The Swift Regime

Erie Without a Federal Rule

The Swift Regime

A federal court that hears a contract suit between citizens of different states is usually deciding a claim that state law created. The Constitution gives Congress no power to enact a general law of contracts, and the same is true of torts and property, so the rule of decision in these cases will usually come from the states.¹ Congress anticipated the situation in section 34 of the Judiciary Act of 1789, the Rules of Decision Act, which survives as 28 U.S.C. § 1652. Unless the Constitution, a treaty, or an Act of Congress provides otherwise, the laws of the several states "shall be regarded as rules of decision in civil actions in the courts of the United States, in cases where they apply."

The Act plainly reaches state constitutions and statutes. The harder question was whether it also reaches common law, meaning the rules judges establish while deciding individual cases, as opposed to rules a legislature enacts. Judges make common law constantly, because cases present issues that no statute addresses.² In Swift v. Tyson (1842), the Supreme Court held that federal courts in diversity cases must apply state constitutional and statutory law but are not bound by the common-law decisions of the state's highest court.³

Justice Story drew the line with some precision. Section 34, he wrote, covers "state laws strictly local": the positive statutes of the state, the local tribunals' construction of them, and rights and titles to things with a permanent locality, such as real estate. It does not reach the construction of ordinary contracts or "questions of general commercial law," where the federal courts, like the state courts, must reason from general principles and legal analogies to the right rule. The Court later summarized the holding this way: in matters of general jurisprudence, federal courts "need not" apply the unwritten law of the state as declared by its highest court, and they are "free to exercise an independent judgment as to what the common law of the State is — or should be."⁴

That line made sense inside the theory of law that Story's generation held. The textual argument rested on ordinary usage: the laws of a state are its legislature's enactments or long-established local customs having the force of law, and "[i]n the ordinary use of language it will hardly be contended that the decisions of courts constitute laws."⁵ Behind the argument stood a view of the common law as a universal body of principle that existed independently of any court. Judges discovered it; they did not create it. A state supreme court's opinion on a commercial question was therefore evidence of the universal rule, not the rule itself, and the Act's reference to "laws of a state" said nothing about it. Nor was there any reason to prefer a state judge's discovery over a federal judge's. Federal judges, elevated from among the bar's best, might even be the better discoverers.⁶

In practice, one state came to contain two bodies of common law, and the courthouse decided which one governed. A contract suit filed in state court might be decided under rule X on damages, while the same suit filed in federal court under diversity jurisdiction was decided under a different rule Y. A lawyer could predict the result simply by noting which court would hear the case.⁷ A client who asked whether a contract would be enforced could be told only "yes" or "no" depending on whether the suit could get into federal court. If the other company was a Kentucky citizen sued in Kentucky, the Kentucky courts would not enforce the contract, but if diversity existed and the suit was brought in federal court, it would be enforced.⁸ That difference is the engine of forum shopping, the choice of state or federal court because the law applied there favors your side.

The advantage ran to litigants from out of state. An out-of-state plaintiff could file in whichever court viewed the common law more favorably to the client, and the in-state defendant, who had no say in the forum, was stuck with the choice. When the out-of-state party was the defendant, the in-state plaintiff could force the federal court to hear the case by filing there. If the plaintiff chose state court, the out-of-state defendant could remove to federal court whenever the federal view of the common law was better.⁹ By the end of the nineteenth century, state courts of supreme appellate jurisdiction regularly published their decisions in bound volumes, and the West Reporter system put those volumes in lawyers' hands. Lawyers could see exactly where state and federal law diverged, and the resulting disparities created forum-shopping opportunities of the kind most famously exploited in Black & White Taxicab Co. v. Brown & Yellow Taxicab Co.¹⁰

That 1928 case made the advantage stand out in bold relief.¹¹ Brown & Yellow, a Kentucky corporation owned by Kentuckians, and the Louisville and Nashville Railroad, also a Kentucky corporation, wanted Brown & Yellow to have the exclusive privilege of soliciting passengers and baggage at the Bowling Green railroad station, with Black & White, a competing Kentucky corporation, kept from interfering.¹² Kentucky's common law would not enforce that arrangement, so Brown & Yellow reincorporated in Tennessee, and the Tennessee corporation sued its Kentucky competitor in federal court. The federal court enforced the exclusivity, and the Supreme Court upheld the result. Nothing about the taxi business at the Bowling Green station had changed. The reincorporation produced diversity of citizenship, diversity opened the federal courthouse, and there the judge applied an independent view of general common law that Kentucky's courts did not share. Criticism of the Swift approach became widespread after that decision.¹³

The freedom Swift gave federal courts had a boundary, and the boundary marks where forum shopping stopped paying. Where a local statute was on point, Swift agreed that the Rules of Decision Act made it applicable. That included state case law construing the statute and decisions on matters regarded as inherently local, such as real estate. Only when no local statute governed and the case turned on the "general" common law did the federal court apply general federal common law in place of the state's.¹⁴

The line between statutes and judge-made law follows the theory behind the regime. A statute is an enactment by a lawmaking authority, so even a federal judge who believed in a universal common law had to obey it, while a judicial opinion was treated as a fallible attempt to report principle that existed independently. The usual error is to say that Swift let federal courts ignore state law entirely. It let them ignore only the state judges' decisions on general common-law questions.