CHOICE OF LAW

WHAT IS IT?
A set of rules used to determine which body of law to apply in a lawsuit regarding a state claim (i.e. Ks or tort
claim) brought under diversity jurisdiction (or supplemental jurisdiction via diversity jurisdiction).

WHEN ARE YOU LIKELY TO USE IT?

When there is diversity jurisdiction—where the plaintiff and defendant are from different states. In diversity
jurisdiction cases, ‘state law’ governs. ‘Choice of law’ rules set forth by Erie and Klaxon will tells us which state’s
law to apply.

WHAT’S THE LEGAL HISTORY BEHIND IT?

Erie RR v. Tompkins
 Facts: Tompkins, a citizen of PA, was injured in that state when he was hit by an object protruding from a
passing train while he was walking along railroad tracks.
o Tompkins brought a tort claim for negligence against the railroad, which was incorporated in
New York, in New York federal district based on diversity of citizenship (diversity jurisdiction)
o Tompkins invoked federal common law precedents and Erie invoked PA common law—the
outcome of the case depended on the law that was applied.
 Resulting Rules:
o All law is the product of state power
o Federal courts are not authorized to make federal common law (limited power)—only law in
domains where it has constitutional legislative power.
 Congress has not delegated federal courts the power to make tort or contract law for
interstate commerce. Therefore, under Congress’ Rules of Decision Act (RDA),
federal courts must apply state law to cases brought forth by diversity jurisdiction.

HOW TO APPLY IT.

Question # 1: federal law or state law?
Federal law – federal question cases
State law—diversity cases where state law applies (i.e. Ks, torts)
Question # 2: if state law, which state’s law?
Klaxon v. Stentor tells us that federal courts must follow the ‘choice of law’ rules in the state in which
they sit when deciding on which state law to apply in a diversity jurisdiction case.
Question # 3: if applicable state law hasn’t resolved the issue yet?
The court must make an “Erie Guess,” making an educated guess about how the state’s Supreme Court
would resolve the issue. A federal court will consider one or more of the following to make their educated
guess:
1. The State’s Supreme Court decision on an issue analogous to the one at hand
2. Trends across the states to determine if there is a majority position
3. Looking to the way in which State “X” resolved the issue, if it known that this state generally
follows State “X’s” laws
Note: State laws govern the fiduciary duties that managers owe to their shareholders. Most
states, who are presented with an issue of this type, will generally adopt Delaware business
law to resolve the issue because Delaware courts are highly regarded for their knowledge in
business law.

REMEMBER.
State courts are only bounded by the precedential authority set forth by the Supreme Court on federal issues.
 State courts not bounded in the following scenario:
NY federal court settles a PA state regarding a tort issue. NY federal court uses Erie guess to determine
what they believe is the way in which PA state court would resolve this issue. PA courts are not bound to
this determination by the federal law.