Horizontal Choice of Law in Federal Court

Abstract

Federal courts routinely apply state law. In diversity cases, federal courts apply the state law that the forum state would apply—the so-called Klaxon rule. Outside of diversity, the vitality of Klaxon is far less clear. Federal courts have departed from Klaxon when applying state law in cases arising under bankruptcy, admiralty, the Foreign Sovereign Immunities Act, and more. Scholars have called for courts to abandon Klaxon in cases arising under the Class Action Fairness Act (CAFA) or consolidated as multidistrict litigation (MDL). These departures from Klaxon might track offhand references to “diversity” in Klaxon and other Erie cases, but they are inconsistent with jurisdictional and institutional policies of Erie and its progeny. The policies of reducing jurisdictional manipulation and the resulting inequities are relevant no matter the basis of federal jurisdiction. And the policies of respecting state interests and constraining federal judicial lawmaking point to state choice-of-law rules whenever the court has decided to apply state law. Taken together, these policies call for the extension of Klaxon to any case in which state law applies in federal court—and perhaps to other cases where state law plays a role in federal law. Much like Erie itself, these policy concerns are particularly important given the sociolegal context. In Erie, it was the manipulation of diversity jurisdiction that allowed corporate defendants to obtain preferable treatment. Today, it is bankruptcy, CAFA, and MDL that might create those opportunities. Klaxon is the only response consistent with the policies of Erie, the Rules of Decision Act, and the federal jurisdictional statutes. Without it, the accident of federal jurisdiction will unjustifiably alter the state law to be applied.