Applying the Forum's Rules

Applying the Forum's Rules

Klaxon gives a diversity court a destination but no route. A federal judge who hears a state-created claim with no Federal Rule on point must apply the substantive law of the state where the court sits, including that state's conflicts rules, and may not substitute a federal general common law.¹ Deciding which law governs such a case has posed one of the most difficult problems in federal litigation, and it goes to the heart of the relationship between the federal and state governments.² The route Klaxon prescribes has two stages. First, the judge selects a state by asking which state's substantive law the forum state's courts would apply to the issue in dispute. Second, the judge finds what the selected state's law provides on that issue. Each stage asks its own question and draws on its own body of state law, and a judge who answers the first correctly but the second carelessly still reaches a result that a state court in the same city would not reach. The rule exists to prevent that disparity. Otherwise, the accident of diversity of citizenship would constantly disturb the equal administration of justice in coordinate state and federal courts sitting side by side.³

The subsections below take the first stage, then the cases in which the forum's own rule is unsettled, then the second stage.

Following the Forum's Choice-of-Law Rule

The first stage reduces to one question the federal judge puts to the forum state's law: if this plaintiff had filed the same suit in the state courts down the street, which state's law would those courts apply to the issue in dispute? The federal court gives the answer the state court would give, because the conflicts rules applied by a federal court in Delaware “must conform to those prevailing in Delaware's state courts.”⁴ The answer comes from the forum state's own statutes and decisions. The federal judge's view of the best way to choose among states has no role, even when the state's rule seems outdated or leads to a law the judge finds less sensible, because the rule belongs to the state.

The facts of Erie make a compact test. Tompkins, a Pennsylvania citizen, was injured near Hughestown, Pennsylvania, and sued the Erie Railroad, a New York corporation with its principal place of business in New York.⁵ He could have filed in a Pennsylvania state court, a Pennsylvania federal court, a New York state court, or a New York federal court. Suppose both states follow the traditional place-of-injury rule, which treats the place where the last event necessary to make the actor liable occurred as the place of the tort and the source of the governing law.⁶ The four courts then proceed as follows:

• A Pennsylvania state court applies the place-of-injury rule, finds that the injury occurred in Pennsylvania, and applies Pennsylvania law.
• A Pennsylvania federal court asks what that state court would do, follows the same rule, and applies Pennsylvania law.
• A New York state court applies New York's place-of-injury rule, which also points to Pennsylvania, and applies Pennsylvania law.
• A New York federal court follows the rule a New York state court would follow, so it too applies Pennsylvania law.

All four courts reach Pennsylvania law because all four conflicts rules point to the same place.⁷ The New York federal court deserves the closest look. It sits in New York and applies Pennsylvania law, and its reason is that a New York state court would do the same. If every state used the same conflicts rules, every case would in theory be decided under the same substantive law wherever suit was brought, and forum shopping for more favorable law would disappear.⁸

The shorthand that a federal court in diversity applies the law of the state where it sits misdescribes the New York federal court's work in that example, since the court applied Pennsylvania law. The instruction is to apply the law the forum's courts would choose, and the forum's rule may point to a sister state or to the forum itself. Change New York's rule to one that applies New York law whenever the case has a meaningful New York connection, and the New York corporate defendant supplies one. A New York state court would then apply New York tort law, which allows recovery if the defendant failed to use due care, and the New York federal court would do the same.⁹ Vertical uniformity holds. Horizontal uniformity does not, because a Pennsylvania federal court would apply different law than the New York federal court applies.¹⁰

Day & Zimmermann, Inc. v. Challoner tests the rule against a forum result that looks pointless. Military personnel were seriously injured in Cambodia during the Vietnam War and pressed strict liability claims against an American manufacturer in a federal court in Texas, which was both the forum and the place of manufacture.¹¹ Texas chose tort law by the place of injury, which pointed to Cambodian law, and Cambodian law did not recognize strict liability, so applying it would end the case.¹² The Fifth Circuit refused to follow that path. It found a false conflict. Cambodia had no interest in the liability of an American manufacturer toward an American claimant, while Pennsylvania, the defendant's principal place of business, and Wisconsin and Tennessee, the victims' domiciles, did, and every American state involved, Texas included, was a strict liability state. With no conflict among interested states, the court applied forum law and said it believed Texas would do the same despite its earlier adherence to the place-of-tort rule.¹³

The Supreme Court unanimously reversed in a brief per curiam opinion. It quoted Klaxon and added: “A federal court in a diversity case is not free to engraft onto those state rules exceptions or modifications which may commend themselves to the federal court but which have not commended themselves to the State in which the federal court sits.”¹⁴ The federal court had to apply the Texas place-of-tort rule that referred to Cambodia, although it had found Cambodia a disinterested state and believed Texas itself would not have applied that law.¹⁵ The false-conflict exception, whatever its merits, had not commended itself to Texas. Had it stood, servicemen who could invoke diversity would have won strict liability in a Texas federal court, while identical servicemen in a Texas state court would have faced Cambodian law. That is the accident-of-diversity disparity Klaxon exists to prevent.

The California example runs Challoner in reverse. In Texas the forum's rule pointed outward, to a foreign place of injury. In California it points inward, to the forum's own law. The federal court follows the state's rule in both. A California federal court applies California law only because California's conflicts rule directs it there, and if California's courts used the place-of-accident rule, the same judge in the same courtroom would apply Arizona law. The forum's substantive law is the product of the forum's conflicts rule and never the starting point, so an answer should identify that rule before it names any state's law.

When the Conflicts Rule Is Unsettled

Klaxon assumes that the forum state's courts have said what their conflicts rules are. Often they have not, or they spoke long ago. The federal court then treats the conflicts rule as it treats any other state law and looks to the state's highest court, the only court empowered to bind a federal court sitting in diversity. Rulings of intermediate appellate courts and trial courts are not strictly binding. Where the highest court has not spoken, the federal court must apply what it finds the state's law to be, as though it were sitting as a state court, a process called making an Erie guess.¹⁷ Decisions of the state's intermediate appellate courts guide that guess unless the federal court is convinced by other persuasive data that the highest court would decide otherwise.¹⁸

The method follows from what Klaxon protects. A judge who fills a gap with a method the judge prefers produces an answer that no court of the state has given, and a state court a block away might resolve the same dispute differently. A prediction aimed at what the state's courts will decide tries to give the answer they will give, so the two courthouses converge even where state law is incomplete.

Certification offers an alternative to guessing. A majority of states have adopted the Uniform Certification of Questions of Law Act or its 1995 successor, and in those states a federal court has a mechanism for asking the state's highest court for the applicable rule. Many states lack a procedure, and a federal court there must rely on state precedents to determine the rule the state would use.¹⁹ Certification is discretionary. The decision lies within the federal court's sound discretion, and it is appropriate only when it will conserve the time, energy, and resources of the parties and the court, since the process is often slow and may return vague answers.²⁰

An Erie guess fills silence. It does not license a federal judge to revise a conflicts rule the state has already announced. In Challoner, the Fifth Circuit did not say that applying the Texas rule would be unconstitutional. It found a false conflict and applied local law because it believed Texas courts would no longer follow the place-of-tort rule when the rule pointed to the law of a disinterested state.²² The Supreme Court reversed, because a federal court may not engraft onto the state's rules exceptions that have not commended themselves to the state.²³ Courts divide over how freely a federal judge may read signs that a state's courts are moving. Not all courts take a liberal view of the federal judge's interpretive powers. One Fifth Circuit judge rejected that view as “attempting to psychoanalyze state court judges rather than to rationalize state court decisions,” and concluded: “The Georgia courts can overrule their prior decisions. The Federal Courts cannot do so.”²⁴

Commentators note the practical cost. If federal courts may not anticipate changes in state conflicts law, a party who would benefit from a standard, territorially oriented rule in the state's latest high-court pronouncement does well to choose the federal court. A party who wants that rule modernized has far better odds in the state supreme court.²⁵ The choice between two courthouses in one state can then matter again, which is the intrastate disparity Klaxon was meant to close.

Because the conflicts rules belong to the state where the court sits, the choice of court matters. A motion to transfer under § 1404, which courts decide by weighing private and public interest factors that the statute does not itself list, raises its own question about whose rules follow the case, and the discussion of transfers below takes it up.²⁶

Finding the Chosen State's Law

Once the forum's conflicts rule names a state, the federal court has finished only the first task. Erie requires it to apply that state's substantive law, and the content of that law remains to be found.²⁸ Erie itself shows what turns on the answer. The Supreme Court held that there is no federal general common law and remanded for a determination and application of Pennsylvania law. On remand the Court of Appeals held the railroad not liable, and Tompkins lost his $30,000 award.²⁹ The state law a diversity court must apply includes judicially announced state-created substantive law as well as state statutes and constitutions.³⁰

The state's highest court is the authoritative voice of its law. When it has spoken, its decision settles the content of state law for a federal court sitting in diversity. When it has not, the federal judge must make an Erie guess.³¹ The federal court stands in for the state judiciary, so the only result that keeps the two courthouses of one state in step is the result the state's own judges would reach. A prediction aimed at their decision converges on that result, while a judgment about the wisest rule diverges from it.

Step two is where students most often misstate the rule. Early Supreme Court decisions went further than the modern formulation. In West v. American Telephone & Telegraph Co., the Court held that a federal court should follow an intermediate appellate decision even though it might think the state supreme court would establish a different rule in some future case. In Fidelity Trust Co. v. Field, it held that a federal court must follow a state trial court's decision even though that decision would bind no other trial or appellate judge in the state.³⁶ The formulation in step two treats such decisions as guidance that yields to persuasive contrary data. Either way, an intermediate appellate decision on point is where the inquiry starts when the highest court has said nothing.

Mishandling the chosen state's law can produce forum shopping of its own. In McKenna v. Ortho Pharmaceutical Corp., the federal district court in Pennsylvania correctly applied Pennsylvania's borrowing statute, but the Court of Appeals reversed it for its reading of the applicable Ohio statute of limitations. Erie and Klaxon were followed, yet interstate forum shopping resulted from the federal court's manipulation of the foreign law.³⁷ Limitations periods add a wrinkle of their own. Statutes of limitation are “substantive” for vertical (Erie) purposes but generally “procedural” for horizontal (state-state) choice-of-law purposes, a tension the later discussion of limitations periods and labels develops.³⁸

A refinement, raised in Nolan v. Transocean Air Lines, asks whose conception of the selected state's law a federal court applies when the forum's own rule points outward. The working answer here is the Erie guess described above: determine the selected state's law as its highest court would declare it.

The two stages together deliver what Klaxon promises. Because the federal court applies the conflicts law that the courts of its state would apply, and then finds the chosen state's law as that state's courts would, the combination of Klaxon and Erie produces substantial vertical uniformity.³⁹ Uniformity across states is another matter, because each state keeps its own conflicts rules, and the next section turns to the forum shopping that follows.