531 U.S. 497 (2001)
Petitioner Semtek International Inc. filed a complaint against respondent Lockheed Martin Corp. in California state court, alleging inducement of breach of contract and business torts.1 Respondent removed the case to the United States District Court for the Central District of California on the basis of diversity of citizenship.2 The district court dismissed petitioner’s claims as barred by California’s 2-year statute of limitations, adopting language suggested by respondent to dismiss the claims “in [their] entirety on the merits and with prejudice.”3
Petitioner appealed the dismissal to the Court of Appeals for the Ninth Circuit, which affirmed the district court’s order.4 Petitioner subsequently brought suit against respondent in the State Circuit Court for Baltimore City, Maryland, alleging the same causes of action. These claims were not time barred under Maryland’s 3-year statute of limitations.5 Respondent removed the action to the United States District Court for the District of Maryland on federal-question grounds, but that court remanded the case to state court.6
The Maryland state court granted respondent’s motion to dismiss on the ground of res judicata.7 Petitioner returned to the California federal court and the Ninth Circuit, moving unsuccessfully to amend the earlier order to indicate that the dismissal was not “on the merits.”8 Petitioner appealed the Maryland trial court’s order to the Maryland Court of Special Appeals.9 The Court of Special Appeals affirmed the dismissal.
After the Maryland Court of Appeals declined to review the case, the Supreme Court granted certiorari.10
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?11
Federal common law governs the claim-preclusive effect of a dismissal by a federal court sitting in diversity.12 This Court adopts 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.13 This rule applies provided that state law is not incompatible with federal interests.14
Yes. The California federal district court dismissed Semtek’s diversity action on statute-of-limitations grounds under California law.15 The Maryland Court of Special Appeals applied federal law to accord the dismissal claim-preclusive effect.16 Federal common law instead requires that the preclusive effect of the California federal diversity judgment be determined by California’s law of claim preclusion.17 Because no federal interest conflicts with that state rule here, the Maryland court’s application of federal law was error.18
The claim-preclusive effect of the federal diversity judgment is determined by the law of the State in which the federal court sits.19