Erie Rule

 

The Erie Problem

 

 

Erie tells us we’ll look at the law of the state for the rules for making basic decisions in diversity cases in federal court. As Erie evolves into the choice between “substance” and “procedure”, we get more balancing tests. Under the Byrd analysis, we have to balance the federal interest against the state interest. The rubric Byrd provided got us to the Guaranty Trust question. Hanna allows us to balance countervailing federal considerations, and even provides a refinement. The courts say: let’s look at it a different way when we look at federal rules on point. Rather than go through the traditional analysis, Hanna tells us we must use the FRCP when we have them and avoid the outcome-determinative test we were initially given. We look instead at Erie’s twin-aims: that’s a pretty explicit efficiency/equity balancing test.

 

 

In diversity cases, a federal court must apply the law that would be applied by the courts of the state in which they sit. By “the law”, we mean court decisions as well as statutes. Most of the time, the Erie issue is not difficult at all. We have a rule: when Congress created the federal court and empowered them to hear diversity cases, it had to tell them which law to use in those cases.

 

 

The Rules of Decision Act – § 1652

 

 

That’s where the Rules of Decision Act (RDA) comes in. It says that federal courts will use state law to decide diversity cases. The RDA has survived virtually unchanged to the present day: 28 U.S.C. § 1652. But what does the statue mean by “the laws of the several states”?

 

 

Swift v. Tyson – If you want to look up the law, we might look up statutes as well as case law. Swift had to figure out what law applied. Justice Story says that court decisions are not laws. Story said that “laws equal statutes” and so state statutes will bind federal courts. But if there are no statutes, we will fill in the gaps with federal common law. Story says that the law is The Law, and is the same and unchangeable everywhere, an idea grounded in Natural Law philosophy.

 

 

Erie Railroad v. Tompkins – Tompkins sued the railroad in the Southern District of New York to try to take advantage of the rule of Swift v. Tyson, which said that federal court didn’t have to use state common law to decide cases. Can federal courts ignore state law when deciding diversity cases? Federal courts must follow and apply both state statutes and state case law in deciding cases unless the case is governed by federal statutes or the United States Constitution.

 

 

Brandeis and the Court attack Swift on several fronts: (1) Swift relied on a bogus interpretation of the Rules of Decision Act, as proven by Chuck Warren. (2) Swift has had disastrously unfair results in practice. (3) Swift is unconstitutional because it usurps part of the power that the Constitution left to the states to make their own laws (statutes and case law).

 

 

Swift, the case, was an unconstitutional result. We don’t typically see the court go out of its way to declare something they previously did as unconstitutional, but Brandeis does go out of his way to try to ground Erie in constitutional analysis.

 

 

Brandeis declares that there is no “federal general common law”. Congress can’t dictate common law to the states. But arguably, we still do have federal common law. Congress can easily use legislative tools to change the substance of state laws (as in statutes). All they have to do is coerce states (by withholding funds, for example) to adopt statutes that Congress prefers.

 

 

The Klaxon rule says that the federal court applies the “choice of law” law of the state in which it sits. This is a variant of Erie. If the court really wanted uniformity, this is where it screwed up. If there was one set of rules on what law should be applied, it would give us a much greater sense of certainty. Recall Piper and its complications.

 

 

Erie says that you must apply the “law of the state”. If there’s a statute, that’s what you apply. If there is no statute, we look at the case law of the highest court in that state. If there isn’t a definite ruling from the State Supreme Court, the federal court must make their Erie “guess”: they must take a stab at predicting what the State Supreme Court would do. There are two ways to do this: (1) Look at intermediate appellate or state district courts. (2) Ask the State Supreme Court directly by “certifying a question” of state law. Most state courts can accept certified questions. (This is rare, because it is discretionary.)

 

 

Guaranty Trust Co. v. York – Can the federal courts hear this suit even though it would be barred if it took place in state court between non-diverse parties? NEW RULE, AGAIN! The outcome of the case in federal court should be the same as it would be in state court. The Court looks to the policy intent of the ruling in Erie and asserts that it doesn’t matter whether state law is substantive or procedural as long as it will have an impact on the outcome of a case.

 

 

York gives us the outcome-determinative test. We don’t look at the name given to the rule by the state to determine whether the rule is substantive or procedural. We want to ensure the case will come out substantially the same whether it is tried in federal court or state court. The problem is that this test goes too far: a lot of crazy little things can be outcome-determinative! If we apply York literally, then the FRCP will kind of wither and die, because virtually every rule will run up against a state rule in conflict. Post-York, there is confusion among the courts about how to apply or limit the rule.

 

 

The eerie Erie three

 

 

Ragan v. Merchants Transfer & Warehouse Co. – If we apply the outcome-determinative test to this case, the outcome will definitely be affected if we use federal instead of state rules. Do we follow the state rule in this case? According to York, we must, and that’s what the Supreme Court holds in Ragan.

 

 

Cohen v. Beneficial Indus. Loan Corp. – The federal rule has no bond. The New Jersey statute says you have to use a bond. Is this outcome-determinative? Yes! Thus, the Supreme Court holds that New Jersey state law trumps FRCP Rule 23.1.

 

 

Woods v. Interstate Realty Co. – Under Mississippi law, you can’t sue in Mississippi as a foreign corporation unless you designate an agent for service of process in Mississippi. Under federal rules, there would be no problem for a Tennessee company to sue in Mississippi without any such agent. The Supreme Court held that the state statute trumps the FRCP again!

 

 

The Byrd balancing test

 

 

It looked like York was swinging the Erie pendulum too far towards using state statutes, laws, and rules. It’s a Byrd, here to save the day!

 

 

Byrd v. Blue Ridge Electric Cooperative – Should the state policy of having the judge decide a particular issue of fact trump the federal rule of having a jury decide in the interest of uniformity of outcome? Our new test says that we will use the federal rule if it’s uncertain whether a different result would follow from applying the that rule instead of the state rule.

 

 

There are three questions that you ask when you deal with Erie issues: (1) Is the state rule bound up with rights and obligations? This is the substantive question. In Erie, the state rule had everything to do with rights and obligations, so the state rule applied. If the answer is yes, state law applies. If the answer to this first question is no, however, you ask the second question: (2) Will applying the state rule dictate the result of the case? This comes out of York. In York, the answer was yes. If the state rule is outcome-determinative, we must ask a third question: (3) Are there countervailing federal considerations?

 

 

The main advantage of Byrd is that it gives us a chance to consider the federal forum’s interest in running things a certain way. This case helps us to preserve the rest of the federal rules and stop the killing off of all the FRCPs! It stops the erosion of the Eerie Erie Three!

 

 

Hanna v. Plumer – When a situation is covered by the Federal Rules, the REA tells you to use the Federal Rule and the only way you’re going to not use the Federal Rule is if it is unconstitutional. But the trick is that the Supreme Court both writes the rules and decides whether they’re constitutional. Thus Hanna gives us a simple way to preserve the FRCP. If the Federal Rules are on point, you use them, unless they are unconstitutional.

 

 

The twin aims of Erie are: (1) Stop forum shopping, and (2) avoid unfair differences in administration of justice between state and federal courts.

 

 

The Rules Enabling Act says that the Supreme Court gets to set the rules of procedure for the federal courts, provided that it does not “enlarge, modify, or abridge any substantive right”. Congress, by statute, empowered the court to create the Federal Rules of Civil Procedure. The REA is different from the RDA. The latter is the law that prescribes the way in which the federal courts decide the legal questions involved in diversity cases.

 

 

Modern Erie

 

 

How do we put Erie, York, and Byrd together with Hanna in order to describe a unified Erie doctrine? Is there a Federal Rule of Civil Procedure at issue? If no, analyze under the twin aims of Erie. That’s Hanna dicta. If there is a Federal Rule, then is there a conflict between the proposed Federal Rule and the state’s procedure? If not, then you use the Federal Rule. Presumably, if there’s no conflict, you can use the state rule as well. That’s a possible explanation for Gasperini. If there is a conflict, then you ask: is it within the REA? If yes, then you apply the Federal Rule. There can’t be a no answer because a court will never declare one of its own rules unconstitutional.

 

 

It turns out that if there is a Federal Rule, there is only one possible result: use the Federal Rule. Is there a Federal Rule or statute on point? If yes, then use it. If not, then we’re into the murkier Erie guess. It’s suggested that we ask the York question: is the rule outcome-determinative? If not, then you use the Federal Rule. If yes, you use the Byrd test which asks if there is an overriding federal interest. If there is a FRCP or statute, we use Hanna. On the other hand, if there isn’t, we use a combination of York and Byrd.

 

 

Burlington Northern Railroad v. Woods – What’s the Erie question? The Erie choice is between the Alabama “specific” rule, or the “discretionary” Federal Rule. The Court rules that the Federal Rule wins! Is there a Federal Rule on point? Yes, and there’s a conflict, so we use the Federal Rule.

 

 

Stewart Organization, Inc. v. Ricoh – Our Erie conflict is between the Alabama precedent (common law) and the federal statute (28 U.S.C. § 1404). Federal law allows you to transfer, while the Alabama Supreme Court has held that forum selection clauses are invalid based on public policy reasons. The conflict isn’t the forum selection clause itself, but between Alabama’s common law provision and a federal statute that says that you can move litigation at the discretion of the court. The Court holds that we shall follow the federal statute. § 1404(a) wins! The decision about whether the rule or statute is on point is the real battleground. If you have any hope of applying a state rule, it must be at the “on point” level.

 

 

Walker v. Armco Steel Corp. – Do we apply the Federal Rule? The Court says that Rule 3 does not affect the statute of limitations, for some reason. The Court gyrates out of the seemingly clear conclusion from the one-sentence-long Rule 3. The Court suggests that there is not a federal statute on point. Once we get there, the opinion makes sense because the twin aims of Erie really are affected. In one forum, you’ll be able to sue, while in another forum you can’t. This was part of the trilogy that came after the outcome-determinative test. The Court was unwilling to let go and reverse itself. Thus, the Court continues to maintain that Rule 3 is trumped by state exception statutes.

 

 

Gasperini v. Center for Humanities, Inc. – This is all about the conflict between the good ol’ Seventh Amendment and New York law. New York state law allowed a review of the jury award by a judge. On the other hand, the Seventh Amendment says that no fact tried by a jury can be reexamined by any other court. In this case, Ginsburg says that we can protect both federal and state interests. The Court rules that the appellate court cannot apply New York law (the Second Circuit was in error) but the federal district court can apply New York law, so it was right.

 

Choice of law

 

 

All courts, state and federal, must make choice of law decisions. The Rule of Klaxon says that a federal court ordinarily must apply the choice-of-law rules of the state in which it sits.

 

 

Choice of law is another place where we see the balancing test. In deciding choice of law, the Restatement tells us that the transactional test that most jurisdictions use is a balancing test that are used to see which jurisdiction has the closest relationship to the claim. Where did the claim arise? Where are the parties? We want to make it easy to litigate issues like this, but we want to make it equitable by ensuring some relationship between the law we choose and the participants in the event.

 

 

There is exception to the rule for cases that are transferred. When a case gets transferred, you apply the choice-of-law rules of the state from which it was transferred. (This is called the Van Dursen & Ferens doctrine.) The point is that a transfer should be no more and no less than a “change of courthouse”, but it shouldn’t change the law that is used.

 

 

Gries v. Modell – Should Ohio law or Delaware law apply to the contract between Gries and Modell? The corporation is incorporated under Delaware law, but the team is in Ohio. Arguably, since Delaware law governs the corporation, Delaware law covers the contracts. However, most state courts will try to apply their own law at first blush. It’s convenient and they’re familiar with it. The Ohio Supreme Court agrees with the trial court that Ohio law should be applied. The Ohio Supreme Court changes the standard by which Ohio courts decide choice of law issues in contract cases. The old rule is that the place where the contract is to be performed governs.

 

 

Why use a “place of performance” rule? It’s an easy, black letter rule. Most contracts have a place of performance, and if you can identify it, you’ll know which state’s rules apply. Also, if a contract is being performed somewhere, it makes sense that the law of that place applies.

 

 

The new test, which comes out of the Restatement of Conflict of Laws, is the most significant relationship test. It’s a factor test! Those factors include: (1) The place of contracting, (2) the place of negotiation of the contract, (3) the place of performance, (4) the location of the subject matter of the contract, and (5) the domicile, etc., of the parties. Note that part of the purpose of the Restatements is to eliminate black line rules and allow more discretion by considering and weighing multiple factors.

 

 

Morgan v. Biro – Does Ohio law or Kentucky law apply to the facts of the case? NEW RULE! The court abandons the old rule of “lex loci delicti” (“the law of the place where the tort was committed”) in favor of a balancing test weighing the following factors: (1) where the injury happened, (2) where the misdeed that caused the injury happened, (3) where the parties are from, (4) where the relationship between the parties is, and (5) additional factors (“section 6”).