Defining Federal Common Law

Defining Federal Common Law

Erie rejected "general federal common law" in diversity cases, yet the Supreme Court has kept fashioning judge-made rules in areas of federal interest. The resulting federal rules of decision make up what is now called federal common law.¹ Clearfield Trust Co. v. United States shows what the label means in practice. A government check bore a forged endorsement, and the question was whether the United States' delay in notifying the bank of the forgery cost it the right to recover. No federal statute answered that question. The Supreme Court held that federal common law may govern an issue implicating uniquely federal interests even when no federal statute directly controls, so the rules governing checks payable by the United States come from a uniform federal judge-made standard rather than from varying state laws. No text supplied the rule. The Court chose it, and that act of choosing is what makes the rule federal common law.

Stated generally, federal common law is a rule of decision, meaning the legal standard a court applies to resolve the dispute before it, that a federal court creates when no controlling provision of the Constitution, a federal statute, or a treaty supplies one.² The same idea appears in compressed form as the body of decisional law that federal courts produce when they adjudicate federal questions and other matters of federal concern, such as disputes between the states and foreign relations, excluding cases governed by state law.³

The definition yields a working test: whenever a federal court is free to decide for itself which rule governs a question, it is applying, or making, federal common law.⁴ The freedom to choose is the point. A court bound by a controlling text has none, and neither does a diversity court that must apply a state's rule under Erie. The freedom usually appears in a field where the Constitution and federal statutes establish a federal interest but do not specify a rule. Courts then fashion rules to advance and protect that interest, with little useful guidance from Congress.⁵ That was the silence the check dispute presented.

Federal courts also do a great deal of work with federal law that creates no rule in this sense. When a court interprets the Constitution or a statute, the rule of decision rests on a controlling provision of federal law, and the court's task is to determine what that provision means.⁶

The check dispute falls on the other side of the line. The court there had no provision whose words, however read, answered the question about the government's delay, and common lawmaking begins at that gap in the text.

The line blurs at the edges, and it is worth admitting as much. Statutes always require interpretation, and the line is hardest to draw when Congress writes a command so broad and indefinite that it virtually invites the courts to supply the statute's substance.⁷ The Sherman Act is the standard example. After 130 years, much of its substantive meaning has come from federal courts acting in a manner not strikingly different from a common-law court.⁸ Whether a given ruling is interpretation or creation therefore depends partly on how clear one finds the controlling command and how broad a theory of interpretation one prefers.⁹ This chapter concentrates on the creation of rules where no text controls and leaves routine statutory interpretation to one side.

The distinction still matters because the two activities justify themselves differently. The Rules of Decision Act obliges federal courts to apply state law except where the Constitution, laws, and treaties "otherwise require or provide." That exception authorizes federal judges to interpret the Constitution and laws, but it may cast doubt on the legitimacy of federal common law that lacks a similar textual warrant.¹⁰ The same worry explains what Erie did and did not decide. Erie did not reject the idea that federal courts can make law. It held that their lawmaking powers are limited by Article I, which constrains the national government vis-à-vis the states, and by the separation of powers, which constrains the federal judiciary in particular.¹¹ Judicial lawmaking seems least troubling when Congress has, explicitly or implicitly, invited the courts to supply principles in common-law fashion on a subject Congress itself has power to regulate.¹²

Federal common law is also genuine federal law, which separates it from the general common law of the Swift era. It enters the vertical choice of law, the choice between state and federal law with federal law understood as the higher law under the Supremacy Clause.¹³ It therefore works like any other federal rule of decision. It displaces conflicting state law, obligates state judges to give it effect, and provides the basis for Supreme Court review. It thus lacks the spurious quality that defined general federal common law under Swift v. Tyson.¹⁴ The D'Oench, Duhme case, which asked whether the accommodation maker of a note could assert a no-consideration defense against a federal agency that held the note by assignment, supplies the image. Federal law is "no juridical chameleon changing complexion to match that of each state wherein lawsuits happen to be commenced." It is found in the Constitution, statutes, or common law, and federal common law implements the Constitution and statutes and is conditioned by them.¹⁵