Limits of the Klaxon Rule

Limits of the Klaxon Rule

Klaxon tells a federal court in diversity to apply the conflicts rules of the state where it sits, and Erie supplies the reason: the court must apply the forum state’s substantive law, conflicts rules included, and may not create a federal general common law to govern a state-law claim.¹ The earlier sections followed that instruction through its ordinary operation, from the forum’s choice-of-law rule to the chosen state’s law to the question of whose rule travels with a transferred case. Each step took two things for granted. The state rule is one the state may constitutionally have, and the claim is one for which state law supplies the rule of decision.

Three situations test those assumptions. A state rule may reach farther than the Constitution lets the state go, and a federal court’s deference stops at that line. A label such as “substantive” may mean one thing for Erie and another for the state’s own conflicts doctrine, as it does for limitations periods. And a claim may be in federal court for a reason other than diversity, in which case the question is whether state law still supplies the rule of decision. The subsections below take the three in that order.

Constitutional Limits on State Rules

When two states connect to a case and their laws differ, the choice between them often decides whether the claim lives or dies.² A litigant with that much at stake will test the state’s choice-of-law rule against every available objection, and Klaxon itself invites the Constitution into the test. The Court described each state’s freedom to pursue local policies that diverge from its neighbors’ as a freedom exercised “within the limits permitted by the Constitution,” and it said Delaware could decide whether forum law or some other law governs a matter “subject only to review by this Court on any federal question that may arise.”³ The federal court defers because the conflicts rule is the state’s own law, and Erie rests on the Tenth Amendment, which reserves to the states matters not governed by federal sources.⁴ A state’s power to make law ends where the Constitution ends it, so Klaxon assumes a state rule that stays inside that line.

Klaxon itself rejected an argument from the Full Faith and Credit Clause. The dispute arose from a New York contract, and section 480 of the New York Civil Practice Act added interest to contract damages. The respondent contended that the clause required Delaware to apply section 480 whatever Delaware’s conflicts rules provided, and it relied on John Hancock Mutual Life Insurance Co. v. Yates, where a New York statute was so integral to an insurance contract that Georgia had to sustain the contract under the clause. The Court found the analogy inapt. Section 480 had no bearing on the contract’s validity. It went only to interest, an incidental item of damages on which courts at the forum had commonly been free to apply their own law or another’s. “Nothing in the Constitution ensures unlimited extraterritorial recognition of all statutes or of any statute under all circumstances,” and the clause “does not go so far as to compel Delaware to apply § 480 if such application would interfere with its local policy.”⁵ The Court reversed and remanded “for decision in conformity with the law of Delaware,” leaving the Delaware cases to the court of appeals.⁶

The limit that matters more often runs against a state that applies its law to a dispute it barely touches. A state may not apply its own law where it has no “significant contact . . . creating a state interest,” and a federal court sitting in diversity may not do so either.⁷ Allstate Insurance Co. v. Hague states the standard: the state whose law is chosen must have a significant contact or aggregation of contacts creating state interests, so that the choice is neither arbitrary nor fundamentally unfair. The reasoning holds in reverse as well. A state may not apply another state’s law when that state has no such contact, and a federal court in diversity is bound in the same way.⁸

Add a real contact and the result changes. If the collision had happened in F, or the defendant were an F business, F would have a significant contact, and the federal court would follow F’s rule as it follows any other state rule.

A federal judge’s objection to a state rule differs from a constitutional objection, and Day & Zimmermann, Inc. v. Challoner marks the difference. The court of appeals there found Cambodia a disinterested state and concluded that Texas itself would not have applied the law of the place of the tort, so it applied local law in place of the Texas rule that pointed to Cambodia. Its opinion stopped short of calling the Texas rule unconstitutional.⁹ The Supreme Court required the federal court to apply the Texas rule anyway.¹⁰ Disagreement with a state’s method, or a prediction that its courts would change the method, gives a federal judge no license to depart. Criticism of a rule’s results does not either. The traditional last-act rule can produce arbitrary consequences, and the modern answer to whether it should be reconsidered is “perhaps,” but that reconsideration belongs to the state’s own courts.¹¹

Limitations Periods and Labels

The word “substantive” does not mean the same thing everywhere, and a limitations period shows how much Klaxon’s instruction depends on which meaning is in play. “Substantive” and “procedural” are shorthand for a choice-of-law decision reached after analysis. They do not reveal the analysis, and the same rule may take a different label depending on the question asked. A statute of limitations is substantive for vertical (Erie) purposes and generally procedural for horizontal (state-to-state) purposes.¹³

The vertical label comes from Guaranty Trust Co. v. York. The question was whether a state limitations period or the federal laches principle, a judge-made doctrine against stale claims, should govern a diversity case. The outcome for the parties would differ dramatically depending on the answer, and the Court, speaking through Justice Frankfurter, held that the state statute must govern.¹⁴ Thus was born the outcome-determinative test: if applying one rule or the other would substantially determine the outcome, the state rule applies. Frankfurter’s reasoning was that “if a plea of the statute of limitations would bar recovery in a State court a federal court ought not to afford recovery.”¹⁵ A limitations defense either ends a claim or lets it go forward, so a federal court free to ignore the state period would let a plaintiff whose claim had expired in the state courthouse revive it across the street. That is the accident-of-diversity advantage Erie forbids. Commentators find the result palatable and the rationale elusive, and since limitations rules historically keep evidence fresh and spare courts a plethora of old cases, it is hard to see why Congress could not enact such a rule for the federal courts.¹⁶ The vertical rule therefore rests on Erie’s outcome concern and not on any bar to federal timing rules.

The horizontal label answers a different question: when another state’s law governs the merits, does the forum still apply its own limitations period? Many forums say yes, because they treat limitations as procedural for choice of law.¹⁷ The same statutes serve the forum’s own courts by keeping stale evidence out and old cases off the docket, so a forum may regard the timing question as its own business even when another state’s law governs the rest.¹⁸ The Supreme Court has allowed a forum to apply its own longer period to a claim governed by another state’s substantive law, in Sun Oil Co. v. Wortman.

The two labels answer two questions, and Klaxon connects them. The Erie label tells the federal court that state law, and no federal timing rule, supplies the answer. Klaxon then tells the court which part of the state’s law that is: whatever the forum’s courts would do, including how they treat limitations. The federal judge must achieve vertical uniformity by applying the same law the state judge would.¹⁹ A New York state court may apply New York’s own period because limitations is procedural for choice of law, and a federal court in New York must make the identical choice because limitations is substantive for Erie. The same duty means that federal courts in different states can reach different results on the same facts, the horizontal disuniformity that follows from vertical uniformity.²⁰ A litigant who argues that Erie requires the period of the state whose law governs the merits has run the two labels together.

The lawyers gain nothing by arguing over the labels. In the first version, the trucker’s lawyer gets nowhere by arguing that limitations is substantive and State A’s two-year period must therefore follow State A’s law, because “substantive” for Erie only means that state law supplies the period. In the second version, the driver’s lawyer gets nowhere by arguing that limitations is procedural and the federal judge may apply a federal timing practice. The facts, the courthouse, and the judge are the same in both versions, and only State B’s treatment of limitations differs. Klaxon makes that treatment the federal court’s own, so the result tracks the state court and not the judge’s view of the better classification.

The usual error is to answer step three with the Erie label, reasoning that a substantive rule must come from whichever state’s law governs the claim. The Erie label settles only that state law supplies the period. The forum’s conflicts treatment of limitations decides which state’s period it is.

Claims Beyond Diversity

Klaxon reaches exactly as far as Erie’s command to apply state law, because the forum’s conflicts rules belong to the state law that Erie requires a federal court to apply.²⁴ Where state law supplies the rule of decision, the Klaxon instruction follows. Where federal law supplies it, the instruction has nothing to attach to. That distinction sorts the settings below.

In a federal-question case, the court applies federal law, and federal common law rather than state common law usually fills the gaps.²⁵ Suppose a plaintiff sues the United States in the Northern District of Texas on a claim that raises a federal question. Even if Texas law would find the United States not negligent, the court may and should apply general federal common law principles. Justice Jackson explained the point in a case against the Federal Deposit Insurance Corporation: a federal court in a non-diversity case does not sit as a local tribunal, and “Federal law is no juridical chameleon changing complexion to match that of each state wherein lawsuits happen to be commenced because of the accidents of service of process and of the application of the venue statutes.”²⁶ Klaxon matches the federal courthouse to the state courthouse next door, while a federal claim is supposed to mean the same thing in every district.

The line blurs where federal law opens the courthouse without supplying the substantive rules. The Foreign Sovereign Immunities Act contains no liability-creating rules, so a court that gets past immunity must still decide which law governs the claim, and courts are divided. Some follow Klaxon and apply the choice-of-law methodology of the state where they sit. Others apply an independent federal approach, usually borrowed from the Second Restatement.²⁷ In practice the difference may be small, because most state courts follow a similar approach. Still, Klaxon has little claim to application where the need for uniformity is strong, and federal courts should reserve the power to apply an independent approach, especially if a state’s approach could produce an unusual rule that defeats a foreign sovereign’s legitimate and reasonable expectations.²⁸

A state-law claim attached to a federal claim stands differently. Supplemental jurisdiction supplies the power to hear the claim and leaves the source of its law unchanged. The claim remains one for which state law supplies the rule of decision, so Erie and Klaxon apply and the court follows the conflicts rules of the state where it sits.²⁹ Erie reaches pendent state claims under United Mine Workers v. Gibbs, and the Seventh Circuit applied Klaxon to pendent state claims in Baltimore Orioles, Inc. v. Major League Baseball Players Ass’n.

One courtroom and one set of events therefore produce two routes to the governing law, and the source of each claim decides which route applies.

The justification for Klaxon is thinnest where no state court could have heard the claim. The rule buys harmony between the federal and state courts of one state at the price of continued divergence among states, and the harmony it buys disappears when the state court would have lacked jurisdiction. Federal interpleader, cases under the 100-mile “bulge” rule, and cases of pendent jurisdiction fall in that group.³⁰ For state claims supported only by pendent personal jurisdiction, commentators advise federal courts to avoid the strong forum bias of state conflicts doctrine and to choose a law that does no violence to the defendant’s reasonable expectations.³¹ Those arguments press for exceptions at the margins. The baseline for a state-law claim remains the forum’s conflicts rules.

State-law class claims show the same continuity. The Class Action Fairness Act moved most multistate class actions into federal court but left choice of law where it was, so the forum’s conflicts rules still select the governing law. The Supreme Court addressed the problem of one state’s law governing a multistate class in Phillips Petroleum Co. v. Shutts, a state-court class action brought under a Kansas rule similar to Rule 23 for thousands of royalty owners who claimed interest on delayed royalty payments for natural gas produced by Phillips Petroleum.³² The practical effect shows up at certification. If the forum’s rules require a nationwide class to be governed by the law of the place of injury, a class with members in all fifty states and the District of Columbia could implicate up to fifty-one sources of law, and applying that many laws is onerous, particularly before a jury. Numerous courts have held that the need to apply many laws makes individual questions predominate over common ones and defeats certification under Rule 23(b)(3), though some courts have certified such classes anyway.³³

Federal Rule of Evidence 501 draws the same boundary for privilege. Federal common law governs a claim of privilege unless the Constitution, a federal statute, or rules prescribed by the Supreme Court provide otherwise, but in a civil case state law governs privilege regarding a claim or defense for which state law supplies the rule of decision. The Rules of Evidence took effect on July 1, 1975, and their reach into the law applied in federal courts is wide.³⁴ When state privilege law applies and more than one state is involved, Rule 501 does not say which state’s privilege governs. Some commentators argue that Rule 501, as an act of Congress, frees federal courts from state conflicts principles. A majority of the decisions since the Rules took effect have kept following Klaxon and looking to the forum state’s choice-of-law rules to decide whose privilege applies.³⁵