Private Disputes and Federal Interests

Private Disputes and Federal Interests

Erie made state law the rule of decision in any case not governed by the Federal Constitution or an act of Congress: “There is no federal general common law.”¹ Yet on the same day Justice Brandeis wrote 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 decisions can be conclusive.² A litigant who wants a federal rule must therefore bring the case within an exception to the state-law default.

Clearfield Trust Co. v. United States makes that showing easy when the United States is the claimant. The Supreme Court held that federal law controls whether the government may recover a payment it made on a stolen, fraudulently endorsed check, because it would be inconvenient for the federal government to navigate a large number of inconsistent state laws when it could follow a single rule.³ The justification belongs to the government, however. The rule concerns the rights of the federal government, not rights in government-issued commercial paper generally.⁴

Two questions follow once the United States leaves the caption. Does the federal rule still govern when private parties dispute rights in government paper? Bank of America v. Parnell and Miree v. DeKalb County show that it largely does not. And can a federal interest reach a suit in which every party is private? Boyle v. United Technologies Corp. shows that it can, when applying state law would obstruct an obvious federal purpose.

Parnell and Private Parties

Bank of America v. Parnell shows what is left of Clearfield Trust when the United States is not the claimant. A bank sued Parnell and others who had cashed United States bonds stolen from it, and federal jurisdiction rested on diversity of citizenship, whereas the United States itself had been the party in Clearfield Trust.⁵ The government had called the bonds in for redemption, which raised the question whether they were “overdue” when cashed; the case also raised whether Parnell acted in good faith and which side had to prove good faith or its absence.⁶ The questions were linked, because how far the bonds were overdue bore heavily on good faith.⁷ State law apparently put the burden of proving good faith on the defendants, while the court of appeals, reading Clearfield Trust to control, held that federal common law governed and required the bank to prove a lack of good faith.⁸ The burden mattered because the party who carries it loses when the evidence is evenly balanced, so the choice of rule could decide the case.

The Supreme Court divided the case along the line between the government’s instrument and the private transaction built around it. Writing for the Court, Justice Frankfurter held that whether the bonds were overdue is a question of federal law, because it goes to the nature of the rights and obligations that United States commercial instruments create.⁹ The good-faith and burden-of-proof questions pertained to what the Court treated as “essentially a private transaction,” and the law of the state where that transaction took place governed them.¹⁰

State law controls the burden of proof because no federal stake supports a uniform rule. The dispute was between private parties, it reached federal court through diversity, and it did not directly implicate the federal government: the rights and duties of the United States were not at issue, and the outcome mattered to the government at best remotely.¹¹ Diversity alone did not explain the departure from Clearfield Trust; the decisive difference was a much weaker federal interest and a correspondingly weaker need for a uniform rule.¹² Clearfield Trust worried about a Treasury exposed to the varying rules of every state in which its checks might be cashed. Which of two private parties must prove good faith leaves the Treasury’s position untouched, and state law, already familiar to people who deal in such transactions, can settle the question.

Federal law keeps the overdue question because it concerns the meaning of the government’s own instrument, and that meaning should not change with the state where a holder happens to cash the bond. Fairness points the same way: applying one timeliness standard when the government is a party and another when private parties dispute the same paper would catch the private parties between two standards.¹³ Because the Court applied federal law to one question and state law to the other, the difference between them lies in the strength of the federal interest, not in the Court’s power to make federal law.¹⁴

As the decision stands, federal law governs some rights in government paper while the laws of the several states govern others.¹⁵ The dissenting Justices would have applied to all such transactions the federal law merchant that Clearfield Trust had held applicable to United States commercial paper; the majority’s narrower view is the one that stands.¹⁶

The split has a cost. Suppose Clearfield Trust, held liable to the United States, sought to recover from J. C. Penney Co. on the chain of endorsements. The federal rule on timeliness would not automatically govern that private claim, and if state law controlled, Penney might have a defense that leaves Clearfield Trust holding the loss.¹⁷ Critics have said that the decision threatens federal uniformity and makes it likelier that a party in Clearfield’s position goes without a remedy, and the Court gave lower courts little guidance for drawing the line.¹⁸ The damage is probably limited, because whether an instrument is overdue remains a federal question, and a party that loses to the government and then cannot recover from a private party because of a shifted burden of proof should be rare.¹⁹

Miree v. DeKalb County applies the same reasoning farther from the Treasury. Survivors of passengers killed in a plane crash sued a county as third-party beneficiaries of a grant contract with the federal government. The contract required the county to keep land beside the airport in a condition that permitted normal operations, yet the land had been used as a garbage dump, and the birds it attracted were ingested into the plane’s engines.²⁰ The Supreme Court held that state law, not federal common law, governed.²¹ The contract with the government looks like a federal hook, but the litigation was among private parties, and no substantial rights or duties of the United States hinged on its outcome.²² The one federal interest offered, promoting compliance with federal aviation safety regulations, was “far too speculative, far too remote a possibility to justify the application of federal law to transactions essentially of local concern,” and nothing showed that state law was inadequate to achieve it.²³

Federally created rights that surface in private litigation receive the same restraint, and even more of it. Courts favor state law unless a federal interest or policy clearly requires uniform results. Thus the competence of an insured under a national service life insurance policy to change his beneficiary was held to be a federal question, but the power of a guardian to make that change was not.²⁴

The insistence on a concrete federal stake follows from what a federal common law rule does: it displaces state law, so a court needs a reason tied to harm the federal government would actually suffer if state law applied. A general interest in safety in federally funded programs would reach nearly every transaction that touched a federal grant, bond, or contract, and the state-law default would vanish for much of ordinary commerce. A forged Treasury check puts a definite loss on the government’s books, while the crash suit puts nothing there. It is therefore a mistake to reason that a federal bond, grant, or agency contract makes every dispute about it federal.

Neither decision closes the door entirely. Parnell left open that the federal interest in defining the rights and obligations of parties to a transaction in government securities may radiate beyond the government’s own suits, and that a diversity case with different facts might call for federal common law.²⁵ Chief Justice Burger’s concurrence in Miree stressed that Clearfield Trust does not preclude federal common law in every matter involving only private citizens, because private rights may sometimes depend on a specific exercise of congressional regulatory power, and where Congress has not legislated, the inevitable incompleteness of legislation makes interstitial lawmaking a basic responsibility of the federal courts.²⁶ The question in each private dispute is therefore whether a concrete federal interest reaches into it, and Boyle is a case in which one does.

Radiating Federal Interests

A federal interest can reach a lawsuit in which no federal party appears. In Boyle v. United Technologies Corp., the family of a Marine pilot killed in a helicopter crash sued the manufacturer on a state-law design-defect theory, and the manufacturer answered that it had built the helicopter to government specifications and was entitled to immunity.²⁹ Although the dispute involved only private parties, the Supreme Court held that federal common law, not state law, governs the liability of federal contractors. It added that a contractor is not liable if it complied with reasonably precise specifications and warned the government of dangers known to the contractor but not to the government.³⁰

The Court found that two federal interests radiated into the private sphere, and each works through a different mechanism.³¹ The first is the government’s interest in procuring military equipment relatively inexpensively, a field in which government contracts have long been a subject of federal common law. A contractor that state tort law can hold liable for a design the military dictated must price that risk into its bids, and the cost returns to the government as higher contract prices.³² The judgment would run against the manufacturer, but the Treasury would carry the burden.

The second interest comes from the discretionary function exception of the Federal Tort Claims Act, under which a person may not recover damages from the government for actions taken in the exercise of a discretionary function.³³ The Court regarded the choice of a military helicopter’s design as plainly discretionary, so the government would have been immune had it designed and built the aircraft itself.³⁴ A state judgment against the contractor for following that design would reach the same decision by another route, because the contractor would pass the cost along to the government, and the result would be indirect liability for a function Congress shielded from direct liability.³⁵

Both interests point toward a uniform federal defense for contractors that built what the government specified. The same standard governs private disputes generally: a sufficient federal interest is typically found only when applying state law would interfere with some obvious federal purpose. The government’s ability to obtain equipment made to its specifications is such a purpose, because holding manufacturers liable for complying with federal requests would undermine it.³⁶

The two conditions the Court attached to the defense, compliance with reasonably precise specifications and a warning about dangers the government did not know, keep it tied to its reason.³⁷ The federal interest lies in protecting the government’s own choices and in keeping the government informed enough to make them, so a contractor gains protection only to the extent that the claim attacks something the government decided. When the contractor made the choice itself, state liability reaches no decision of the government, and the federal interest has nothing to protect.

Howard v. Lyons applied the same logic to a federal officer. The case was solely a diversity action between private parties, with neither the government nor any federal instrumentality in the suit, yet federal common law governed the validity of a defense raised by a federal officer sued for a tort committed in the course of his official duties.³⁸ The Court reasoned that the officer’s authority to act derives from federal sources and that the privilege is designed to promote the effective functioning of the federal government.³⁹ If state law fixed the privilege’s reach, an officer’s protection would vary with the state in which the plaintiff chose to sue. The principle has also been extended to some suits by private parties against an independent contractor performing its duty under a government contract.⁴⁰

Boyle and Parnell mark the two ends of a spectrum. In Parnell, whether federal bonds were overdue was a federal question because it went to the nature of the rights and obligations the government’s instruments create, while the burden of proving good faith belonged to an essentially private transaction and was decided under state law.⁴¹ Miree sits even closer to that end. In Boyle, by contrast, state liability would have reached the government’s own purse and its discretionary decisions through the contract price. A private dispute moves along the spectrum according to how directly state law would burden a federal purpose, and the identity of the parties adds nothing by itself.

Boyle was decided five to four, and the division shows where the disagreement lies. Justice Scalia, writing for the majority, described a few areas involving uniquely federal interests as so committed by the Constitution and laws of the United States to federal control that state law is preempted and replaced, where necessary, by federal law whose content the courts prescribe. Justice Brennan’s dissent answered that federal common law can displace state law only in “few and restricted” instances.⁴² The dispute was over whether this was an appropriate occasion to displace state law, and both sides accepted that federal common law has a place. The majority also framed its inquiry as the preemption of state law, which cast doubt on the need for the two-step analysis in United States v. Kimbell Foods, under which a court first decides whether federal interests justify federal law and only then decides whether to fashion a uniform rule or adopt state law.⁴³ A later section returns to those two steps.

Congressional silence also entered the debate. Government contractors had pressed Congress for years to create a contractor’s defense by statute and had failed, and the dissent detailed those efforts to argue that the Court should have left the matter to Congress.⁴⁴ The inference from that silence is weak, since Congress has many competing issues and limited time. Treating the absence of explicit statutory authority as decisive would also leave almost no federal common law at all, because such law by definition lacks an explicit statutory basis.⁴⁵