Chapter 6

ASCERTAINING APPLICABLE LAW

ChapterScope
This chapter is concerned with how federal and state courts determine what law to follow. For instance, in a diversity case, is the federal judge required to apply the law of the state in which she sits, or is she free to decide on her own, following other federal cases, what the law should be? In a state case involving a subject of federal concern (e.g., U.S. government bonds), to what extent is the state court obligated to apply principles formulated in federal cases?

The bulk of this chapter is concerned with the choice of law in diversity cases. The choice of law in federal question cases, and in state cases involving matters of federal interest, is treated at the end of the chapter.

Key concepts in this Chapter are:

• Erie v. Tompkins: Under Erie Railroad v. Tompkins, in diversity cases the federal courts must apply state judge-made law (“common law”) on any substantive issue where there is no federal statute on point.
  • “Forum shopping”: A key reason for this rule is to prevent “forum shopping.” “Forum shopping” occurs where a plaintiff chooses between federal and state court based on which system is more favorable to her substantive case. Applying state substantive law in federal diversity cases thus removes the benefits of forum shopping.
• Determining state law: When the federal court tries to apply state law, the standard is, How would the state’s highest court determine the issue if the case arose today?
  • The federal court must also apply state law governing conflict of laws. In other words, the conflict of laws rules of the state where the federal court sits must be followed.
• Procedure/substance distinction: Erie v. Tompkins says that state common law controls in “substantive” matters. But federal rules and policies generally control on matters that are essentially “procedural.” It is thus vital to distinguish between procedure and substance. As to procedural issues:
  • Federal Rules take precedence: Erie is only applicable where there is no controlling federal statute. Since the Federal Rules of Civil Procedure are adopted pursuant to a congressional statute, the FRCP take precedence over state policy when applicable.
  • Federal statute on point: Similarly, where there is a federal procedural statute (as distinct from a Federal Rule) that is directly on point, that statute will control over any state law or policy, even though this may promote “forum shopping.”
  • Case not covered by a Federal Rule or statute: If the issue at hand is not covered by anything in the FRCP or in a federal statute, but the issue is nonetheless arguably “procedural,” the federal court balances the state and federal policies against each other. Where the state interest in having its policy followed is fairly weak, and the federal interest strong, the court is likely to hold that the federal procedural policy should be followed.