Recognized Areas of Federal Common Law

Recognized Areas of Federal Common Law

In the Erie opinion Justice Brandeis wrote that “there is no federal general common law,” and on the same day he wrote for the Court that whether the water of an interstate stream must be apportioned between two states is a question of “federal common law” on which neither state's statutes nor its decisions can be conclusive.¹ The two statements are consistent. Erie rejected the general common law that diversity courts had declared on subjects belonging to the states, and it left standing the judge-made law that federal courts make where a federal interest requires it. That law lacks the spurious quality of Swift v. Tyson, because it applies in state and federal court alike and offers national uniformity through Supreme Court oversight.²

A practical question follows: where, after Erie, can a litigant point to an established body of federal common law instead of arguing for a new one from the two requirements of federal lawmaking power and a uniquely federal interest? Federal courts have applied federal common law most often in six settings: the rights and legal relations of the United States, disputes between states, international relations, admiralty and maritime cases, gaps in federal statutes, and the preclusive effect of judgments that federal courts enter in diversity cases.³ The Supreme Court has named a narrower core: the rights and obligations of the United States, interstate and international disputes implicating the conflicting rights of states or relations with foreign nations, and admiralty. In those cases, it has said, the federal system does not permit state law to control, either because the authority and duties of the United States as sovereign are intimately involved or because the interstate or international character of the controversy makes state law an inappropriate source.⁴ Neither list is exhaustive or analytically precise, so the categories are best learned as places where federal common law keeps recurring.⁵

In each of these settings the usual reasons for following state law carry little weight. Local substantive law sensibly solves local problems, important state policies deserve protection, and well-developed state doctrine brings order and certainty, but those reasons lose force where the subject is the national government, the relations among states, relations with other nations, or maritime commerce.⁶ Federal concerns take their place: a wish for uniform law where definite federal interests should prevail, a need to foster federal policies, and a preference for decisionmaking by the federal judiciary.⁷ Each area therefore satisfies the requirements from the preceding section in its own way, and the subsections below name the federal power and the federal interest for each field so that the same reasoning can be seen recurring.

Outside these fields the Court proceeds with caution and with deference to state law, describing federal common law as appropriate in only a few and restricted instances.⁸ In Rodriguez v. FDIC a unanimous Court found no uniquely federal interest in how a consolidated corporate tax refund, once paid to a designated agent, is divided among the members of the group, and it observed that states create corporations and that state law is well equipped to resolve disputes over corporate property rights.⁹ A problem that fits none of the recognized areas therefore starts with a presumption that state law governs, and the party seeking a federal rule must show both the power and the interest. Even inside a recognized area, a federal court free to fashion a rule may occasionally select state law as the most sensible one, as the preclusion discussion at the end of this section shows.¹⁰

Rights of the United States

Clearfield Trust Co. v. United States, the case from the preceding section, anchors the first and firmest of the recognized areas: the legal relations and proprietary interests of the United States. When the government sought reimbursement from the bank so that it could issue another check to the proper payee, the district court applied Pennsylvania law under Erie, and that law barred recovery because of the government's unreasonable delay in notifying the bank of the forgery. The Supreme Court took a different view, holding that the uniquely federal interests implicated when the United States issues commercial paper called for federal law.¹¹ The government owns property, enters into contracts, and often sues to protect its interests, and each of those activities can raise a question that no statute answers.¹² Federal courts have made similar decisions for themselves in other suits to which the United States is a party, whether the suit involves commercial paper the government issued, government contracts, or the effect of a federal lien.¹³

Courts have explained the source of this lawmaking power in three ways: as flowing from the jurisdictional grant under which the United States sues, as implied whenever the government or one of its instrumentalities is a party, and as an outgrowth of federalism, on the theory that the government is exercising constitutional or federal functions.¹⁴ The first explanation fares poorly. Jurisdiction over suits by the United States presents no difficulty, yet Clearfield placed little weight on the simple fact of jurisdiction; what accounts for its holding is that the rules governing the government's rights and duties on its commercial paper implicate a distinctively federal interest.¹⁵ The federalism explanation has the most support in the decisions.¹⁶

Federalism also explains a result that party status cannot. Howard v. Lyons was a diversity action between private parties, with neither the government nor any instrumentality in the lawsuit, yet the Court applied federal common law to the validity of a defense raised by a federal officer sued for tortious activity in the course of official duties, because the officer's authority derives from federal sources and the defense exists to promote the effective functioning of the federal government.¹⁷ The reverse holds as well. The Clearfield rule concerns the rights and obligations of the federal government itself, and litigation between private parties about government-issued securities is generally outside it.¹⁸ The question is whether the dispute touches a federal function; the names on the caption do not settle it.

A federal rule is needed for these dealings because it would be inconvenient for the federal government to navigate a large number of inconsistent state laws rather than follow a single rule.¹⁹ Courts reach that judgment through two criteria. The legal problem must lie generally within the area of federal competence, and, because competence alone would not displace equally valid state law, there must also be a strong need for national uniformity.²⁰ Dealings in government commercial paper meet both, which is why they are among the clearest examples of a federal interest; in an early case the Court identified a federal policy, derived from an overall statutory scheme, favoring protection of the Federal Deposit Insurance Corporation against the diversity of state laws on liability.²¹ The same two questions carry over to government contracts and liens, and to torts, which the next case shows.

United States v. Standard Oil Co. of California extends the approach to torts. In February 1944 a soldier, John Etzel, was hit and injured by a Standard Oil truck at a street intersection in Los Angeles; the government paid $123.45 for his hospital care and continued his soldier's pay of $69.31 during his disability, and Etzel released the company and its driver from his own claims for $300.²² The United States sued the company to recover those outlays and the value of Etzel's lost services, and the question was whether federal or state law determined that liability.²³ The Court held that Clearfield, rather than Erie, supplied the governing approach, and it observed that although Clearfield involved the government's contractual relations, its principles apply equally where the relations affected are non-contractual or tortious.²⁴

The Court's reasons come in layers. No relation between the government and a citizen is more distinctively federal than the one with members of its armed forces, which federal military power creates and defines and which the same power extends to protecting from harm inflicted by others. The government's purse is also affected, so its fiscal powers add weight against state intrusion.²⁵ The Court saw no good reason why the government's right to indemnity, or the lack of one, should vary with the different rulings of the several states, and because the liability sought would chiefly make the federal treasury whole, it treated the question as one of federal fiscal policy, with no special concern for the states or their citizens.²⁶

That answer required the Court to explain why Erie did not send the question to California tort law, and the explanation marks the edge of Erie itself. Erie's great object was to secure, in diversity cases, the substantive law a state court would apply, and what it discarded was federal common law used as a substitute for state power to create and enforce legal relationships in the area set apart for state control.²⁷ It reached matters essentially of local interest and state control. It did not broaden state power over matters made federal by constitutional or valid congressional command, or over matters so vitally affecting the interests, powers, and relations of the federal government as to require uniform national disposition.²⁸ Federal judicial power over common-law problems was cut down only where state law governs liability, and it remained unimpaired for essentially federal matters, the law of independent federal judicial decision.²⁹ Whether state law controls in such a case therefore turns on the specific governmental interests and the effects of applying state law, including federal supremacy in performing federal functions, the need for uniformity, and sometimes the inference to be drawn from Congress's inaction on a known problem.³⁰

The Court drew the line between federal and local concern at the soldier's own claims. The government's claim for its outlays arises out of the government-soldier relation, while the soldier's personal rights against the wrongdoer can be fully protected without any indemnity for the government, so the liability sought was not essential or even relevant to protecting the states' citizens against tortious harms, except in the remotest sense.³¹

Standard Oil also shows that deciding which law governs is a different step from deciding what the rule provides. The Court concluded that state law should not be selected as the federal rule, and it then declined to create a liability itself.³² The opinion opens by noting how rarely the Court is asked to create a new substantive legal liability without legislative aid and as at the common law.³³ Its reluctance had reasons: the issue arises frequently, Congress had never created a right to indemnification by statute, and a federal common law right would upset settled expectations. The Court did not doubt its authority, but on balance it thought deference to Congress wiser.³⁴ Clearfield asked which law governed the government's rights on its own paper; Standard Oil asked that question and then a second one, whether to create a liability Congress had never provided. The common mistake is to reason that once federal law governs a government claim, the government wins. Federal law governed in Standard Oil, and the claim still failed for want of a federal liability the Court was unwilling to create.

A dispute between private parties over federal paper falls on the local side of the same line more often than not. In Bank of America v. Parnell, which a later section examines, the Court treated the question whether federal bonds were overdue as federal, because it went to the nature of the rights and obligations the United States' instruments create, and it decided the burden of proof and good-faith questions under state law, because they concerned an essentially private transaction.³⁵ The federal question concerned the instrument the government issued; the state question concerned how two private parties allocate proof between themselves. Later sections return to the point that a federal court may apply federal common law and still choose state law as its content.

The Uniform Commercial Code raises a related question about content. The Code has been adopted by Congress for the District of Columbia and enacted in over forty states, so it is not federal law of general application, but in ascertaining the federal common law that governs government transactions a court has a choice of sources, and some courts have drawn heavily on the Code because it controls most commercial transactions in the United States.³⁶ In United States v. Wegematic Corp. the court reasoned that a Code adopted for the District of Columbia and in over forty states was well on its way to becoming a truly national law of commerce, so that insisting on a different rule for transactions with the United States would be a distinct disservice.³⁷ The Code is a source for the federal rule and does not bind the court. One court rejected the Code's rule in a similar fact situation, noting that the United States might have more difficulty insuring against loss and controlling its employees.³⁸ Another refused to abandon an earlier federal rule for state law that had become uniform through the Code, because the federal interest in protecting the treasury from liability was still present.³⁹

Interstate Disputes

Article III extends the federal judicial power to controversies between states, and that grant is generally believed to be the source of the federal courts' authority to make law for such controversies, although the Supreme Court has never identified the constitutional provision it relies on.⁴² The Court was building this body of law long before Erie. In Kansas v. Colorado it explained that when one state's action reaches through natural forces into another state's territory, the extent of each state's rights becomes a dispute the Court must settle in a way that recognizes the equal rights of both, and that through successive decisions it was “practically building up what may not improperly be called interstate common law.”⁴³ Erie left that body of law alone. Hinderlider v. La Plata River & Cherry Creek Ditch Co., decided the same day, held that apportioning the water of an interstate stream is a question of federal common law on which neither state's statutes nor its decisions can be conclusive.⁴⁴

No state's law can supply the rule, for two reasons that do separate work. The first concerns fairness between the contestants. Each state is a co-equal sovereign, so applying one state's law to a controversy between two would be inconsistent with the equality and quasi-sovereignty of each.⁴⁵ If Colorado and Wyoming both claim the right to withdraw unlimited amounts of water from an interstate stream, neither state's law can sensibly decide between them: the matter is uniquely interstate, of national interest, and calls for a neutral federal rule of decision whether or not Congress has enacted a statute to apportion the water.⁴⁶ The second reason concerns where a rule can come from. Neither the Constitution nor any statute answers such controversies or says where the governing law is to be found, so the Court has of necessity developed its own body of law.⁴⁷ With the states as the disputants and no other lawmaker holding authority over the subject, there is no alternative candidate for the rule, and where Congress has supplied none, the federal court creates it.⁴⁸

The rules the Court has built show how independent of state law the field is. State law on the rights of riparian landowners, meaning those whose land borders a watercourse, does not control the Court's resolution of a dispute between states over the diversion of water from an interstate river, as the Court held in Connecticut v. Massachusetts.⁴⁹ The Court has likewise fashioned a federal rule to locate the boundary between two states that share a river as their common border, and in selecting the line directly above the deepest part of the river's channel it followed international law.⁵⁰ Neither rule comes from a state's law.

The objections that drove Erie explain why this field raises so little of the worry behind that decision. One objection was forum shopping, the ability of a litigant to choose between a state court and a federal court in order to obtain a more favorable rule. Suits between states offer no such choice, because the Supreme Court has both original and exclusive jurisdiction over them, so a single tribunal hears the case and no competing body of law can claim the dispute.⁵¹ The other objection was that federal courts were declaring rules on matters belonging to the states. A controversy between two states is not a matter within the competence of either, so that concern is absent here as well.⁵²

The missing federal statute does not separate the creek dispute from the Colorado and Wyoming dispute, since a statute governs neither. The difference lies in the contestants. Between two landowners in the same state, that state's law is a neutral measure because no other state has a stake in the answer, while between two states no single state's law can play that role. The usual error is to treat every water dispute as a federal matter.

The federal rule is not confined to suits with a state on each side. In Hinderlider the Court ruled that non-state parties may be bound by the federal common law that arises to resolve disputes between states, and it applied the apportionment rule it had developed for interstate disputes to an action brought by a private party, the ditch company, against a state official.⁵³ The logic is straightforward. An apportionment fixes how much of the stream each state may use, and a private user draws water through the position of the state where it operates, so the private user cannot claim more than a federal rule permits the state to take.

Illinois v. City of Milwaukee carries the field from water allocation to pollution. Illinois sued four Wisconsin cities in federal court to abate the pollution of Lake Michigan, no federal statute directly governed the issue, and the Court held that Illinois's claim for interstate pollution gave rise to an action under federal common law.⁵⁴ The defendants were cities, not states, and the case still fell inside the field, because the interstate character of the controversy is what brings it there. Congress can displace this body of law by statute, and it did so here: it legislated six months after the decision, and the Court later held that the legislation implicitly extinguished the common-law remedy.⁵⁵ A later section takes up displacement in full.

Foreign Relations

In Banco Nacional de Cuba v. Sabbatino the Supreme Court held that the act of state doctrine, the rule that keeps federal courts from ruling on the legality of a foreign sovereign's acts within its own territory, is a question of federal common law, and the case remains the leading authority on federal common law in international relations.⁵⁸ The case grew out of the Cuban government's expropriation of property belonging to a corporation controlled by American citizens. It reached the federal courts as a suit between two nominally private parties on alienage jurisdiction, pleaded in form as a claim for breach of contract.⁵⁹ Banco Nacional, suing as agent of the Cuban government, sought the proceeds of a shipment of sugar, and the defendants answered that the expropriation violated international law, so that valid title never passed to the government. The district court accepted that defense and granted summary judgment against Banco Nacional, and the Supreme Court reversed.⁶⁰

Two features make the case a clean lesson in federal lawmaking. No text supplied the answer, because the Court admitted that neither the Constitution nor any act of Congress required the application of federal common law in the area of international relations.⁶¹ And state law would have produced the same result. Justice Harlan recognized that New York also followed the act of state doctrine, and he still reasoned that the issue involved the basic competence of the federal executive and judicial branches to decide questions affecting foreign relations, so it had to be treated as exclusively federal.⁶² His opinion gave the doctrine “constitutional” underpinnings: it “arises out of the basic relationships between branches of government in a system of separation of powers” and concerns “the competency of dissimilar institutions to make and implement particular kinds of decisions in the area of international relations,” which made the problems involved uniquely federal in nature.⁶³ The Court has since stated the point generally: “an issue concerned with a basic choice regarding the competence and function of the Judiciary and the National Executive in ordering our relationships with other members of the international community must be treated exclusively as an aspect of federal law.”⁶⁴

Federal law, and no state's law, supplies the rule for two reasons, and each does separate work. The first concerns power. In some areas the states simply lack authority to make law at all, and foreign relations is the most notable of them: foreign policy is the domain of the federal government, so if law is needed it must be federal, and if none exists the courts must create it, because there is no alternative candidate for the rule.⁶⁵ That conclusion rests on the principle, associated with United States v. Curtiss-Wright Export Corp., that the power to conduct international relations belongs to the United States as a collective government rather than to the states one by one.⁶⁶ The second reason concerns the federal interest. The executive branch has an interest in handling sensitive matters of foreign policy, and that interest counsels against federal courts ruling on whether a foreign sovereign's acts were lawful under international law. Relying on a disuniform body of state law to decide whether and how far courts should pass on such expropriations was the undesirable alternative.⁶⁷ If each state set its own rule, courts in different states could answer the same question about the same foreign act differently, and every answer would invite friction with a foreign government that only the national executive is positioned to manage.

The federal interest here is clearer even than the one in Clearfield. Uniformity in the rules for the government's own checks matters, but the interest in determining issues relevant to the nation's foreign relations is unarguable.⁶⁸ The doctrine also raises an apparent puzzle, because it restrains the federal judiciary, and one might ask why federal common law should be the source of a rule that limits the courts that create it. The tension is more apparent than real, since the separation-of-powers concerns that counsel judicial restraint are the same ones that show the question cannot be left to the states.⁶⁹ The subject is plainly one of federal power, because foreign policy belongs to the federal government.⁷⁰ The harder link runs from that power to judicial lawmaking. No statute in Sabbatino shows that Congress meant the courts to develop the doctrine, so the usual explanation infers an invitation from the presence of a uniquely federal interest.⁷¹

Once a field is committed to the federal government, the same interest can displace rules that a state has enacted on its own. In Zschernig v. Miller the Court found a state law barring inheritance by foreign legatees, unless their country of origin gave reciprocal inheritance rights to U.S. legatees, preempted by the federal interest in foreign relations, because the reciprocity regime impaired the effective exercise of foreign policy.⁷² In American Insurance Ass'n v. Garamendi, a California statute required insurers to disclose information about policies they had sold in Europe between 1920 and 1945, so that Holocaust survivors and their dependents could pursue compensation, perhaps by pressuring or suing foreign governments, and the Court again held the state rule preempted.⁷³ Both decisions follow from the point that states have no lawmaking authority in this field to begin with.⁷⁴

The air-accident suit and the Cuban sugar suit are both foreign-affairs disputes in federal court, and federal law governs both. What separates them is whether a controlling text exists. Federal common law fills silence, and the court in Sabbatino had no treaty or statute to apply, so it had to choose the rule itself. The court in the air-accident case only reads the treaty, which is interpretation and not lawmaking. The usual error is to label every foreign-affairs question federal common law, when the label applies only where no treaty or statute speaks.

Sabbatino left open how much customary international law, the body of unwritten norms that nations observe as legally binding, federal common law absorbs. The Restatement (Third) of Foreign Relations Law treats customary international law as part of federal common law, while critics, relying on Erie and on doubts about where customary norms have been heading, warn that its growing human rights content can collide with state choices such as the death penalty and could displace state control over criminal justice.⁷⁵ The same debate surrounds the Alien Tort Statute, 28 U.S.C. § 1350, which gives federal courts jurisdiction over an alien's claim for a tort in violation of the law of nations. In Sosa v. Alvarez-Machain the Court allowed such claims only where the underlying norm has the specificity and universality needed to support a federal common law obligation, and the plaintiff's claim of illegal arrest and detention did not qualify, despite sources of customary law such as the Universal Declaration of Human Rights and the International Covenant on Civil and Political Rights.⁷⁶

Admiralty and Maritime Law

Article III extends the federal judicial power to “all cases of admiralty and maritime jurisdiction,” and Congress has conferred matching jurisdiction on the federal courts by statute.⁷⁹ That grant has long been read to imply authority in the federal courts, exclusive of the states, to “evolve and apply a national substantive law,” and the courts are expected to exercise it wherever Congress has not acted.⁸⁰ In Southern Pacific Co. v. Jensen the Supreme Court ruled that the constitutional grant gave the federal courts, and Congress, power to develop a uniform body of substantive federal maritime law, which forms part of the national law.⁸¹ The earlier section on federal lawmaking power used admiralty as a contrast to diversity. This section looks at what the grant produces: a field in which the courts' lawmaking authority is settled and the live questions concern how they use it.

Article III reaches these cases in keeping with the framers' understanding that seagoing warfare and commerce were matters of federal concern.⁸² Two separate reasons support that understanding. The first is uniformity. A vessel on a voyage passes through the waters and ports of many states, so if each state's law governed collisions, cargo losses, and injuries aboard ship, the same conduct would carry different consequences depending on where the parties happened to sue.⁸³ That forum-dependent result is what Erie condemned, which is why federal common law in admiralty is consistent with Erie's philosophy and is further supported by the national interest in uniform law for maritime commerce.⁸⁴ The drafters of Article III and of the Judiciary Act of 1789 are generally understood to have had that uniformity in mind when they created the jurisdiction.⁸⁵ The second reason is expertise: federal law in this field is likely to be better when it comes from federal judges, who have special knowledge of maritime matters.⁸⁶

The diversity grant sits beside the admiralty grant in Article III and reads in parallel with it, yet only the admiralty grant has been taken to carry lawmaking authority.⁸⁷ What separates them is the purpose each serves. Diversity jurisdiction was created to give out-of-state litigants a neutral forum, and an unbiased tribunal serves that purpose whichever state's law it applies, so the grant gives no sign that anyone intended federal judges to write substantive rules.⁸⁸ A neutral forum that applies each state's own rule leaves the variation intact, so uniformity in maritime matters requires that the rule itself be federal. The general test follows from the contrast: the fact that the Constitution confers jurisdiction over a kind of case does not by itself imply lawmaking power, and the question is whether the area is one in which the federal government has a distinctively important interest.⁸⁹ The dissent in Jensen objected that Article III speaks only of establishing jurisdiction and prescribes no substantive law, an objection that Erie later adopted for diversity, and the Jensen majority view has nonetheless been reaffirmed since Erie.⁹⁰ A question that pairs the two grants is testing this contrast: a diversity court applies state law to a state-created right, while an admiralty court applies federal maritime law that the courts themselves may develop.

Much of the field was built before Erie, which might suggest that it fell with Swift v. Tyson. Relying on the jurisdictional grants, the Court constructed a nineteenth-century body of law covering maritime employment, contract, and tort disputes, and it read maritime jurisdiction broadly enough to reach events on all navigable waterways, including freshwater rivers and lakes.⁹¹ The overlap with the general law merchant that Swift had applied does not doom the maritime rules, because a Swift-era rule that rested on a constitutional source of federal power became federal common law after Erie, and the admiralty grant is such a source.⁹² The Court has consistently interpreted the grant of general admiralty jurisdiction as a proper basis for judge-made rules of maritime law.⁹³

Reading a jurisdictional grant as an implicit command to create common law began early, and admiralty and suits between states are its most prominent examples, because state law was impracticable to use in either area and Congress furnished no substantive law to speak of.⁹⁴ Congress has since legislated in parts of the field, the Jones Act being one example, but maritime law remains largely judge-made, and federal statutory law and federal common law both govern admiralty cases.⁹⁵ The field fits the two-part analysis developed earlier in this chapter. Article III supplies the federal lawmaking power, and the national interest in uniform maritime commerce supplies the uniquely federal interest that, as Clearfield Trust held, can justify federal common law even though no federal statute directly controls.

Because maritime law is largely judge-made, courts regularly meet gaps, and the way the Court fills them is the part of the field to hold onto. Moragne v. States Marine Lines is the clearest case in which statutory policy supported a new remedy. A longshoreman was killed while working in navigable waters, and his widow's claim for wrongful death fell into a gap, because compensation for wrongful death was available under state and federal law in various situations but none of the established schemes applied to her.⁹⁶ The Court overruled its own earlier decision in The Harrisburg instead of denying relief and leaving Congress to rewrite the rules.⁹⁷ It drew on a range of enactments as evidence that the legal treatment of wrongful-death claims had changed, and it asserted a power to fill the gaps by drawing on the policies of federal statutes in revising its own federal common law.⁹⁸ The Court attached no legal significance to the gaps in the statutes, and it honored instead the policy of the statutes in deciding what the common law should contain.

The same method produced the opposite answer in Dutra Group v. Batterton. A seaman sought punitive damages in a suit claiming that the unseaworthiness of a vessel caused personal injury, and the Court followed the policy underlying the Jones Act in ruling that the damages were unavailable.⁹⁹ The Court has found it hard to blend statutory policy consistently into maritime law, and in Atlantic Sounding Co. v. Townsend it allowed punitive damages for an employer's deliberate denial of a crew member's request for maintenance and cure.¹⁰⁰ Moragne and Batterton share a method and differ in direction. In the first, the surrounding statutes showed a legislative judgment favoring wrongful-death recovery, and the maritime worker left uncovered received a remedy. In the second, a closely related statute pointed against enlarging the seaman's remedy, and the Court followed it. The common mistake is to reason that because maritime law is judge-made, the courts may add any remedy they think fair. The courts shape the rule in light of the statutory policy around it, and a related statute can counsel restraint as readily as expansion.

Statutory Gaps and Delegation

Congress cannot write a statute detailed enough to answer every question that will arise under it, and federal courts have long made common law in the space that remains, on authority that Congress has conferred expressly or by implication.¹⁰³ That warrant differs from the one in Clearfield Trust, where the Court held that the rights and duties of the United States on its own commercial paper are governed by federal law and chose the rule itself, although no statute addressed the effect of delay in notifying a bank of a forgery.¹⁰⁴ In the statutory settings the federal statute supplies the warrant, because the court is carrying out a scheme Congress enacted. The authorization takes two forms: interstitial gap-filling, which answers the impossibility of anticipating every question, and implied delegation, in which Congress provides jurisdiction or a skeletal scheme and leaves the courts to develop the substantive law beneath it.¹⁰⁵ Judge Friendly's list of the methods by which federal courts create common law includes construing a jurisdictional grant as a congressional command to create common law and filling statutory interstices, along with a method that Clearfield Trust illustrates, spontaneous generation, in which a court creates a rule with no statutory invitation at all.¹⁰⁶

Interstitial gap-filling is the most prevalent form of statute-based federal common lawmaking, and it exists because statutes cannot be written with enough detail to cover every question of construction and application.¹⁰⁷ Federal courts interpret vague words, supply omitted procedural rules, and decide whether particular claims and defenses exist when Congress described the elements of a statutory cause of action in very general terms. The situation arises most often when a federal statute contains no statute of limitations.¹⁰⁸ Interpreting a vague word sits close to the line between reading a text and creating a rule, but an omitted procedural rule or an unstated defense falls more clearly on the creation side, because no word in the statute answers the question. A court cannot wait for Congress to fill the gap, since the statutory right is already before it and the case must be decided.

A close relative of gap-filling arises when Congress writes standards so broad that they cannot be applied directly and need implementing rules before they can govern any dispute. The Supreme Court has approved judicial rulemaking of that kind under the Sherman Antitrust Act and under the Employee Retirement Income Security Act.¹⁰⁹ A command that general leaves its content to be worked out case by case, and its breadth is itself a reason to think Congress expected the courts to do the working out.

The implied form of delegation is clearest in Textile Workers Union v. Lincoln Mills of Alabama, the leading case. Section 301 of the Taft-Hartley Act grants federal jurisdiction over suits for violation of contracts between employers and labor organizations in industries affecting interstate commerce, but it sets out no rules for deciding them.¹¹⁰ A court told to hear such suits has to decide them under some body of law, and the statute did not say which. In an opinion by Justice Douglas, the Supreme Court held that the federal courts must fashion a body of substantive principles of federal labor law from the legislative outline Congress had provided.¹¹¹ Two features of the statutory setting made that inference reasonable. Congress has constitutional authority to regulate in the area, and the Taft-Hartley Act and other federal statutes on collective bargaining expressed a federal policy that the courts could implement by developing common-law rules.¹¹² The Court accordingly read the grant of jurisdiction as an implicit authorization to develop a uniform national law of collective bargaining, free of whatever the states might do.¹¹³

The inference is not self-evident, and the Court did not pretend otherwise. It conceded that the legislative history of section 301 is “somewhat cloudy and confusing,” and the underlying dispute sounded in contract, ordinarily an area of state rather than federal power.¹¹⁴ The delegation here is implied from the statute's structure and policy, so cases that rest on it turn on how clearly Congress left room for the courts. Once the inference is accepted, federal law supplies both the right and the remedy, and the case is one of true federal-question jurisdiction.¹¹⁵ The judge-made rules also bind state courts, which must apply them whatever local law provides.¹¹⁶

Reading a jurisdictional grant as a command is an old practice. From the nation's beginning the federal courts did so in admiralty and in suits between states, where state law was impracticable to use and Congress furnished almost no substantive law, and Lincoln Mills is the leading case taking the practice beyond those fields.¹¹⁷ Its reach has been wide. The decision opened the way for judicial lawmaking in many areas where Congress enacted a general regulatory scheme, and regulations issued under the securities laws have served as a springboard for an important body of federal common law on securities regulation and corporate responsibility.¹¹⁸ The outer edge is contested: one court of appeals recognized a private federal common-law claim against telephone companies even though the regulatory statutes said nothing about private remedies, and other courts have criticized that result.¹¹⁹

Congress sometimes removes the need for inference altogether. Federal Rule of Evidence 501 instructs the federal courts to apply to federal cases the privilege rules “as they may be interpreted by the courts of the United States in the light of reason and experience.”¹²⁰ That instruction is an express grant of common lawmaking power, because Congress left the content of privilege law to judicial development and told the courts how to proceed. Express and implied delegation rest on the same logic. In each, the statute supplies a warrant that free-standing judicial lawmaking lacks, and federal common law is appropriate where an explicit or implicit statutory grant of authority justifies it.¹²¹

What separates a statute that invites rulemaking from one that merely hands an official a power? Wheeldin v. Wheeler supplies the second kind. The statute there granted only the power to issue subpoenas, and the Court found that Congress had not intended a private cause of action against a federal officer for abuse of that power, so any liability would have to rest on state law.¹²² Justice Douglas, who also wrote Lincoln Mills, observed that “we are not in the free-wheeling days antedating Erie R. Co. v. Tompkins” and that it was difficult to see how a statute granting only the power to issue subpoenas implies a cause of action for abusing it.¹²³ Both statutes were silent on the point in dispute, so silence cannot be the difference. Section 301 covered an entire class of suits that had to be decided under some body of law, and it sat inside a scheme expressing a federal policy for the courts to implement. The subpoena provision conferred a single power and gave no sign that Congress wanted the courts to build a body of liability around it. Creating the liability would substitute the court's judgment for the legislature's on whether officers should answer in damages, and without any sign of delegation that decision stays with Congress. The usual error is to reason that because Lincoln Mills lets courts create law where a statute grants jurisdiction, any federal statute invites the courts to create remedies.

The same caution marks the Court's later decisions, which show a reluctance to infer private remedies from congressional legislation.¹²⁴ Whether a statute carries an implied private remedy is a related question that the Court treats as a separate theory. It asks whether Congress meant to give a particular plaintiff a right to sue, while delegation asks whether Congress meant the courts to develop the rules that govern a field.

Preclusion of Diversity Judgments

Semtek International Inc. v. Lockheed Martin Corp. supplies the newest recognized area, the effect of a judgment that a federal court has entered in a diversity case. A federal court in California, hearing a state-law claim because the parties were citizens of different states, dismissed the suit as barred by the statute of limitations, and the plaintiff later brought the same claim in the Circuit Court for Baltimore City, Maryland.¹²⁹ The Maryland court had to decide what claim-preclusive effect the first judgment carried, meaning how far it barred the plaintiff from litigating the same claim again. The Supreme Court held that federal common law governs that question, and that the content of the federal rule is the preclusion law of the state in which the rendering court, the court that entered the first judgment, sits.¹³⁰

The Court reached federal common law by elimination, and each elimination shows why the question falls into a gap. The Full Faith and Credit Clause of Article IV and 28 U.S.C. § 1738 govern, by their terms, only the effects of state-court judgments (and, for the statute, judgments of territorial courts), and no other provision of the Constitution or of any federal statute addresses the claim-preclusive effect of a federal diversity judgment.¹³¹ A state-court judgment makes the gap visible by comparison. Had a California state court entered the same limitations dismissal, full faith and credit would have required the Maryland court to give it the effect California gives, and California would not have treated it as barring a new suit.¹³² Because the first court was federal, that command did not reach it, and the Maryland court had no text to follow.

Federal Rule of Civil Procedure 41(b) was the remaining candidate. It provides that a dismissal, apart from three listed exceptions that do not include limitations dismissals, is an adjudication upon the merits, and many readers take that phrase to mean that the dismissal has claim-preclusive effect.¹³³ The Court declined to read the rule as a preclusion rule for two reasons. A reading that fixed the effect in state courts of a federal judgment resting on a state limitations period might give the rule substantive content that the Rules Enabling Act forbids. It would also produce variations in outcome between state and federal litigation that influence the choice of forum, because out-of-state defendants sued on stale claims in California would systematically remove to federal court, where a limitations dismissal would bar suit everywhere.¹³⁴ The Court likewise treated Dupasseur v. Rochereau, an 1875 decision that looked to the preclusion law of the state where the first case was brought, as no longer binding, since that result may have rested in part on pre-Rules federal law requiring federal courts to follow the forum state's procedural law in nonequity cases.¹³⁵

With no text controlling, the Court held that the question is one of federal common law, and its reasoning explains why the answer could not be left to whatever a state chooses to say. The Court has long held that whether a state court has given a federal judgment its due force and effect is a federal question that the Court reviews, and that even when states give federal judgments no more effect than they give their own, they do so by direction of the Court, which has the last word on the claim-preclusive effect of all federal judgments.¹³⁶ The federal interest at stake is the federal judiciary's own interest in the effect of its judgments, which is why the question cannot depend on a state's view of a federal court's judgment.¹³⁷ The structure resembles Clearfield, since no statute answered the question and federal law still supplied the rule, and a state court that fails to give a federal judgment its due effect has decided a federal question that the Supreme Court can review.¹³⁸

Choosing federal common law does not decide what the rule says, and here the Court chose to borrow. It adopted, as the federal rule of decision, the law that state courts would apply in the state where the federal diversity court sits.¹³⁹ Two reasons support the choice, and each answers a different worry. A uniform federal rule has nothing to protect, because the substantive law behind a diversity claim is state law, so no federal policy calls for the kind of national uniformity that the government's checks required.¹⁴⁰ Borrowing also produces a uniformity that does matter here, since the same dismissal then has the same preclusive effect whether a state court or a federal court ordered it.¹⁴¹ That equality removes the incentive that a separate federal rule would create. If federal dismissals barred suit everywhere while state dismissals did not, defendants would file in or remove to federal court to gain the better result, which is the forum shopping and inequitable administration of law that Erie condemned.¹⁴²

The borrowed law is California's, and it governs because federal common law adopts it. California law does not apply of its own force, and Maryland's law, as the law of the court hearing the second suit, plays no part. The Court added that this federal reference to state law will not obtain in situations in which the state law is incompatible with federal interests.¹⁴³ No such conflict appeared in Semtek, so the Court had no need to decide what would follow if one did. A later section takes up the difference between state law that governs under Erie and state law that a federal court selects as the federal rule.

Both the Kansas judgment and the California dismissal end up measured by the preclusion law of the state that rendered them, so the outcomes look alike. The route differs, and the difference depends on which kind of court entered the first judgment. A state-court judgment reaches the second court through the Full Faith and Credit Clause and § 1738, which are constitutional and statutory commands.¹⁴⁴ A federal diversity judgment reaches it through a federal common law rule that the Supreme Court chose and may revisit where state law would conflict with federal interests. A court that skips the question of who rendered the judgment will reach the wrong source of law, even when it names the right state.

The mechanics of claim preclusion belong to the study of res judicata. Semtek earns its place in this chapter for two reasons. It shows that federal common law reaches the effect of a federal court's own judgment even when the court was sitting in diversity, a field in which the Court has otherwise been cautious about recognizing federal common law.¹⁴⁵ It also shows that the federal rule, once chosen, takes its content from state law.