Effects of Federal Common Law

Erie rejected a general federal common law, yet the Supreme Court has kept fashioning judge-made rules in fields where federal interests are at stake, and those rules of decision make up what is called federal common law.¹ Clearfield Trust Co. v. United States is the model. No federal statute controlled, but the negotiability of checks payable by the United States was governed by a uniform federal judge-made standard rather than by the varying laws of the states. Earlier sections traced where such a rule comes from and why the Court chose the one it did. This section asks what the rule does once it exists.

Three separate questions arise, and the answer to one does not supply the answer to another:

Which law prevails when a federal common law rule conflicts with a state rule?
Which courts must apply the federal rule?
Which courts may hear a claim that rests on it?

Swift's general law answered none of them well. It displaced only state decisional law, it bound no state court, and it supplied rules only to cases that diversity had already brought into federal court.² Federal common law, which a federal court creates in an area of federal power, has none of those weaknesses. Clearfield shows each point in miniature. The federal rule on delayed notice of a forgery overrode Pennsylvania's contrary rule, the same rule would have governed had the United States sued in a Pennsylvania state court, and a claim resting on that rule arises under federal law.

Supremacy Over State Law

The Supremacy Clause makes a federal rule of decision outrank any conflicting state law, and a rule of federal common law is a federal rule of decision.³ When Clearfield's federal standard collided with Pennsylvania's contrary rule on delayed notice of forgery, the federal standard controlled and Pennsylvania's yielded.

The displacement reaches state law in every form. Federal common law overrides state statutes as well as state judicial decisions.⁴ Justice Brandeis made the point on the day he decided Erie, writing that whether the water of an interstate stream must be apportioned between two states is a question of federal common law, “upon which neither the statutes nor the decisions of either State can be conclusive.”⁵ Suppose Colorado and Wyoming each claim the right to withdraw unlimited water from an interstate stream. The dispute is uniquely interstate and of national interest, so neither state's law can govern it, and if Congress has supplied no apportionment rule, the court will create one.⁶

A federal rule does not rank lower because a court rather than Congress announced it. The Supremacy Clause asks whether the rule is federal, and when federal courts create common law, that law preempts inconsistent state law.⁷ Erie reasoned the same way from the state side: state law is state law, whether a legislature or a judge announces it.⁸ It is a mistake, then, to assume that a state statute must survive a judge-made federal rule because only a legislature could have enacted it. The statute is state law, and it gives way like any other state rule that conflicts with valid federal law.

Swift's general law could do none of this. Federal courts following Swift deferred to state constitutions, statutes, and judicial opinions interpreting them, along with state decisions on purely local questions, and they applied their own view of general law only where no valid state statute spoke.⁹ General law therefore displaced state decisional law but gave way to state statutes, while federal common law displaces both.¹⁰ Nor did general law bind any state court. It was natural law, not federal law within the meaning of the Supremacy Clause, so the states had no supremacy obligation to follow it.¹¹ Federal common law has a sovereign behind it. It arises where the Constitution and federal laws establish a federal interest without specifying a rule, and courts fashion it to protect that interest.¹²

The need for displacement follows from the reason for creating the rule. Courts make federal common law where a single national answer matters, as with government checks cashed in many states. If each state's statutes and decisions could still impose their own rule on the same transaction, the federal rule would be one variant among many, and the uniformity that justified it would be lost.

Once a federal rule exists, the preemption question is easy. By creating the rule, the court has shown that it is meant to displace state law on that issue, and the Supremacy Clause settles priority whenever the two conflict.¹³ The takeover usually pushes aside state law that may have governed before it, unless federal legislation later rejects the judge-made rule.¹⁴ The hard question comes earlier, whether a court should make federal law on the subject at all, and the next major section takes it up. Rejection by Congress gets its own section later in the chapter.

The check dispute and the contract suit both sat in federal court, and neither had a federal statute on point. What separates them is a federal interest. Erie held that federal courts have no power to create a general federal common law governing substantive rights, so state law, statutory or common, governs substantive matters unless a federal interest says otherwise.¹⁵ Nor can the grant of diversity jurisdiction supply that interest, because Erie made clear that the constitutional grant of diversity jurisdiction is not in itself an adequate basis for judicial lawmaking.¹⁶

Binding in State Courts

A uniform standard is uniform only if every court that hears the issue applies it, and state courts may exercise jurisdiction over most federal rights of action.¹⁹ So when federal common law controls an issue, the rule binds state courts as well as federal courts.²⁰ State judges must give it effect, and the Supreme Court can review a state court that fails to.²¹

The duty follows from the rule's status as federal law under the Supremacy Clause. A rule that bound only federal judges would let a litigant who preferred the local rule file in state court, and the same transaction would come out differently depending on the forum. Supreme Court oversight is what keeps the many courts applying the rule from drifting into many versions of it.²² Swift's general law had no such reach. It operated only when diversity brought a state-law claim into federal court, whereas federal common law applies in both court systems.²³

Dice v. Akron, Canton & Youngstown R. Co. is the clearest illustration. An injured railroad worker sued in state court under the Federal Employers' Liability Act, and the employer defended with a signed release that the worker said had been obtained through fraudulent misrepresentations about the document.²⁴ The state supreme court judged the release by a state standard that charged the worker with supine negligence for signing without reading carefully. The Supreme Court reversed, holding that federal common law controls.²⁵ Federal law had created the right of action, so federal law also governed the circumstances in which a worker could surrender it, and that standard was not meant to vary from state to state.²⁶ Otherwise two workers with identical releases and identical fraud claims could keep or lose the same federal right depending on the courthouse in which each happened to sue. A state court that must follow federal substantive law in this way presents a converse-Erie problem, and a later section takes up its details.²⁷

Erie sends authority in one direction only. It requires a federal court hearing a state-law claim to apply the state's substantive law, and it rests on the Tenth Amendment's reservation to the states of powers not delegated to the federal government.²⁸ Federal common law arises on subjects within federal power, where that reservation does not apply, so the obligation reverses. A federal diversity court is bound by state law on a state-created right, and a state court is bound by federal law on a federal subject. Erie never lets a state court's view fix the content of the federal rule.

The obligation holds even when the federal rule departs from the state's own law. State courts are bound by federal decisions on matters of federal common law, whether those decisions deviate from state law or from the state's interpretation of it.²⁹ The state supreme court in Dice had its own settled approach to releases, and that approach gave way. A rule that bound state courts only when it matched their existing doctrine would add nothing to state law, and it would leave the federal interest unprotected in exactly the cases where the two systems disagree.

Two limits apply. State courts hearing federal claims may generally apply their own procedural rules, but they must respect the rules of decision that define the parties' substantive rights and obligations.³⁰ Dice sits near that line, because a state standard for surrendering a federal claim goes to the substance of the right. And a state court is bound only on issues that federal common law actually controls.

Now change the claim. Two residents of one state sue each other in that state's courts for negligence arising from a collision on a state highway. No federal power or federal interest is involved, so there is no federal common law to bind the court, and state law supplies the rule. As Erie put it, 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.³¹ The first question is always whether federal common law controls the issue. If it does, the state court has no discretion to use a different rule.

Federal Question Jurisdiction

A claim arising under federal common law is a federal-question case, within the original jurisdiction of the federal courts as such, so diversity of citizenship is unnecessary.³⁴ The general federal-question grant is 28 U.S.C. § 1331.

The reason lies in what that grant looks to, which is the source of the law on which the claim rests. A rule of federal common law is federal law. A federal court fashions it to protect a federal interest, and it displaces conflicting state law under the Supremacy Clause.³⁵ A claim founded on such a rule therefore has the same federal character as a claim founded on a statute. Any other result would be incoherent, because federal law would control the dispute while the federal courts could hear it only if the parties happened to be citizens of different states. Swift shows the opposite arrangement. Federal judges sitting in diversity applied general law to cases that diversity had already put before them, and they felt free to decide as they thought the law should be.³⁶ Federal common law has no such dependence on diversity.³⁷

The Milwaukee pollution litigation shows the rule at work. In Illinois v. City of Milwaukee the Court recognized a federal common-law remedy in a dispute over interstate pollution, and because federal common law supplied the rule, the claim arose under federal law without any showing about the parties' citizenship. A dispute of this kind is uniquely interstate and of national interest, so the neutral rule of decision has to be federal even when Congress has enacted nothing.³⁸ The remedy proved short-lived. Congress legislated six months after the decision, and in a later phase of the same litigation the Court held that the legislation implicitly extinguished the common-law remedy.³⁹ That history foreshadows the provisional character of federal common law, taken up in the section on displacement by Congress. It leaves the jurisdictional logic untouched: for as long as federal common law supplies the rule, the claim arises under federal law.

Illinois and the lumber company both stand in federal court with no federal statute behind their claims. Illinois needed no diversity because the rule of decision was federal, while the lumber company needs diversity because state law supplies the rule. When a stem sets two such disputes side by side, ask where the rule of decision comes from, because that source decides whether diversity matters.

Federal common law also works in the other direction, as the rule of decision in a case that is in federal court on some other basis, including diversity.⁴⁰ In federal-question cases, federal legislation is often present in incomplete form. In diversity cases, the federal lawmaking authority that is a prerequisite often has not been exercised at all.⁴¹ Francis v. Southern Pacific Company is the diversity example. The plaintiffs sued for the wrongful death of a railroad employee killed while riding on a free pass. Utah law created the right of action and imposed liability for ordinary negligence, but federal decisions of the Swift era had limited a railroad's liability to gross negligence, and federal statutes extensively regulated free passes while saying nothing about tort duties. A majority of the Court held that federal law controlled, and that the federal law was the rule of the old cases.⁴² Jurisdiction rested on diversity, because Utah law created the claim, and federal common law entered only to displace the state standard of care on one point.⁴³

Two errors are common here. One is to look for diversity behind a claim founded on federal common law. The other is to treat every state-created claim that borrows a federal rule as a federal-question case. A claim founded on federal common law carries its own footing under § 1331, while a state-created claim into which a federal rule intrudes keeps the basis it already had.

The test that emerges for diversity cases runs as follows. State law will usually govern the matter in controversy unless the matter lies in an area of federal lawmaking authority and two further conditions are met. First, there must be a significant conflict, specifically shown, between some legitimate federal policy or interest and the use of state law on the point in issue. Second, the federal court must find an overriding necessity for uniformity that requires a uniform federal rule.⁴⁴ The later sections on when courts make federal law develop those prerequisites.

The same reasoning resolves a puzzle about § 301 of the Taft-Hartley Act, which gives the federal courts jurisdiction over suits on labor-management contracts. Before Lincoln Mills, the First Circuit assumed that state law would govern at least some issues and upheld the statute as a valid exercise of protective jurisdiction, a theory that would sustain federal jurisdiction even though state law supplied the rule.⁴⁵ In Lincoln Mills a majority instead read § 301 as requiring the federal courts to fashion and apply a federal common law of labor-management contracts. That reading removes the jurisdictional problem, because federal law then provides both the right and the remedy, and the case is one of true federal-question jurisdiction.⁴⁶ A later section treats statutory delegations of this kind as their own area of federal common law.