Civil Procedure: Choice of Law 07/10/2011 17:02:00

State Law in Federal Courts: The Erie Doctrine

The Rules of Decision Act (RDA) instructs a federal court to apply federal law to the case if federal law governs the issue, but otherwise to decide the case under applicable principles of state substantive law. In Swift v. Tyson, Justice Story concluded that the RDA rewuired federal courts to apply relevant state statutes to a case, but that they were not bound to follow the common law rulings of state judges. The term common law refers to rules of law established by judges in deciding individual cases, as opposed to rules enacted by statute. Justice story concluded that in a diversity case, as opposed to applying any one states common law, a court should look at all common law cases to divine the true common law rule on the issue before it. Black & White Taxicab & Transfer Co. v. Brown & Yellow Taxicab & Transfer Co., 276 U.S. 518 (1928) The Brown and Yellow Cab Company (a Kentucky corporation) and the Louisville and Nashville Railroad agreed to a contract which would give Brown and Yellow a monopoly on providing taxi service to railroad passengers, thereby cutting out the competing taxi company, the Black and White Cab Co. (also a Kentucky corporation). This kind of agreement was illegal under Kentucky common law, as interpreted by Kentucky's highest court. Brown and Yellow dissolved itself, reincorporated in Tennessee, and signed the contract. Brown and Yellow then filed a lawsuit against Black and White in a Kentucky federal court, seeking an order enforcing the contract and ordering that Black and White could no longer solicit passengers. The case was in federal court because of diversity: because of Brown and Yellows reincorporation, it was a lawsuit between a Tennessee citizen and a Kentucky citizen.

The federal court upheld the agreement, citing Swift v. Tyson, and holding that under general federal common law, the agreement was valid. If Brown and Yellow had brought suit in a Kentucky state court, the agreement would not have been upheld. The Erie Decision Facts: Tompkins got his arm lopped off in a train accident. He sued the railroad in the Southern District of New York to try to take advantage of the rule of Swift v. Tyson, which said that federal court didnt have to use state common law to decide cases. Procedural Posture: Tompkins won at trial and the railroad appealed to the Second Circuit, arguing that Pennsylvania law, which would have been more favorable to the defendant, should have been applied. The Second Circuit upheld the verdict for Tompkins, refusing to interpret Pennsylvania law. The Supreme Court granted certiorari because they wanted to strike down Swift. Issue: Can federal courts ignore state law when deciding diversity cases? Rule: NEW RULE!!! Federal courts must follow and apply both state statutes and state case law in deciding cases unless the case is governed by federal statutes or the United States Constitution. Analysis: Brandeis and the Court attack Swift on several fronts: 1. Swift relied on a bogus interpretation of the Rules of Decision Act, as proven by Chuck Warren. 2. Swift has had disastrously unfair results in practice. 3. Swift is unconstitutional because it usurps part of the power that the Constitution left to the states to make their own laws (statutes and case law).

 The Swift decision is flawed because it promotes forum shopping. Citizens of one state could move to another state to create diversity and bring suit in federal court to take advantage of a more favorable choice of law. Such a defect is substantial and provides no benefit.
Conclusion: Swift is overturned. The present case is remanded to the Second Circuit for them to determine how Pennsylvania law would apply to the situation.

The basic command of Erie is straightforward: In cases that are not governed by federal law, the federal court must apply state law rather than taking its own view of what the applicable rule should be. this can be a difficult task if state law is unclear, so you look at that states case law, trends, dicta etc The state supreme court predictive approach the federal court judge, in determining the law of the state, should follow intermediate state court precedents, unless convinced that the states highest court would rule otherwise. Should a federal courts Erie guess overrule a prior state supreme court decision, that states courts are not bound by the federal court ruling should a similar case come before them later. The state court is bound by that states supreme courts prior decisions, until they are overruled. There are state statutes and court rules authorizing federal courts to certify questions of state law to the state supreme court for decisions. This allows federal courts to ask what the state law is instead of guessing (applying the predictive approach). Certification is not routinely used:

If all questions of state law were submitted for certification, they would flood state supreme courts Certification is expensive and may delay a federal case Since most cases settle, the case can probably be resolved without a definitive ruling on the question.

An interesting problem: In a case like Erie, that has connections with several states, which states substantive law should the court use? This choice of law problem arises because the tort law of one state may differ from the tort law of another state. All states have developed choice of law rules to determine which body of substantive law to apply in cases with connections to more than one state. Klaxon Co. v. Stentor Electric MFG. Co. Establishes that the federal court in a diversity case should apply the substantive law that would be applied by the state courts in the state in which the federal court sits. Federal Common Law: Federal Judges making Federal Law There are certain areas in which the law must be federal, yet Congress has never enacted a governing statute. ex: matters of inter-state interests like how much water a state is allowed to pump from a river that crosses state lines. Such matters require neutral decision-making. This means Congress has to provide a federal apportionment rule to the case, and if Congress has not provided one, the court will create a federal common law rule. Substance and Procedure under the Erie Doctrine

The Erie decision left yet another unanswered question: must a federal court in a diversity case apply State Procedural law as well as state substantive law? The Court Gropes for a Test: Guaranty Trust Co. v. York In this case, the Supreme Court attempted to clarify when lower federal courts should defer to state law in a diversity case. Facts: The plaintiffs sued for some stuff. The defendant countered by claiming that the New York statute of limitations barred the plaintiffs suit. The plaintiffs claimed that the New York statute of limitations did not apply under Erie because their claim was in equity rather than in law. The Second Circuit found that the plaintiffs were right and that their suit could proceed. The defendant appealed to the Supreme Court. Issue: Can the federal courts hear the suit even though it would be barred if it took place in state court between non-diverse parties? Rule: NEW RULE, AGAIN! The outcome of the case in federal court should be the same as it would be in state court. Analysis: The Court looks to the intent of the ruling in Erie and asserts that it doesnt matter whether state law is substantive or procedural as long as it will have an impact on the outcome of a case. Conclusion: The judgment was reversed and the case was remanded, presumably to be dismissed by application of the New York statute of limitations. The courts dilemma here is that federal courts had a developed doctrine for dealing with the timeliness of an equitable claim, while the state court would apply the statute of limitations and dismiss the claim. However, the case did not arise under federal law, it arose under state law, and the court chose to prioritize the intent of Erie, which was to assure uniform outcomes in state and federal diversity cases (by respecting what state law would have wanted).

This case arose out of state law. If it arose out of federal law, the federal doctrine for the timeliness of equitable claims would have applied as opposed to state law. So, the test established un Guaranty trust of when state law should apply is: Not based on whether the issue might be labeled one of substance or one of procedure. It is based on the rationale underlying Erie: if applying a federal procedural rule instead of a state rule would affect the outcome, the federal court should use the state rule. problem: how does one determine/distinguish when applying a federal rule instead of a state rule truly would affect the outcome. Ex: differences in service requirements do not seem to affect the outcome of a case, and yet are different for state and federal rules. The Guaranty opinion never suggested that it was in any way unconstitutional for a federal court to apply its laches doctrine, but rather, that a federal court should sometimes choose to follow state practice to further Eries policy of uniformity of outcomes in diversity cases. The Problem restated and refined: Byrd v. Blue Ridge In this case, the Supreme Court drew back from slavish adherence to the outcome-determinative test affirmed in Guaranty. Facts

Byrd (P) was injured in South Carolina while connecting power lines in the course of his employment for a subcontractor of Blue Ridge Rural Electric Cooperative, Inc. (D). Byrd, a North Carolina resident, brought a diversity action against Blue Ridge Rural, a South Carolina corporation, for personal injuries. Under South Carolina law, if Blue Ridge were Byrds statutory employer, Byrds award would be limited to workmens compensation and he would not be entitled to sue Blue Ridge for negligence. Blue Ridge raised an affirmative defense based on South Carolina law that it was Byrds statutory employer and that Byrd was therefore limited to workmens compensation. After hearing Blue Ridges evidence, the judge struck Blue Ridges affirmative defense without hearing Byrds evidence. The jury returned a verdict for Byrd and Blue Ridge appealed. The court of appeals reversed and directed a verdict for Blue Ridge and the U.S. Supreme Court granted certiorari. Blue Ridge asserted that under Erie Railroad Co. v. Tompkins the issue of immunity should be decided by the judge according to South Carolina state law. Byrd asserted that the Erie doctrine could not preclude his right to a trial by jury under the Seventh Amendment. Issue Under the Erie doctrine, must state law be applied in determinations of rights, regardless of conflict with federal law and the Constitution?

Holding and Rule (Brennan) No. The Erie doctrine does not mandate that state law be applied in determinations of rights regardless of conflict with federal law and the Constitution. Under the Erie doctrine, federal courts in diversity must respect the definitions of rights and obligations created by state law, but state law cannot alter the essential function of the jury as provided by the Seventh Amendment.

The Court held that South Carolinas determination that immunity was a question of law to be decided by a judge was merely a determination of the form and mode of enforcing immunity. It did not involve any essential relationship or determination of rights created by state law. The court held that the Erie doctrine can still reach form and mode determinations if there are no affirmative countervailing considerations. The court held that the right to have the issue decided by a jury was mandated by the Seventh Amendment. The right to a jury trial in federal court is a fundamental and essential right provided for in the Seventh Amendment and that may not be changed by any contrary state law or requirements. Disposition Remanded with orders for a jury trial.

In Guaranty, while the idea is that federal courts should ordinarily defer to state law in diversity cases in matters of form and mode, the policy of uniform outcomes my have to yield to affirmative, countervailing considerations in this case, the importance of jury trial in the federal system (and generally, if a policy is part of state created rights and obligations). So Byrd does not reject Guaranty, it reaffirms it, and the fact that there can be exceptions. the idea here is that the policy of uniform outcomes should lead to application of the state rule. However, if deferring to state law would interfere with other policies important to the administration of federal courts, the court may opt to follow the federal practice. Two tracks of the Erie Doctrine: Hanna v. Plumer Guaranty and Byrd did not address the question whether a federal diversity court should follow a state practice that conflicted with one of the Federal Rules of Civil Procedure.

Hanna v. Plumer develops a test to treat this issue.

Facts: Hanna, from Ohio, sued the estate of Osgood, from Massachusetts, over a car accident in South Carolina. Procedural Posture: Hanna served process by leaving documents with the wife of the executor, which complied with the FRCP, but not Massachusetts law. The defendant moved to dismiss on this basis, citing Erie and subsequent cases, and the trial court granted the motion. The plaintiff appealed, saying that the FRCP rules in diversity actions. The Circuit Court ruled that the state statute should govern because it is substantive rather than merely procedural. The plaintiff appealed to the Supreme Court. Issue: In a civil action brought in federal court based on diversity jurisdiction, shall service of process be based on the FRCP or on state law? Rule: NEW(ish) RULE! Basically, Erie does not kill the FRCP. Analysis: The majority writes that the Federal Rules of Civil Procedure as adopted by the Supreme Court do not violate the Rules Enabling Act, nor are they unconstitutional. The Court is trying to remedy a divergence between the Erie line of cases and those construing the Rules Enabling Act. The Court finds that if there was no conflict with state law, the Federal Rules of Civil Procedure would control, but Erie presents a problem. The defendant argued that the outcome-determinative test must be used, and under that test the defendant would win immediately. However, the Court says that the outcome-determinative test is not absolute. Erie is meant to remedy problems arising from big differences between state and federal law, not tiny, insubstantial ones. The Court suggests that the difference between Massachusetts law and the Federal Rules of Civil Procedure in this case is not that big. To figure out which law controls, the Court says that the policy reasons underlying Erie must be considered. Erie, according to this Court, has two goals: Stop forum-shopping, and Avoid unfair differences in administration of justice between state and federal courts.

The Court says that the competing rules, though outcomedeterminative, have little or no relevance to the choice of a forum. You wouldnt decide to file in state versus federal court based solely on the choice between these two laws. The difference between the two laws also doesnt raise any equal protection problems. The Court further argues that Erie has never been used to kill a Federal Rule. The Federal Rules of Civil Procedure have not been held to be invalid, only not as broad as alleged and thus trumped in a particular case by a state rule. The Court says that the tests of Erie and of the Rules Enabling Act are not identical. The nature of the Rules Enabling Act is that it kills rules that go too far given the constitutional and Congressional mandate. Nobody is allowed to write unconstitutional rules. But Erie dealt with a difference in law that was clearly substantive, and didnt kill the Federal Rules of Civil Procedure. The Court claims that Erie wasnt meant to curtail the power of Congress to say how things should run at a procedural level in the federal courts. Justice Harlan, in a concurring opinion, proposes an alternative rule: the state rule should prevail if the choice of rule would substantially affect those primary decisions respecting human conduct which our constitutional system leaves to state regulation. Harlan objects to the rule made by the majority in that he feels that anything that can reasonably be called procedural and put into the Federal Rules of Civil Procedure will be allowed to control, no matter how much it screws up rights granted by the states. Harlan finds that this makes the Federal Rules of Civil Procedure too absolute. Harlan says that in the present case, the Federal Rules of Civil Procedure should rule because the effect of using them instead of the Massachusetts rule would not be substantial. Harlan basically says: no harm, no foul, so well use the Federal Rule. Conclusion: The decision of the Circuit Court of Appeals was reversed. The FRCP live on! Notes and Problems

The federal court could disregard the state rule because the Constitution grants power over the federal courts to the federal government and Congress grants control of the rules to the courts as well. We only apply Hanna when a federal court would behave differently from a state court in the absence of a competing state rule. If the federal practice is dictated by the Federal Rules of Civil Procedure or another federal statute, that practice rules as long as the rule or statute is constitutional. It appears that there was precedent for finding the REA constitutional. Therefore, when youre considering whether a federal court should apply a rule, you must ask two things: (1) Is the rule okay under the REA in that it is a rule of practice and procedure? (2) Is the rule constitutional in and of itself? No Rule has ever been held unconstitutional or in violation of the REA. The difference between federal and state practice is that the state practice would stop the suit in its tracks, while the federal practice would let it continue. The federal practice is followed because it is procedural and thus in the realm of the REA, and it is also constitutional on its face.

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