action was filed,” id., at 638. The goal of Erie and Klaxon, we reasoned, was to prevent “forum shopping” as between state and federal systems; the plaintiff makes a choice of forum law by filing the complaint, and that choice must be honored in federal court, just as it would have been honored in state court, where the defendant would not have been able to transfer the case to another State.
We left open in Van Dusen the question presented today, viz., whether “the same considerations would govern” if a plaintiff sought a §1404(a) transfer. 376 U.S., at 640. In my view, neither of those considerations is served—and indeed both are positively defeated—by a departure from Klaxon in that context. First, just as it is unlikely that Congress, in enacting §1404(a), meant to provide the defendant with a vehicle by which to manipulate in his favor the substantive law to be applied in a diversity case, so too is it unlikely that Congress meant to provide the plaintiff with a vehicle by which to appropriate the law of a distant and inconvenient forum in which he does not intend to litigate, and to carry that prize back to the State in which he wishes to try the case. Second, application of the transferor court’s law in this context would encourage forum shopping between federal and state courts in the same jurisdiction on the basis of differential substantive law. It is true, of course, that the plaintiffs here did not select the Mississippi federal court in preference to the Mississippi state courts because of any differential substantive law; the former, like the latter, would have applied Mississippi choice-of-law rules and thus the Mississippi statute of limitations. But one must be blind to reality to say that it is the Mississippi federal court in which these plaintiffs have chosen to sue. That was merely a way station en route to suit in the Pennsylvania federal court. The plaintiffs were seeking to achieve exactly what Klaxon was designed to prevent: the use of a Pennsylvania federal court instead of a Pennsylvania state court in order to obtain application of a different substantive law. Our decision in Van Dusen compromised “the principle of uniformity within a state,” Klaxon, supra, at 496, only in the abstract, but today’s decision compromises it precisely in the respect that matters—i.e., insofar as it bears upon the plaintiff’s choice between a state and a federal forum. The significant federal judicial policy expressed in Erie arid Klaxon is reduced to a laughingstock if it can so readily be evaded through filing-and-transfer.
The Court is undoubtedly correct that applying the Klaxon rule after a plaintiff-initiated transfer would deter a plaintiff in a situation such as exists here from seeking a transfer, since that would deprive him of the favorable substantive law. But that proves only that this disposition achieves what Erie and Klaxon are designed to achieve: preventing the plaintiff from using “the accident of diversity of citizenship,” Klaxon, 313 U.S., at 496, to obtain the application of a different law within the State where he wishes to litigate. In the context of the present case, he must either litigate in the State of Mississippi under Mississippi law, or in the Commonwealth of Pennsylvania under Pennsylvania law.
[I]t seems to me that a proper calculation of systemic costs [of the Court’s decision] would go as follows: Saved by the Court’s rule will be the incremental cost of trying in forums that are inconvenient (but not so inconvenient as to prompt the court’s sua sponte transfer) those suits that are now filed in such forums for choice-of-law purposes. But incurred by the Court’s rule will be the costs of considering and effecting transfer, not only in those suits but in the indeterminate number of additional suits that will be filed in inconvenient forums now that filing-and-transfer is an approved form of shopping for law; plus the costs attending the necessity for transferee courts to figure out the choice-of-law rules (and probably the substantive law) of distant States much more often than our Van Dusen decision would require. It should be noted that the file-and-transfer ploy sanctioned by the Court today will be available not merely to achieve the relatively rare (and generally un-needed) benefit of a longer statute of limitations, but also to bring home to the desired state of litigation all sorts of favorable choice-of-law rules regarding substantive liability—in an era when the diversity among the States in choice-of-law principles has become kaleidoscopic.
Thus, even as an exercise in giving the most extensive possible scope to the policies of §1404(a), the Court’s opinion seems to me unsuccessful. But as I indicated by beginning this opinion with the Rules of Decision Act, that should not be the object of the exercise at all. The Court and I reach different results largely because we approach the question from different directions. For the Court, this case involves an “interpretation of §1404(a),” ante, at 524, and the central issue is whether Klaxon stands in the way of the policies of that statute. For me, the case involves an interpretation of the Rules of Decision Act, and the central issue is whether §1404(a) alters the “principle of uniformity within a state” which Klaxon says that Act embodies. I think my approach preferable, not only because the Rules of Decision Act does, and §1404(a) does not, address the specific subject of which law to apply, but also because, as the Court acknowledges, our jurisprudence under that statute is “a vital expression of the federal system and the concomitant integrity of the separate States,” ante, at 523. To ask, as in effect the Court does, whether Erie gets in the way of §1404(a), rather than whether §1404(a) requires adjustment of Erie, seems to me the expression of a mistaken sense of priorities.
For the foregoing reasons, I respectfully dissent.
Questions and Comments
(1) The Van Dusen Court justified its result that transfers retain transferor court choice-of-law principles by observing that 28 U.S.C. §1404 was intended only to change the courthouse, and nothing else. But what if such a desire is impossible to accomplish? Doesn’t §1404 plus the decision in Van Dusen give plaintiffs a right they never had before—the right to choose an inconvenient forum with favorable law, secure in the knowledge that §1404 will allow transfer to a convenient forum? Did Congress intend to give plaintiffs this advantage in passing §1404? Thus interpreted, won’t §1404 encourage federal-state forum-shopping by plaintiffs (by removing the limitation of convenience), thus countering the only justification for Klaxon?
(2) Even if Van Dusen correctly determined that plaintiffs properly possess this advantage, does the Ferens holding go too far by turning litigation into even more of an artificial game than it would otherwise be?
(3) If the Ferens dissent is correct that the issue is easily resolved by reference to the Rules of Decision Act, then wouldn’t Van Dusen have to be overruled? How can the Act itself require a federal court to apply the same law as the state court across the street, when all it says is that “the laws of the several states … shall be regarded as rules of decisions,” without saying which states? The notion that the relevant state is the one in which the federal court sits stems from Erie, not from the text of the Act, and Erie did not purport to be addressing matters such as choice of law after change of venue; indeed, if it had addressed such issues, its opinions could have been dismissed as dicta.
If Klaxon rests on constitutional principles, then why shouldn’t it take precedence over the Rules of Decision Act, even assuming that the dissent is correct about what the Act requires? If section 1404(a) has equal standing to the Rules of Decision Act (both being statutes) then which one should govern in case of conflict?
(4) How should a similar case be treated if transfer were sought under 28 U.S.C. §1406, which allows transfer when venue in the original forum is improperly laid? In Martin v. Stokes, 623 F.2d 469 (6th Cir. 1980), the court held that the law of the transferee forum would apply in cases transferred under §1406. Correct? What should be the result under a §1404 transfer if the courts of the state in which suit was originally brought would have dismissed the case on forum non conveniens grounds? Would Erie principles then dictate a change in law accompanying the transfer? If so and if there were two possible transferee forums with different choice-of-law rules, how should the transferor court choose between them?
(5) Should the Van Dusen principle be applied to a §1404 or §1407 transfer in a federal question case when the transfer is to a different circuit with a different interpretation of federal law controlling an issue in the case? Judge (now Justice) Ruth Bader Ginsburg believes that “[this] is a question meriting attention from a Higher Authority.” In re Korean Air Lines Disaster of September 1, 1983, 829 F.2d 1171, 1174 (D.C. Cir. 1987). In the absence of guidance from Congress, the Supreme Court, and the Judicial Panel on Multidistrict Litigation, she concluded that in a §1407 transfer, the transferee court should use its own best judgment on matters of federal law. Compare Eckstein v. Balcor Film Investors, 8 F.3d 1121 (7th Cir. 1993), holding that this is usually the right result.
(6) A perceptive discussion of the general Ferens/Van Dusen problem may be found in Note, Choice of Law in Federal Court after Transfer of Venue, 63 Cornell L. Rev. 149 (1977), which was cited several times in the Ferens majority opinion. The piece asserts that “[i]n the few reported cases where plaintiffs moved for transfer from proper forums, however, the defendants argued for the law of the transferor. This suggests that plaintiff-transferors often blunder in selecting an initial forum.” Id. at 156 (footnote omitted). Should the blundering plaintiff have the right to the law of the transferee forum if it favors him, on the ground that he could have filed there in the first place? Does Ferens clearly preclude that result?
(7) Both the majority and the dissent in Ferens attempted to make it appear that their conclusions were compelled by the existing statutory scheme. If you were in charge of writing the statutes to govern federal venue, how would you draft them to avoid the Ferens problem?
Sometimes defendant files a motion to transfer venue on grounds that the parties entered into a contract that includes an exclusive choice-of-court clause. Such clauses state that the parties agree to resolve some or all of their disputes exclusively in the courts located in a particular county, state or country. In these cases, the transfer turns on the enforceability of the choice-of-court clause. As discussed more fully in Chapter 9, infra, enforcement of choice-of-court clauses is typically a question of state law when the claims at issue are state law claims litigated in state court and a question of federal law when the claims at issue are federal law claims. Under the federal law of enforcement, choice-of-court clauses carry with them a strong presumption of enforceability. Not all states adopt this strong presumption.
What happens when a federal court sitting in diversity is presented with a challenge to the enforceability of choice-of-court clauses? In Stewart Organization, Inc. v. Ricoh Corp., 487 U.S. 22 (1988), the Court concluded that federal law governed the question of the enforceability of the clauses, but the majority stopped short of concluding that the strong presumption of validity applied to federal law claims should also be applied in diversity cases. Writing for the majority, Justice Marshall reasoned that §1404(a) is sufficiently broad that it controls transfers that involve choice-of-court clauses. Because §1404(a) is constitutional under Hanna’s test that federal statutes need only be rationally be capable of rational classification as procedural, it controls in diversity actions notwithstanding contrary state law.
Under §1404(a) the district court is instructed to consider both convenience and fairness, and the presence of the forum selection clause, as well as the relative bargaining power of the parties, would both be relevant to both considerations. The clause would not control the outcome of the §1404(a) inquiry, however, because the court must also take into account the convenience of third parties as well as public interest concerns. In some cases, the clause would be enforced in federal court even though it would not be considered valid in state court, and in other cases the opposite inconsistency could result. Even so, Congress’ intended that a “flexible and multifaceted analysis” be applied. Id. at 31.
Justices Kennedy and O’Connor concurred, writing separately to state that they believed that the strong presumption of validity applied to federal law claims should also apply in the §1404(a) analysis because the presumption furthers important private and public interests.
Justice Scalia dissented, arguing that §1404(a) does not clearly extend to the issue of enforcement of choice-of-court clauses, because enforcement necessarily involves contract law principles, and nothing in §1404(a) indicates that Congress intended that state contract law principles be preempted. Moreover, judge-made principles for use in the federal courts would be inconsistent with the twin aims of Erie. Specifically, a federal rule for enforcement would create forum shopping and would result in different treatment of diverse and local contracting parties. Instead, Justice Scalia thought that state law should be used to determine whether a forum-selection clause is enforceable. If so, the court should either transfer the case (assuming that transfer is warranted under §1404(a)) or dismiss it (if a §1404(a) transfer is not warranted). If the clause is not enforceable under state law, then the district court should consider whether the case should nevertheless be transferred under §1404(a) for independent reasons.
Which view of the role of §1404(a) seems to make most sense? For a critical account of Ricoh, see Mullenix, Another Choice of Forum, Another Choice of Law: Consensual Adjudicatory Procedure in Federal Court, 57 Fordham L. Rev. 291 (1988). See also Borchers, Forum Selection Agreements in the Federal Courts after Carnival Cruise: A Proposal For Congressional Reform, 67 Wash. L. Rev. 55 (1992). If contract law principles are to be considered as part of a consideration of convenience or fairness, must the principle derive from state law, using the principles derived from Erie and Klaxon? And, under the majority’s view, how much weight should a forum-selection clause be given under §1404(a)?
In Atlantic Marine Const. Co. v. U.S. District Court for the Western Dist. of Texas, 134 S. Ct. 568 (2013), a unanimous Court concluded that a district court should transfer a case to the contractually chosen forum unless extraordinary circumstances unrelated to the convenience of the parties clearly disfavored the transfer. The Court further concluded that the presence of a valid choice-of-court clause alters the usual §1404(a) analysis in three ways. First, plaintiff’s choice of forum is given no deference; indeed, plaintiff bears the burden of establishing the presence of extraordinary circumstances necessary to defeat the transfer. Second, only public interest factors will be relevant; the clause conclusively determines the private interests. Third, Van Dusen/Ferens does not apply to these transfers. In other words, the choice-of-law principles of the contractually chosen rather than the transferor court will apply. The Court did not consider how a district court should determine whether the choice-of-court clause is valid.
Forum non conveniens is a doctrine that gives courts discretion to dismiss a case within their jurisdiction if there is a more convenient forum elsewhere. 28 U.S.C. §1404 replaced the common law forum non conveniens doctrine with respect to federal court dismissals to other federal courts. But the doctrine of forum non conveniens retains validity in state court (because there is no general provision for transfer between state courts). It also applies in federal court if the preferred forum is a non-U.S. court. For example, in Piper Aircraft Co. v. Reyno, 454 U.S. 235 (1981), the Supreme Court ruled that a forum non conveniens dismissal to a Scottish court was appropriate in a case involving an airplane crash in Scotland. In Atlantic Marine, the Court stated that forum non conveniens also was the proper procedural mechanism for district courts to use when a contract chooses a state or foreign forum.
Piper held that under the forum non conveniens doctrine, federal district courts have discretion to dismiss a case if they determine that there is an adequate alternate forum and various private and public interest factors weigh in favor of adjudicating the case in that forum. See id. 257-261. The court further held that in determining whether an alternate forum is “adequate,” it was generally irrelevant that the laws or procedures in the alternate forum were less favorable to the plaintiff than those available in the United States. Id. 247-255.
Piper did not address “whether under [Erie], state or federal law of forum non conveniens applies in a diversity case,” id. at 249 n. 13, because the state and federal forum non conveniens laws in that case were identical. See id. Courts of Appeals have concluded that the federal standard applies when the two do diverge. See In re Air Crash Disaster Near New Orleans, 821 F.2d 147 (5th Cir. 1987) (en banc), vacated on other grounds, 490 U.S. 1032 (1989); Sibaja v. Dow Chemical Co., 757 F.2d 1215 (11th Cir. 1985). Is that conclusion consisted with Erie?
Should state courts be bound by the federal forum non conveniens standards when they adjudicate international cases? The question only comes up in forum non conveniens cases involving dismissals to foreign fora. Scholars disagree about the answer. For the view that forum non conveniens should be treated as federal common law rule binding on the states, see, e.g., Greenberg, The Appropriate Source of Law for Forum Non Conveniens Decisions in International Cases: A Proposal for the Development of Federal Common Law, 4 Int’l Tax & Bus. Law. 155, 156 (1986); Lowenfeld, Nationalizing International Law: Essay in Honor of Louis Henkin, 36 Colum. J. Transnat’l L. 121, 136-138 (1997). For two very different views about why the Piper standards do not trump state forum non conveniens law, see Goldsmith, Federal Courts, Foreign Affairs, and Federalism, 83 Va. L. Rev. 1617 (1997); Stein, Erie and Court Access, 100 Yale L.J. 1935 (1991). (The Stein article offers an excellent overview and analysis of the Erie issues implicated by various venue and related doctrines.)
The view that state forum non conveniens law survives in state court finds support in American Dredging Co. v. Miller, 510 U.S. 443 (1994), an admiralty case in state court between U.S. citizens. The Court concluded that, at least in the admiralty context, the federal forum non conveniens doctrine is a procedural rule and not one that trumps state law. It reasoned in part:
At bottom, the doctrine of forum non conveniens is nothing more or less than a supervening venue provision, permitting displacement of the ordinary rules of venue when, in light of certain conditions, the trial court thinks that jurisdiction ought to be declined. But venue is a matter that goes to process rather than substantive rights—determining which among various competent courts will decide the case.
Id. at 453. Should this reasoning extend to non-admiralty cases?
2. Erie and Judgments
Semtek Int’l Inc. v. Lockheed Martin Corp.
531 U.S. 497 (2001)
Justice SCALIA delivered the opinion of the Court.
This case presents the question whether 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.
Petitioner filed a complaint against respondent in California state court, alleging breach of contract and various business torts. Respondent removed the case to the United States District Court for the Central District of California on the basis of diversity of citizenship, see 28 U.S.C. §§1332. 1441, and successfully moved to dismiss petitioner’s claims as barred by California’s 2-year statute of limitations. In its order of dismissal, the District Court, adopting language suggested by respondent, dismissed petitioner’s claims “in [their] entirety on the merits and with prejudice.” Without contesting the District Court’s designation of its dismissal as “on the merits,” petitioner appealed to the Court of Appeals for the Ninth Circuit, which affirmed the District Court’s order. 168 F.3d 501 (1999) (table). Petitioner also brought suit against respondent in the State Circuit Court for Baltimore City, Maryland, alleging the same causes of action, which were not time barred under Maryland’s 3-year statute of limitations. Respondent sought injunctive relief against this action from the California federal court under the All Writs Act, 28 U.S.C. §1651, and removed the action to the United States District Court for the District of Maryland on federal-question grounds (diversity grounds were not available because Lockheed “is a Maryland citizen,” 988 F. Supp. 913, 914 (1997)). The California federal court denied the relief requested, and the Maryland federal court remanded the case to state court because the federal question arose only by way of defense. Following a hearing, the Maryland state court granted respondent’s motion to dismiss on the ground of res judicata. Petitioner then returned to the California federal court and the Ninth Circuit, unsuccessfully moving both courts to amend the former’s earlier order so as to indicate that the dismissal was not “on the merits.” Petitioner also appealed the Maryland trial court’s order of dismissal to the Maryland Court of Special Appeals. The Court of Special Appeals affirmed, holding that, regardless of whether California would have accorded claim-preclusive effect to a statute-of-limitations dismissal by one of its own courts, the dismissal by the California federal court barred the complaint filed in Maryland, since the res judicata effect of federal diversity judgments is prescribed by federal law, under which the earlier dismissal was on the merits and claim preclusive. After the Maryland Court of Appeals declined to review the case, we granted certiorari.
Petitioner contends that the outcome of this case is controlled by Dupasseur v. Rochereau, 21 Wall. 130,135 (1875), which held that the res judicata effect of a federal diversity judgment “is such as would belong to judgments of the State courts rendered under similar circumstances,” and may not be accorded any “higher sanctity or effect.” Since, petitioner argues, the dismissal of an action on statute-of-limitations grounds by a California state court would not be claim preclusive, it follows that the similar dismissal of this diversity action by the California federal court cannot be claim preclusive. While we agree that this would be the result demanded by Dupasseur, the case is not dispositive because it was decided under the Conformity Act of 1872, 17 Stat. 196, which required federal courts to apply the procedural law of the forum State in nonequity cases. That arguably affected the outcome of the case. See Dupasseur, supra, at 135. See also Restatement (Second) of Judgments §87, Comment a, p.315 (1980) (hereinafter Restatement) (“Since procedural law largely determines the matters that may be adjudicated in an action, state law had to be considered in ascertaining the effect of a federal judgment”).
Involuntary Dismissal: Effect Thereof. For failure of the plaintiff to prosecute or to comply with these rules or any order of court, a defendant may move for dismissal of an action or of any claim against the defendant. Unless the court in its order for dismissal otherwise specifies, a dismissal under this subdivision and any dismissal not provided for in this rule, other than a dismissal for lack of jurisdiction, for improper venue, or for failure to join a party under Rule 19, operates as an adjudication upon the merits.
Since the dismissal here did not “otherwise specify” (indeed, it specifically stated that it was “on the merits”), and did not pertain to the excepted subjects of jurisdiction, venue, or joinder, it follows, respondent contends, that the dismissal “is entitled to claim preclusive effect.”
Implicit in this reasoning is the unstated minor premise that all judgments denominated “on the merits” are entitled to claim-preclusive effect. That premise is not necessarily valid. The original connotation of an “on the merits” adjudication is one that actually “passes directly on the substance of [a particular] claim” before the court. Restatement §19, Comment a, at 161. That connotation remains common to every jurisdiction of which we are aware. See ibid. (“The prototypical [judgment on the merits is] one in which the merits of [a party’s] claim are in fact adjudicated [for or] against the [party] after trial of the substantive issues”). And it is, we think, the meaning intended in those many statements to the effect that a judgment “on the merits” triggers the doctrine of res judicata or claim preclusion.
But over the years the meaning of the term “judgment on the merits” “has gradually undergone change,” R. Marcus, M. Redish, & E. Sherman, Civil Procedure: A Modern Approach 1140-1141 (3d ed. 2000), and it has come to be applied to some judgments (such as the one involved here) that do not pass upon the substantive merits of a claim and hence do not (in many jurisdictions) entail claim-preclusive effect. That is why the Restatement of Judgments has abandoned the use of the term—“because of its possibly misleading connotations,” Restatement §19, Comment a, at 161.
In short, it is no longer true that a judgment “on the merits” is necessarily a judgment entitled to claim-preclusive effect; and there are a number of reasons for believing that the phrase “adjudication upon the merits” does not bear that meaning in Rule 41(b). To begin with, Rule 41(b) sets forth nothing more than a default rule for determining the import of a dismissal (a dismissal is “upon the merits,” with the three stated exceptions, unless the court “otherwise specifies”). This would be a highly peculiar context in which to announce a federally prescribed rule on the complex question of claim preclusion, saying in effect, “All federal dismissals (with three specified exceptions) preclude suit elsewhere, unless the court otherwise specifies.”
And even apart from the purely default character of Rule 41(b), it would be peculiar to find a rule governing the effect that must be accorded federal judgments by other courts ensconced in rules governing the internal procedures of the rendering court itself. Indeed, such a rule would arguably violate the jurisdictional limitation of the Rules Enabling Act: that the Rules “shall not abridge, enlarge or modify any substantive right,” 28 U.S.C. §2072(b). In the present case, for example, if California law left petitioner free to sue on this claim in Maryland even after the California statute of limitations had expired, the federal court’s extinguishment of that right (through Rule 41(b)’s mandated claim-preclusive effect of its judgment) would seem to violate this limitation.
Moreover, as so interpreted, the Rule would in many cases violate the federalism principle of Erie, by engendering “‘substantial’ variations [in outcomes] between state and federal litigation” which would “likely … influence the choice of a forum,” Hanna, 380 U.S. at 467-468. With regard to the claim-preclusion issue involved in the present case, for example, the traditional rule is that expiration of the applicable statute of limitations merely bars the remedy and does not extinguish the substantive right, so that dismissal on that ground does not have claim-preclusive effect in other jurisdictions with longer, unexpired limitation periods. See Restatement (Second) of Conflict of Laws §§142(2), 143 (1969); Restatement of Judgments §49, Comment a (1942). Out-of-state defendants sued on state claims in California and in other States adhering to this traditional rule would systematically remove state-law suits brought against them to federal court—where, unless otherwise specified, a statute-of-limitations dismissal would bar suit everywhere.
Finally, if Rule 41(b) did mean what respondent suggests, we would surely have relied upon it in our cases recognizing the claim-preclusive effect of federal judgments in federal-question cases. Yet for over half a century since the promulgation of Rule 41(b), we have not once done so.
We think the key to a more reasonable interpretation of the meaning of “operates as an adjudication upon the merits” in Rule 41(b) is to be found in Rule 41(a), which, in discussing the effect of voluntary dismissal by the plaintiff, makes clear that an “adjudication upon the merits” is the opposite of a “dismissal without prejudice”:
“Unless otherwise stated in the notice of dismissal or stipulation, the dismissal is without prejudice, except that a notice of dismissal operates as an adjudication upon the merits when filed by a plaintiff who has once dismissed in any court of the United States or of any state an action based on or including the same claim.”
See also 18 Wright & Miller, §4435, at 329, n. 4 (“Both parts of Rule 41 … use the phrase ‘without prejudice’ as a contrast to adjudication on the merits”); 9 id., §2373, at 396, n.4 (“‘With prejudice’ is an acceptable form of shorthand for ‘an adjudication upon the merits’”). The primary meaning of “dismissal without prejudice,” we think, is dismissal without barring the defendant from returning later, to the same court, with the same underlying claim. That will also ordinarily (though not always) have the consequence of not barring the claim from other courts, but its primary meaning relates to the dismissing court itself. Thus, Black’s Law Dictionary (7th ed. 1999) defines “dismissed without prejudice” as “removed from the court’s docket in such a way that the plaintiff may refile the same suit on the same claim,” id., at 482, and defines “dismissal without prejudice” as “[a] dismissal that does not bar the plaintiff from refiling the lawsuit within the applicable limitations period,” ibid.
We think, then, that the effect of the “adjudication upon the merits” default provision of Rule 41(b)—and, presumably, of the explicit order in the present case that used the language of that default provision—is simply that, unlike a dismissal “without prejudice,” the dismissal in the present case barred refiling of the same claim in the United States District Court for the Central District of California. That is undoubtedly a necessary condition, but it is not a sufficient one, for claim-preclusive effect in other courts.2
Having concluded that the claim-preclusive effect, in Maryland, of this California federal diversity judgment is dictated neither by Dupasseur v. Rochereau, as petitioner contends, nor by Rule 41(b), as respondent contends, we turn to consideration of what determines the issue. Neither the Full Faith and Credit Clause, U.S. Const., Art. IV, §1, nor the full faith and credit statute, 28 U.S.C. §1738, addresses the question. By their terms they govern the effects to be given only to state-court judgments (and, in the case of the statute, to judgments by courts of territories and possessions). And no other federal textual provision, neither of the Constitution nor of any statute, addresses the claim-preclusive effect of a judgment in a federal diversity action.
It is also true, however, that no federal textual provision addresses the claim-preclusive effect of a federal-court judgment in a federal-question case, yet we have long held that States cannot give those judgments merely whatever effect they would give their own judgments, but must accord them the effect that this Court prescribes. The reasoning of that line of cases suggests, moreover, that even when States are allowed to give federal judgments (notably, judgments in diversity cases) no more than the effect accorded to state judgments, that disposition is by direction of this Court, which has the last word on the claim-preclusive effect of all federal judgments:
It is true that for some purposes and within certain limits it is only required that the judgments of the courts of the United States shall be given the same force and effect as are given the judgments of the courts of the States wherein they are rendered; but it is equally true that whether a Federal judgment has been given due force and effect in the state court is a Federal question reviewable by this court, which will determine for itself whether such judgment has been given due weight or otherwise.…
When is the state court obliged to give to Federal judgments only the force and effect it gives to state court judgments within its own jurisdiction? Such cases are distinctly pointed out in the opinion of Mr. Justice Bradley in Dupasseur v. Rochereau [which stated that the case was a diversity case, applying state law under state procedure]. Deposit Bank, 191 U.S., at 514-515.
In other words, in Dupasseur the State was allowed (indeed, required) to give a federal diversity judgment no more effect than it would accord one of its own judgments only because reference to state law was the federal rule that this Court deemed appropriate. In short, federal common law governs the claim-preclusive effect of a dismissal by a federal court sitting in diversity. See generally R. Fallen, D. Meltzer, & D. Shapiro, Hart and Wechsler’s The Federal Courts and the Federal System 1473 (4th ed. 1996); Degnan, Federalized Res Judicata, 85 Yale L.J. 741 (1976).
It is left to us, then, to determine the appropriate federal rule. And despite the sea change that has occurred in the background law since Dupasseur was decided—not only repeal of the Conformity Act but also the watershed decision of this Court in Erie—we think the result decreed by Dupasseur continues to be correct for diversity cases. Since state, rather than federal, substantive law is at issue there is no need for a uniform federal rule. And indeed, nationwide uniformity in the substance of the matter is better served by having the same claim-preclusive rule (the state rule) apply whether the dismissal has been ordered by a state or a federal court. This is, it seems to us, a classic case for adopting, as the federally prescribed rule of decision, the law that would be applied by state courts in the State in which the federal diversity court sits. [Citations omitted.] As we have alluded to above, any other rule would produce the sort of “forum-shopping … and … inequitable administration of the laws” that Erie seeks to avoid, Hanna, 380 U.S., at 468, since filing in, or removing to, federal court would be encouraged by the divergent effects that the litigants would anticipate from likely grounds of dismissal. See Guaranty Trust Co. v. York, 326 U.S. at 109-110.
This federal reference to state law will not obtain, of course, in situations in which the state law is incompatible with federal interests. If, for example, state law did not accord claim-preclusive effect to dismissals for willful violation of discovery orders, federal courts’ interest in the integrity of their own processes might justify a contrary federal rule. No such conflict with potential federal interests exists in the present case. Dismissal of this state cause of action was decreed by the California federal court only because the California statute of limitations so required; and there is no conceivable federal interest in giving that time bar more effect in other courts than the California courts themselves would impose.
Because the claim-preclusive effect of the California federal court’s dismissal “upon the merits” of petitioner’s action on statute-of-limitations grounds is governed by a federal rule that in turn incorporates California’s law of claim preclusion (the content of which we do not pass upon today), the Maryland Court of Special Appeals erred in holding that the dismissal necessarily precluded the bringing of this action in the Maryland courts. The judgment is reversed, and the case remanded for further proceedings not inconsistent with this opinion.
Questions and Comments
(1) Semtek rejects defendant’s interpretation of Rule 41 in part because it “would in many cases violate the federalism principle of [Erie] by engendering “substantial variations [in outcomes] between state and federal litigation which would likely … influence the choice of a forum.” See Semtek, supra page 540 (internal quotations removed). Is this the right test? Contrast Semtek with Hanna, 380 U.S. at 469-470, which stated that it is “incorrect [to assume] that the rule of [Erie] constitutes the appropriate test of the validity and therefore the applicability of a Federal Rule of Civil Procedure.” Compare also Professor Ely’s analysis, supra pages 518–519. Does Semtek portend closer judicial scrutiny under Erie of the Federal Rules of Civil Procedure? Or does this passage from Semtek simply state a canon of interpretation for federal rules of civil procedure that might clash with state law? Even if it is “merely” a canon, won’t it lead to systemic under enforcement of the federal rules?
(2) Semtek holds that the federal common law rule for the claim-preclusive effects of dismissals by federal courts in diversity should incorporate the state-law preclusion rule unless “the state law is incompatible with federal interests.” Does the Court ever offer a reason why judge-made federal common law should govern? Why doesn’t the Court apply the “twin-aims” test to decide whether state law governs? Is Semtek’s rule of usually applying state law unless there is an important federal interest consistent with Klaxon, supra page 519, which holds that federal courts must (not may) apply state choice-of-law rules in diversity?
(3) How does the preclusion rule announced in Semtek comport with related preclusion rules under the full faith and credit clause and statute, discussed infra Chapter 7?
B. The Federal Common Law
Clearfield Trust Co. v. United States
318 U.S. 363 (1943)
Justice DOUGLAS delivered the opinion of the Court.
On April 28, 1936, a check was drawn on the Treasurer of the United States through the Federal Reserve Bank of Philadelphia to the order of Clair A. Barner in the amount of $24.20. It was dated at Harrisburg, Pennsylvania, and was drawn for services rendered by Barner to the Works Progress Administration. The check was placed in the mail addressed to Barner at his address in Mackeyville, Pa. Barner never received the check. Some unknown person obtained it in a mysterious manner and presented it to the J. C. Penney Co. store in Clearfield. Pa., representing that he was the payee and identifying himself to the satisfaction of the employees of J. C. Penney Co. He endorsed the check in the name of Barner and transferred it to J. C. Penney Co. in exchange for cash and merchandise. Barner never authorized the endorsement nor participated in the proceeds of the check. J. C. Penney Co. endorsed the check over to the Clearfield Trust Co. which accepted it as agent for the purpose of collection and endorsed it as follows: “Pay to the order of Federal Reserve Bank of Philadelphia, Prior Endorsements Guaranteed.” Clearfield Trust Co. collected the check from the United States through the Federal Reserve Bank of Philadelphia and paid the full amount thereof to J. C. Penney Co. Neither the Clearfield Trust Co. nor J. C. Penney Co. had any knowledge or suspicion of the forgery. Each acted in good faith. On or before May 10, 1936, Earner advised the timekeeper and the foreman of the W.P.A. project on which he was employed that he had not received the check in question. This information was duly communicated to other agents of the United States and on November 30, 1936, Earner executed an affidavit alleging that the endorsement of his name on the check was a forgery. No notice was given the Clearfield Trust Co. or J. C. Penney Co. of the forgery until January 12, 1937, at which time the Clearfield Trust Co. was notified. The first notice received by Clearfield Trust Co. that the United States was asking reimbursement was on August 31, 1937.
This suit was instituted in 1939 by the United States against the Clearfield Trust Co., the jurisdiction of the federal District Court being invoked pursuant to the provisions of §24(1) of the Judicial Code, 28 U.S.C. §41(1). The cause of action was based on the express guaranty of prior endorsements made by the Clearfield Trust Co. J. C. Penney Co. intervened as a defendant. The case was heard on complaint, answer and stipulation of facts. The District Court held that the rights of the parties were to be determined by the law of Pennsylvania and that since the United States unreasonably delayed in giving notice of the forgery to the Clearfield Trust Co., it was barred from recovery under the rule of Market Street Title & Trust Co. v. Chelten Trust Co., 296 Pa. 230. It accordingly dismissed the complaint. On appeal the Circuit Court of Appeals reversed.…
We agree with the Circuit Court of Appeals that the rule of Erie does not apply to this action. The rights and duties of the United States on commercial paper which it issues are governed by federal rather than local law. When the United States disburses its funds or pays its debts, it is exercising a constitutional function or power. This check was issued for services performed under the Federal Emergency Relief Act of 1935. The authority to issue the check had its origin in the Constitution and the statutes of the United States and was in no way dependent on the laws of Pennsylvania or of any other state. The duties imposed upon the United States and the rights acquired by it as a result of the issuance find their roots in the same federal sources. In absence of an applicable Act of Congress it is for the federal courts to fashion the governing rule of law according to their own standards. United States v. Guaranty Trust Co. is not opposed to this result. That case was concerned with a conflict of laws rule as to the title acquired by a transferee in Yugoslavia under a forged endorsement. Since the payee’s address was Yugoslavia, the check had “something of the quality of a foreign bill” and the law of Yugoslavia was applied to determine what title the transferee acquired.
In our choice of the applicable federal rule we have occasionally selected state law. But reasons which may make state law at times the appropriate federal rule are singularly inappropriate here. The issuance of commercial paper by the United States is on a vast scale and transactions in that paper from issuance to payment will commonly occur in several states. The application of state law, even without the conflict of laws rules of the forum, would subject the rights and duties of the United States to exceptional uncertainty. It would lead to great diversity in results by making identical transactions subject to the vagaries of the laws of the several states. The desirability of a uniform rule is plain. And while the federal law merchant, developed for about a century under the regime of Swift v. Tyson, represented general commercial law rather than a choice of a federal rule designed to protect a federal right, it nevertheless stands as a convenient source of reference for fashioning federal rules applicable to these federal questions.…
The National Exchange Bank case went no further than to hold that prompt notice of the discovery of the forgery was not a condition precedent to suit. It did not reach the question whether lack of prompt notice might be a defense. We think it may. If it is shown that the drawee on learning of the forgery did not give prompt notice of it and that damage resulted, recovery by the drawee is barred. The fact that the drawee is the United States and the laches those of its employees are not material. The United States as drawee of commercial paper stands in no different light than any other drawee. As stated in United States v. National Exchange Bank, “The United States does business on business terms.” It is not excepted from the general rules governing the rights and duties of drawees “by the largeness of its dealings and its having to employ agents to do what if done by a principal in person would leave no room for doubt.” But the damage occasioned by the delay must be established and not left to conjecture. Cases such as Market St. Title & Trust Co. v. Chelten Trust Co., supra, place the burden on the drawee of giving prompt notice of the forgery—injury to the defendant being presumed by the mere fact of delay. But we do not think that he who accepts a forged signature of a payee deserves that preferred treatment. It is his neglect or error in accepting the forger’s signature which occasions the loss. He should be allowed to shift that loss to the drawee only on a clear showing that the drawee’s delay in notifying him of the forgery caused him damage. No such damage has been shown by Clearfield Trust Co. who so far as appears can still recover from J. C. Penney Co. The only showing on the part of the latter is contained in the stipulation to the effect that if a check cashed for a customer is returned unpaid or for reclamation a short time after the date on which it is cashed, the employees can often locate the person who cashed it. It is further stipulated that when J. C. Penney Co. was notified of the forgery in the present case none of its employees was able to remember anything about the transaction or check in question. The inference is that the more prompt the notice the more likely the detection of the forger. But that falls short of a showing that the delay caused a manifest loss. It is but another way of saying that mere delay is enough. Affirmed.
Questions and Comments
(1) The Clearfield Court says “[t]he desirability of a uniform rule is plain.” Is it? Since the United States will remain liable for failure to give notice in Clearfield situations when actual harm has been suffered for failure to give notice, federal officials will suffer no less burden on the notice issue under the harsher state law or the more relaxed federal common law. The behavior of federal officials, in other words, will not be affected by the choice of the controlling law. Only after-the-fact assessments of liability, which may be important on questions of settlement, trial strategy, or the like, will be affected. Is that enough federal interest to justify displacing federal law?
(2) In Miree v. DeKalb County, 433 U.S. 25 (1977), a number of actions were brought in the aftermath of the crash upon take-off of a Lear jet. One theory of liability was that the plaintiffs were third-party beneficiaries of the contract between the Federal Aviation Administration and the county, one provision of which was the county’s undertaking to keep adjoining land compatible with normal airport operation. Plaintiffs alleged that the crash was caused by the aircraft’s ingestion of birds attracted to a garbage dump adjoining the airport. In the lower courts there was disagreement about whether plaintiffs had claims under federal common law and state law and, if they had a claim under one but not the other, which was controlling. The asserted basis for federal common law was the Clearfield case, and the fact that the United States (through the FAA) was a party to the airport contract. The Supreme Court found no basis for creating any federal common law. Since the United States was not a party to the action, any federal interest was found to be too “speculative.” Under such circumstances, only congressional directions to do so would justify creating federal law.
(3) Does the Miree decision indicate that federal common law is appropriate only when the United States is a party to the litigation? Undoubtedly not. Recall that under Textile Workers v. Lincoln Mills, 353 U.S. 448 (1957), the Court found a congressional intent to have the federal judiciary develop a federal common law of labor relations under §301 of the Taft-Hartley Act—apparently to save the constitutionality of the provision insofar as it granted jurisdiction to the federal courts without diversity.
(4) Is federal common law appropriate whenever the United States is a party to the litigation (and did not receive its rights by assignment)? Perhaps, but with a significant restriction. In United States v. Kimbell Foods, Inc., 440 U.S. 715 (1979), the presence of the United States as a holder of liens arising out of certain federal loan programs gave rise to federal common law, but the lack of a need for a uniform federal standard meant that the content of federal law was to be borrowed from state law.
(5) Many of these issues came to the forefront in the Agent Orange litigation, described generally in Twerski, With Liberty and Justice for All: An Essay on Agent Orange and Choice of Law, 52 Brook. L. Rev. 341 (1986). This litigation against the United States and the chemical companies that had supplied the military with the herbicide Agent Orange during the Vietnam War was brought by individual veterans and their families. The district court initially concluded that the suit was governed by federal common law, but this finding was reversed by the Second Circuit. 635 F.2d 987 (2d Cir. 1980). This meant, of course, that the choice-of-law issue would have to be addressed. Since the individual claims had originally been filed all across the country and transferred to the Eastern District of New York, it was necessary under Van Dusen v. Barrack to ask what law would have been applied by the transferor courts. Note that this litigation implicated two arguments for federal common law: first, the fact that the United States was a party, and second, the need for uniformity.
The resulting choice-of-law nightmare was one that no judge ought to have been asked to address. Judge Weinstein opted for a “national consensus” approach, concluding that “under the special circumstances of this litigation, all transferor states would look to the same substantive law for the rule of decision on the critical substantive issues.” In re “Agent Orange” Product Liability Litigation, (discussed at page 807 infra). This required development of a multistate substantive rule that would compromise the interests of the competing states. But how is this different from developing a federal common-law rule of liability? Can there be any pretense that the court was simply deciding how the state courts would themselves have decided?
(6) The law of interstate relations might be a particularly appropriate area in which to develop federal common law, on the theory that where states are the disputants, it is unfair to allow the law of one of the involved parties to apply. This argument was accepted in Hinderlider v. La Plata River and Cherry Creek Ditch Co., 304 U.S. 92 (1938), governing interstate water rights and decided the same day as Erie. How far should this reasoning be extended? Isn’t it tempting to argue that all aspects of interstate relations should be a matter of federal law? But wouldn’t this federalize the entire subject of conflict of laws?
Illinois v. City of Milwaukee
406 U.S. 91 (1972)
Justice DOUGLAS delivered the opinion of the Court. This is a motion by Illinois to file a bill of complaint under our original jurisdiction against four cities of Wisconsin, the Sewerage Commission of the City of Milwaukee, and the Metropolitan Sewerage Commission of the County of Milwaukee. The cause of action alleged is pollution by the defendants of Lake Michigan, a body of interstate water. According to plaintiff, some 200 million gallons of raw or inadequately treated sewage and other waste materials arc discharged daily into the lake in the Milwaukee area alone. Plaintiff alleges that it and its subdivisions prohibit and prevent such discharges, but that the defendants do not take such actions. Plaintiff asks that we abate this public nuisance.
Article III, §2, cl. 2, of the Constitution provides: “In all Cases … in which a State shall be Party, the supreme Court shall have original Jurisdiction.” Congress has provided in 28 U.S.C. §1251 that “(a) the Supreme Court shall have original and exclusive jurisdiction of: (1) All controversies between two or more States.”
It has long been this Court’s philosophy that “our original jurisdiction should be invoked sparingly.” We construe 28 U.S.C. §1251 (a)(l), as we do Art. Ill, §2, cl. 2, to honor our original jurisdiction but to make it obligatory only in appropriate cases. And the question of what is appropriate concerns, of course, the seriousness and dignity of the claim; yet beyond that it necessarily involves the availability of another forum where there is jurisdiction over the named parties, where the issues tendered may be litigated, and where appropriate relief may be had.…
If the named public entities of Wisconsin may … be sued by Illinois in a federal district court, our original jurisdiction is not mandatory.
It is to that aspect of the case that we now turn.
Title 28 U.S.C. §1331(a) provides that “[t]he district courts shall have original jurisdiction of all civil actions wherein the matter in controversy exceeds the sum or value of $10,000, exclusive of interest and costs, and arises under the Constitution, laws, or treaties of the United States.”
The considerable interests involved in the purity of interstate waters would seem to put beyond question the jurisdictional amount provided in §1331(a). The question is whether pollution of interstate or navigable waters creates actions arising under the “laws” of the United States within the meaning of §1331(a). We hold that it does; and we also hold that §1331(a) includes suits brought by a State.
Mr. Justice Brennan, speaking for the four members of this Court in Romero v. International Terminal Operating Co. (dissenting and concurring), who reached the issue, concluded that “laws,” within the meaning of §1331(a), embraced claims founded on federal common law:
The contention cannot be accepted that since petitioner’s rights are judicially defined, they are not created by “the laws … of the United States” within the meaning of §1331.… In another context, that of state law, this Court has recognized that the statutory word “laws” includes court decisions. The converse situation is presented here in that federal courts have an extensive responsibility of fashioning rules of substantive law.… These rules are as fully “laws” of the United States as if they had been enacted by Congress. (Citations omitted.)
Lower courts have reached the same conclusion.…
Congress had enacted numerous laws touching interstate waters. In 1899 it established some surveillance by the Army Corps of Engineers over industrial pollution, not including sewage.…
The 1899 Act has been reinforced and broadened by a complex of laws recently enacted. The Federal Water Pollution Control Act tightens control over discharges into navigable waters so as not to lower applicable water quality standards. By the National Environmental Policy Act of 1969, Congress “authorizes and directs” that “the policies, regulations, and public laws of the United States shall be interpreted and administered in accordance with the policies set forth in this Act” and that “all agencies of the Federal Government shall … identify and develop methods and procedures … which will insure that presently unqualified environmental amenities and values may be given appropriate consideration in decisionmaking along with economic and technical considerations.” Congress has evinced increasing concern with the quality of the aquatic environment as it affects the conservation and safeguarding of fish and wildlife resources.
Buttressed by these new and expanding policies, the Corps of Engineers has issued new Rules and Regulations governing permits for discharges or deposits into navigable waters.
The Federal Water Pollution Control Act in §l(b) declares that it is federal policy to recognize, preserve, and protect the primary responsibilities and rights of the States in preventing and controlling water pollution.
But the Act makes clear that it is federal, not state, law that in the end controls the pollution of interstate or navigable waters.3 While the States are given time to establish water quality standards, §10(c)(l), if a State fails to do so the federal administrator promulgates one. Section 10(a) makes pollution of interstate or navigable waters subject “to abatement” when it “endangers the health or welfare of any persons.” The abatement that is authorized follows a long-drawn-out procedure unnecessary to relate here. It uses the conference procedure, hoping for amicable settlements. But if none is reached, the federal administrator may request the Attorney General to bring suit on behalf of the United States for abatement of the pollution. §10(g).
The remedy sought by Illinois is not within the precise scope of remedies prescribed by Congress. Yet the remedies which Congress provides are not necessarily the only federal remedies available. “It is not uncommon for federal courts to fashion federal law where federal rights are concerned.” Textile Workers v. Lincoln Mills. When we deal with air and water in the ambient or interstate aspects, there is a federal common law, as Texas v. Pankey recently held.
The application of federal common law to abate a public nuisance in interstate or navigable waters is not inconsistent with the Water Pollution Control Act. Congress provided in §10(b) of that Act that, save as a court may decree otherwise in an enforcement action,
[s]tate and interstate action to abate pollution of interstate or navigable waters shall be encouraged and shall not … be displaced by Federal enforcement action.
The leading air case is Georgia v. Tennessee Copper Co., where Georgia filed an original suit in this Court against a Tennessee company whose noxious gases were causing a wholesale destruction of forests, orchards, and crops in Georgia. The Court said:
The caution with which demands of this sort, on the part of a State, for relief from injuries analogous to torts, must be examined, is dwelt upon in Missouri v. Illinois, 200 U.S. 496, 520. 521. But it is plain that some such demands must be recognized, if the grounds alleged are proved. When the States by their union made the forcible abatement of outside nuisances impossible to each, they did not thereby agree to submit to whatever might be done. They did not renounce the possibility of making reasonable demands on the ground of their still remaining quasi-sovereign interests; and the alternative to force is a suit in this court. Missouri v. Illinois, 180 U.S. 208, 241.
206 U.S., at 237.
The nature of the nuisance was described as follows:
It is a fair and reasonable demand on the part of a sovereign that the air over its territory should not be polluted on a great scale by sulphurous acid gas, that the forests on its mountains, be they better or worse, and whatever domestic destruction they have suffered, should not be further destroyed or threatened by the act of persons beyond its control, that the crops and orchards on its hills should not be endangered from the same source. If any such demand is to be enforced this must be notwithstanding the hesitation that we might feel if the suit were between private parties, and the doubt whether, for the injuries which they might lie suffering to their property, they should not be left to an action at law.
Id., at 238.
Our decisions concerning interstate waters contain the same theme. Rights in interstate streams, like questions of boundaries, “have been recognized as presenting federal questions.6 Hinderlider v. La Plata Co., 304 U.S. 92, 110. The question of apportionment of interstate waters is a question of “federal common law” upon which state statutes or decisions are not conclusive.
In speaking of the problem of apportioning the waters of an interstate stream, the Court said in Kansas v. Colorado, 206 U.S. 46, 98. that “through these successive disputes and decisions this court is practically building up what may not improperly be called interstate common law.” And see Texas v. New Jersey (escheat of intangible personal property), Texas v. Florida (suit by bill in the nature of interpleader to determine the true domicile of a decedent as the basis of death taxes).
Equitable apportionment of the waters of an interstate stream has often been made under the head of our original jurisdiction. The applicable federal common law depends on the facts peculiar to the particular case.
Priority of appropriation is the guiding principle. But physical and climatic conditions, the consumptive use of water in the several sections of the river, the character and rate of return flows, the extent of established uses, the availability of storage water, the practical effect of wasteful uses on downstream areas, the damage to upstream areas as compared to the benefits to downstream areas if a limitation is imposed on the former—these are all relevant factors. They are merely an illustrative, not an exhaustive catalogue. They indicate the nature of the problem of apportionment and the delicate adjustment of interests which must be made.
325 U.S., at 618.
When it comes to water pollution this Court has spoken in terms of “a public nuisance.” In Missouri v. Illinois the Court said,
It may be imagined that a nuisance might be created by a State upon a navigable river like the Danube, which would amount to a casus belli for a State lower down, unless removed. If such a nuisance were created by a State upon the Mississippi the controversy would be resolved by the more peaceful means of a suit in this court.
It may happen that new federal laws and new federal regulations may in time pre-empt the field of federal common law of nuisance. But until that comes to pass, federal courts will be empowered to appraise the equities of the suits alleging creation of a public nuisance by water pollution. While federal law governs,9 consideration of state standards may be relevant. Thus, a State with high water-quality standards may well ask that its strict standards be honored and that it not be compelled to lower itself to the more degrading standards of a neighbor. There are no fixed rules that govern; these will be equity suits in which the informed judgment of the chancellor will largely govern.
We deny, without prejudice, the motion for leave to file. While this original suit normally might be the appropriate vehicle for resolving this controversy, we exercise our discretion to remit the parties to an appropriate district court10 whose powers are adequate to resolve the issues.
Questions and Comments
(1) What was the source of authority in Illinois v. City of Milwaukee [Milwaukee I]? If it was congressional enactment in the area, should a violation of federal legislation be required? Was it shown in this case? Are some areas just “inherently federal”?
(2) Does the grant of original jurisdiction to the Supreme Court imply a grant of lawmaking power? See footnote 6 of the Milwaukee I opinion. Note that in Milwaukee I, unlike diversity cases, there is no grant of jurisdiction to the federal district courts unless it is first concluded that there is federal common law to support federal question jurisdiction.
(3) Is the Milwaukee I approach the one that should have been taken in State of Nevada v. Hall, page 351 supra? Does the fact that Nevada actually sent an agent into California adequately distinguish the two cases? Or is sending a person into California no more significant than sending pollution from Milwaukee into the water system of Chicago? Does the fact that Nevada’s activity in Hall was commercial distinguish the cases, or should it be noted that private companies discharge pollution too, making the cases similar? Which way should a neutral federal court rule on the immunity of Nevada (immune under Nevada law, but not under California law) to damage actions?
(4) In City of Milwaukee v. Illinois, 451 U.S. 304 (1981) [Milwaukee II], the Court reviewed the decision that resulted when the state of Illinois (along with Michigan) took the Court’s advice in the principal case and went to federal district court. Shortly after, however, Congress passed the Federal Water Pollution Control Act Amendments of 1972, 86 Stat. 816. Disagreeing with the courts below, the Supreme Court found that the 1972 amendments rendered unnecessary the creation or continued existence of any federal common law. (Note the first sentence of the penultimate paragraph in Milwaukee I).
Milwaukee II left open the question whether federal environmental statutes preempted state common law actions for injuries in one state caused by cross-border pollution originating in another. 451 U.S. at 310 n.4. The Supreme Court resolved the issue in International Paper Co. v. Ouellette, 479 U.S. 481 (1987). In Ouellette, property owners from the Vermont side of Lake Champlain brought a nuisance action for damages and injunctive relief under Vermont law against a New York paper mill that was discharging effluent into the lake. The Court held that savings provision in the Clean Water Act preempted nuisance actions under the affected state’s law but not under the polluting state’s law. The Court attributed to Congress a worry about the “chaotic regulatory structure” that would arise from inconsistent state pollution laws applying to a single pollution source. Id. at 496-497. Compare this concern with the concern about “inconsistent regulations” in the dormant commerce clause cases, supra pages 377–394.
How does cross-border pollution differ from any other cross-border tort that produces harm in multiple states? Would there be a good reason to prevent application of the law of the state of injury in a case involving multistate libel or an airplane crash? Won’t Ouellette encourage upstream states to pollute at the expense of downstream states? But if downstream states can apply their laws, won’t they clean up their water at the expense of upstream states? Is there any way around this problem?
(5) Many commentators believe that the Supreme Court in recent years has cut back on the scope of federal common law. See, e.g., Lund, The Decline of Federal Common Law, 76 Bost. L. Rev. 895 (1996). A good example of this trend is O’Melveney & Myers v. Federal Deposit Ins. Co., 512 U.S. 79 (1994). In that case, the FDIC sued the law firm of O’Melveny & Myers for its work in connection with a failed thrift, alleging that the firm’s negligence had contributed to the thrift’s insolvency and to the resulting losses to the FDIC. In holding that state rather than federal law governed the defenses the law firm could raise to the federal agency’s suit, the Court reasoned:
[T]his is not one of those cases in which judicial creation of a special federal [common law] rule would be justified. Such cases are, as we have said in the past, “few and restricted,” Wheeldin v. Wheeler, 373 U.S. 647, 651 (1963), limited to situations where there is a “significant conflict between some federal policy or interest and the use of state law.” Wallis v. Pan American Petroleum Corp., 384 U.S. 63, 68 (1966). Our cases uniformly require the existence of such a conflict as a precondition for recognition of a federal rule of decision. See, e.g., Kamen v. Kemper Financial Services, Inc., 500 U.S. 90 (1991). Not only the permissibility but also the scope of judicial displacement of state rules turns upon such a conflict. See, e.g., Kamen, at 98. What is fatal to respondent’s position in the present case is that it has identified no significant conflict with an identifiable federal policy or interest. There is not even at stake that most generic (and lightly invoked) of alleged federal interests, the interest in uniformity. The rules of decision at issue here do not govern the primary conduct of the United States or any of its agents or contractors, but affect only the FDIC’s rights and liabilities, as receiver, with respect to primary conduct on the part of private actors that has already occurred. Uniformity of law might facilitate the FDIC’s nationwide litigation of these suits, eliminating state-by-slate research and reducing uncertainty—but if the avoidance of those ordinary consequences qualified as an identifiable federal interest, we would be awash in “federal common-law” rules.
The closest respondent comes to identifying a specific, concrete federal policy or interest that is compromised by California law is its contention that state rules regarding the imputation of knowledge might “deplete the deposit insurance fund.” But neither FIRREA nor the prior law sets forth any anticipated level for the fund, so what respondent must mean by “depletion” is simply the forgoing of any money which, under any conceivable legal rules, might accrue to the fund. That is a broad principle indeed, which would support not just elimination of the defense at issue here, but judicial creation of new, “federal-common-law” causes of action to enrich the fund. Of course we have no authority to do that, because there is no federal policy that the fund should always win. Our cases have previously rejected “more money” arguments remarkably similar to the one made here. See Kimbell Foods, 440 U.S. at 737-738.
Even less persuasive—indeed, positively probative of the dangers of respondent’s facile approach to federal-common-law-making—is respondent’s contention that it would “disserve the federal program” to permit California to insulate “the attorney’s or accountant’s malpractice,” thereby imposing costs “on the nation’s taxpayers, rather than on the negligent wrongdoer.” By presuming to judge what constitutes malpractice, this argument demonstrates the runaway tendencies of “federal common law” untethered to a genuinely identifiable (as opposed to judicially constructed) federal policy. What sort of tort liability to impose on lawyers and accountants in general, and on lawyers and accountants who provide services to federally insured financial institutions in particular, “involves a host of considerations that must be weighed and appraised,” Northwest Airlines, Inc., 451 U.S. at 98, n.41—including, for example, the creation of incentives for careful work, provision of fair treatment to third parties, assurance of adequate recovery by the federal deposit insurance fund, and enablement of reasonably priced services. Within the federal system, at least, we have decided that that function of weighing and appraising “is more appropriately for those who write the laws, rather than for those who interpret them.” Northwest Airlines, supra, at 98, n.41.
512 U.S. at 87-89; see also Atherton v. Federal Deposit Insurance Corp., 519 U.S. 213 (1996) (state law rather than federal common law sets the standard of conduct for officers and directors of federally insured savings institutions). Would the Court have applied federal common law in Clearfield Trust and Milwaukee I under this standard?
2. We do not decide whether, in a diversity case, a federal court’s “dismissal upon the merits” (in the sense we have described), under circumstances where a state court would decree only a “dismissal without prejudice,” abridges a “substantive right” and thus exceeds the authorization of the Rules Enabling Act. We think the situation will present itself more rarely than would the arguable violation of the Act that would ensue from interpreting Rule 41(b) as a rule of claim preclusion; and if it is a violation, can be more easily dealt with on direct appeal.
3. The contrary indication in Ohio v. Wyandolle Chemicals Corp., 401 U.S. 493. 498 n.3, was based on the preoccupation of that litigation with public nuisance under Ohio law, not the federal common law which we now hold is ample basis for federal jurisdiction under 28 U.S.C. §1331(a).
6. Thus, it is not only the character of the parties that requires us to apply federal law. As Mr. Justice Marian indicated for the Court in Banco National de Cuba v. Sabbatino, where there is an overriding federal interest in the need for a uniform rule of decision or where the controversy touches basic interests in federalism, we have fashioned federal common law. Certainly these same demands for applying federal law are present in the pollution of a body of water such as Lake Michigan bounded, as it is, by four States.
9. “Federal common law and not the varying common law of the individual States is, we think, entitled and necessary to be recognized as a basis for dealing in uniform standard with the environmental rights of a State against improper impairment by sources outside its domain. The more would this seem to be imperative in the present era of growing concern on the part of a State about its ecological conditions and impairments of them. In the outside sources of such impairment, more conflicting disputes, increasing assertions and proliferating contentions would seem to be inevitable. Until the field has been made the subject of comprehensive legislation or authorized administrative standards, only a federal common law basis can provide an adequate means for dealing with such claims as alleged federal rights. And the logic and practicality of regarding such claims as being entitled to be asserted within the federal-question jurisdiction of §1331(a) would seem to be self evident.” Texas v. Pankey, 441 F.2d 236, 24l-242.
10. The rule of decision being federal, the “action … may be brought only in the judicial district where all defendants reside, or in which the claim arose,” 28 U.S.C. §1391(b), thereby giving flexibility to the choice of venue.