Federal Law and Choice-of-Law Reform
June 1, 2023
How much should federal law have to say about the choice-of-law rules used by federal courts in diversity cases? In Klaxon v. Stentor Electric Manufacturing Co., Inc., the U.S. Supreme Court held that federal courts sitting in diversity should apply the choice-of-law rules prevailing in the states in which they sit. This post defends the Klaxon doctrine. After surveying the status quo and its flaws, this post turns to the arguments for general federal choice-of-law rules and highlights the serious problems with a federal solution. Without a clearly superior solution, this post argues for the least-worst approach, which turns out to be Klaxon.
The Klaxon Rule
The Rules of Decision Act provides that “[t]he laws of the several states, except where the Constitution or treaties of the United States or Acts of Congress otherwise require or provide, shall be regarded as rules of decision in civil actions in the courts of the United States, in cases where they apply.” Every law student learns that Swift v. Tyson interpreted these words as authority for federal court to apply general common law rules in diversity jurisdiction cases not governed by state statutes. Over time, federal courts developed a body of non-preemptive general law that often conflicted with the common law of the individual states.
Erie solved this problem (more or less) when it declared that “whether the law of the State shall be declared by its Legislature in a statute or by its highest court in a decision is not a matter of federal concern. There is no federal general common law.”
But Erie did not tell federal courts how to decide which jurisdiction’s law would apply to cross-border cases. In Klaxon v. Stentor, the Supreme Court resolved the issue: “The conflict of laws rules to be applied by the federal court in Delaware must conform to those prevailing in Delaware’s state courts. Otherwise, the accident of diversity of citizenship would constantly disturb equal administration of justice in coordinate state and federal courts sitting side by side.” In other words, federal district courts must apply the choice of law rules of the state in which they sit—and the Supreme Court has made clear that this rule applies whether the case is domestic or transnational.
After 80 years, the Klaxon rule faces practical and conceptual headwinds, which I assess in Some Realism about Choice of Law Statutes and the Common Law: The Oregon Example. On the practical side, the vast majority of published and accessible choice-of-law decisions in most states come from the federal courts. Published choice-of-law decisions from state courts are less common, in large part because trial court opinions are not widely available. Over time, moreover, federal courts inevitably develop their own versions of their home state’s choice of law rules. Under these circumstances, the Klaxon rule may be more form than substance.
Commentators agree, moreover, that state choice of law rules are a mess of conflicting and often open-ended methods. Reform is sorely needed (and is on the way, with the Restatement (Third) of Conflict of Laws). But reform can’t solve this mess, because states remain free to develop their own choice-of-law rules, and Klaxon requires federal courts to use those rules. And, of course, Klaxon therefore accommodates horizontal forum shopping.
The conceptual critique of Klaxon starts with disdain for the disorder of state choice-of-law rules, adds an understandable wish for uniformity, and solves the resulting problem with a heightened assessment of federal interests. As I noted above, federal interests clearly exist. For example, states should not use choice-of-law rules in an arbitrary way to select their own law, and it follows that federal courts should not have to use state rules if they will produce an arbitrary result. But that interest does not threaten Klaxon. Instead, it justifies a subsidiary doctrine: the Allstate/Shutts constitutional rule against arbitrary selection of forum law.
Second, as Allen Erbsen has pointed out, the decision about what choice-of-law rules apply in federal court is itself a federal question—it reflects a clear federal interest in judicial administration and a more fundamental recognition of the federal structure itself, as well as the federal interest in cases that implicate foreign affairs. But of course, Klaxon addresses this issue. As a matter of federal common law, federal courts will apply the choice of law rules of their forum state in diversity actions.
Third, one could argue—alongside Kermit Roosevelt and Tobias Wolff—that the nature of the federal system means that federal court choice-of-law decisions always apply federal common law rules that happen, per Klaxon, to adopt forum state law. Neither Roosevelt nor Wolff argues strongly for general federal choice-of-law rules to replace state rules for diversity cases. Instead, they explore specific situations in which federal rules might make sense. But Marc Rosen takes the larger step; he argues that all choice-of-law decisions by United States courts—including state court decisions—are necessarily federal law decisions. He goes on to claim that, once we realize the inherently federal nature of choice-of-law, the only proper response is to have uniform rules for state and federal court.
I’m skeptical of the argument that all federal court choice-of-law decisions necessarily apply a federal common law rule that happens to mirror the forum state’s choice of law rules. Indeed, Kevin Clermont and Zachary Clopton convincingly argue that Klaxon simply tells federal courts to use state law; it does not incorporate state choice-of-law rules into federal law. And I definitely do not agree that there is a federal interest strong enough to support judicial creation of choice-of-law rules for all diversity cases, let alone for all cases in any court.
Still, reasonable arguments exist for displacing state choice-of-law rules with federal rules in specific situations. Wolff, Roosevelt, Erbsen, and Clopton have identified categories of cases—such as “complex” cases, bankruptcy, and admiralty—that have received special choice-of-law treatment in federal court,. Notably, though, a unanimous Supreme Court pushed back against this trend in Cassirer v. Thyssen-Bornemisza Collection Foundation. Rejecting the idea that a vague federal foreign relations interest might justify a federal choice-of-law rule in Foreign Sovereign Immunities Act (FSIA) cases, the Court stated, “No one would think federal law displaces the substantive rule of decision in those suits; and we see no greater warrant for federal law to supplant the otherwise applicable choice-of-law rule.” More generally, Justice Kagan observed that “only the same choice-of-law rule can guarantee use of the same substantive law—and thus . . . guarantee the same liability” as required by the FSIA.
Cassirer reaffirms the basic Klaxon approach and warns lower federal courts not to go hunting for reasons to make their own choice-of-law rules. It also signals that the Supreme Court has little interest in developing federal choice-of-law rules in general. More specifically, Cassirer clearly indicates that federal courts should not seize on foreign relations interests to develop special rules for transnational cases.
Conceptually, therefore, the case for discarding Klaxon entirely is weak, and even the stronger case for making exceptions to Klaxon for special categories faces doctrinal headwinds. Nonetheless, the practical problems that I discussed still remain. Shouldn’t responsible commentators push for federal choice-of-law rules for in order to address those practical concerns, even if the theoretical claims fall short? Here, too, the answer is no.
Statutory choice-of-law rules make sense in many situations, and Congress could definitely do more to address choice of law in specific circumstances—although it rejected that approach when it enacted the Class Action Fairness Act. That said, I very much doubt that Congress will find the time to draft a choice-of-law code anytime soon, and I’m deeply skeptical that it would draft a good set of rules for all cases. We should not advocate for a federal choice-of-law code without very clear indications that it would be a good one.
It’s more plausible—although still unlikely—that Congress would delegate the development of choice-of-law rules to the federal courts (as was suggested with the Class Action Fairness Act). In that case, we would be in the same place that we’d be if the Supreme Court acted on its own. There are thus two alternative paths.
The first alternative is to overrule Klaxon and have the federal courts develop federal choice-of-law rules for all some or all diversity cases. The inevitable result would be a prolonged confusion as the various circuits came up with choice-of-law rules, with the need for frequent Supreme Court intervention to resolve conflicts. And what kinds of rules would we get? With the current Court majority, I think there’s a fair chance that a new federal common law for choice of law would harken back to the First Restatement. Maybe that’s OK, or maybe it’s not, but Klaxon opponents should at least reckon with that possibility.
And then what? Here the answer is clear: vertical as well as horizontal forum shopping. Differences in choice-of-law rules would lead to different substantive law being applied in state and federal court, which would of course mean differences in outcomes—and litigants would shop for their favored result. As John Coyle has shown, the same dynamic already has emerged for forum selection clauses; federal courts are significantly more likely than state courts to enforce these clauses, thus creating clear incentives to forum shop between state and federal court. Perhaps a sophisticated Erie theorist can explain the benefits of this outcome, but I can’t. The Supreme Court was correct in Cassirer: federal law does not displace “the substantive rule of decision” in these cases, and there is no good reason for federal law “to supplant the otherwise applicable” state rule for choice of law (or for the validity of a forum selection clauses).
The second alternative—and perhaps the best answer to my objection to rules that would apply only in federal court—is to replace Klaxon with a set of preemptive federal choice-of-law rules for all cases in state and federal court. But I’m afraid that preemptive federal choice-of-law rules—especially federal common law rules—are a great example of an idea that makes sense in theory but that would probably fail in practice.
A preemptive federal common law for choice of law would require the Supreme Court to superintend the choice-of-law decisions of every state and federal court. I’m skeptical that the Court has the ability to do that. Instead, each circuit would enforce its interpretation of federal law on the district courts, and each state supreme court would enforce its interpretation on its own courts (although intermediate state courts would probably do the bulk of the work). There is no reason to believe that, for example, the First Circuit and the Massachusetts Supreme Judicial Court would interpret federal common law in the same way, even if both acted in good faith.
My prediction—which I hope is never tested—is that a federal common law of choice of law would end in chaos. The best result would be a period of experimentation followed by a retreat to a bulked-up Allstate/Shutts rule.
The debate over Klaxon thus comes down to three options: (1) overrule Klaxon and let the federal courts develop federal choice-of-law rules to apply exclusively in federal court, (2) develop a set of preemptive federal choice-of-law rules through legislation, or (3) stick with the Klaxon regime. No one who has read this far will be surprised by my conclusion that (1) and (2) are terrible choices. That leaves us with (3)—with Klaxon—as the least-worst choice. Or maybe, considering all of the practical issues, Klaxon turns out to be the best choice after all?