Wednesday, September 28, 2011

Diversity as Simulation

One way to think about diversity is as federal "simulation" of state law.  In cases of straightforward diversity jurisdiction – where federal courts hear state law disputes between citizens of different states, e.g., P-Cal sues D-Tex under state law claim X for $100k – federal courts are supposed to pretend to be state courts, and thus accurately apply the substantive law of the state, as the highest court of the state would apply such law.  In that sense, federal courts sitting in diversity are supposed to be merely providing different tribunals – free of the biases against out-of-staters that allegedly afflict state courts – rather than different law.

Courts, of course, do two things: they resolve disputes and make law, i.e., precedent.  A federal court sitting in diversity, however, cannot make state law; state courts are not bound by a federal decision regarding pure state law.  A federal appellate court sitting in diversity can only make law that binds lower federal courts, as in “The Second Circuit declared in Decision X that the law of Connecticut, until the Connecticut Supremes say otherwise, is A.” District courts sitting in the Second Circuit would be bound by the Second Circuit’s view of Connecticut law.

To the extent the view of the Second Circuit differs from the view of Connecticut’s intermediate courts on what the law of Connecticut is, there is the opportunity for forum shopping.  That is, the “different tribunals” of federal diversity jurisdiction have in fact created a body of law different than the body of law declared by Connecticut’s intermediate courts.  An out-of-state plaintiff might be tempted to sue an in-state plaintiff in federal rather than state court, or vice versa, depending on which law was more favorable.

A possible way to avoid this would be if the Second Circuit (for example) were to declare as a jurisprudential rule of the circuit that its views of the law of New York, Connecticut, and Vermont are non-precedential and do not bind lower *federal* courts in the circuit, as to the content of state law.  In this sense, the federal appeals court would be saying, formally, “All we are doing in diversity cases is resolving disputes –offering different tribunals – rather than making law.”  Certainly the prestige of an appellate court opinion could de facto render, by persuasive force, the applicable law in federal court different than the law in state court.  And clearly there are downsides to converting federal diversity courts into non-hierarchical state simulators, but still: does simulation need hierarchy to be effective?  It very well may -- I've only thought about it briefly, in connection with this post, but decided it was a fun topic to ponder.  Thoughts?

--Brendan Maher

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The problem is that Erie disrupts the original constitutional paradigm. Pre-Erie, if you wanted to sue an out-of-state defendant, a plaintiff had to choose between the defendant's home state or, as a default rule, federal common law. This promoted interstate commerce, because no state had an incentive to create law to favor its own citizens over out-of-state plaintiffs or defendants, because the out-of-state party could always opt out of any unfairness by resorting to the federal common law baseline through diversity or removal jurisdiction. Once Erie took away the out-of-state party's right to a neutral federal common-law baseline, we see the mess we have today, where states and their judges move the law to expropriate the gains from interstate commerce for the home state citizens and (especially) attorneys. The Class Action Fairness Act and SLUSA are a couple of kluges designed to prevent such abuses, but it's hard to get federal legislators to act to undo the damage caused by Erie.

Posted by: Ted | Sep 28, 2011 6:59:52 AM

There's been controversy concerning this kind of conflict between the Seventh Circuit and the Illinois courts regarding the applicability of the Illinois Consumer Fraud Act to Illinois actors/corporations that violate the literal terms of the CFA (815 ILCS 505/2) but as to non-Illinois residents. For a while, the federal courts in this circuit held that ICFA did not so apply; then the Illinois Supreme Court said it did; over the following few years, the federal courts changed over and said it did; then the Illinois Supreme Court changed course and said it did not; and the federal courts... are in complete chaos, with some saying that they're bound by the federal precedent and some saying that they're bound by the recent change by the Illinois Supreme Court, and the Seventh Circuit punting in dicta (under the not-entirely-implausible theory that the Illinois Supreme Court's ruling was, itself, a boundary-conditions case and in dicta itself).

So we've got multiple choice of law issues regarding what is, essentially, a choice of law issue... because most states have something quite similar to the ICFA, but with the exceptions of Connecticut and Pennsylvania the jurisprudence isn't as detailed or extensive. The kicker is in the remedies, as usual, but isn't it usually that way?

Posted by: C.E. Petit | Sep 28, 2011 9:46:41 AM

To the extent taken publicly, this would undermine the authority of the federal courts by creating the appearance of illegitimate exercise of authority.

The strategy that was instead taken in the roughly first century of the federal courts was a more or less natural law view. The "common law" simply existed and was out there to be discovered, rather than deriving entirely from the authority of precedents issued by particular courts as the current mainstream legal theory doctrine claims. Since every state's court was discovering the same thing that existed in some Platonic form out there apart from particular state court authority, borrowing freely from courts of many jurisdictions on questions of common law in an undiscriminating manner was perfectly acceptable and special attention to the appellate courts of a particular state where the court sitting in diversity was located was not so important.

Posted by: ohwilleke | Sep 28, 2011 3:58:07 PM

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