Diversity Jurisdiction Under Article III

Article III of the U.S. Constitution grants federal courts jurisdiction over "cases and controversies." More specifically, the Supreme Court has interpreted Article III, Section 2, Clause 1 to mean Congress may grant jurisdiction to federal courts in certain circumstances.

One of these circumstances allows courts to hear cases between citizens of different states. This type of jurisdiction — diversity jurisdiction — is one of two ways federal courts may hear disputes.

Generally, courts may exercise diversity jurisdiction when the following factors are met:

• The plaintiffs and defendants are all citizens of different states (i.e., the parties have “complete diversity”), and
• The amount in dispute exceeds $75,000.

Although diversity jurisdiction may seem relatively straightforward, it can get tricky.

For example, if someone has homes in different states, in which state are they a citizen? What about a company whose principal place of business is in Virginia but does business in every state? And what happens if there are multiple plaintiffs and defendants in a lawsuit?

This article begins by providing a brief description of state and federal courts. It then summarizes diversity jurisdiction and its nuances. It also provides historical background about diversity jurisdiction and the landmark Supreme Court case regarding it.

Federal vs. State Courts

Before exploring diversity jurisdiction, it may help to understand the federal and state court systems in the United States. These separate court systems have different functions, structures, and jurisdictions.

Jurisdiction refers to a court’s authority to hear a dispute, apply the law, and render a decision. If a court does not have jurisdiction over a dispute or the litigants, it cannot render a decision. As noted above, Article III allows Congress to grant jurisdiction to federal courts.

A court must generally have two types of jurisdiction before it can review and decide a case:

• Subject matter jurisdiction refers to jurisdiction over the events giving rise to the lawsuit (e.g., a car accident or contract dispute)
• Personal jurisdiction refers to jurisdiction over the parties to the lawsuit (e.g., does the court have jurisdiction over the plaintiffs and defendants?)

The following sections provide brief descriptions of federal and state courts. For more in-depth information, see FindLaw's article Federal or State Court: Subject Matter Jurisdiction.

Federal Courts

The U.S. federal court system consists of the following courts:

• U.S. District Courts
• Circuit Courts of Appeals
• The U.S. Supreme Court

Federal courts have limited jurisdiction. Article III allows Congress to limit the jurisdiction of federal courts to specific types of cases.

Federal courts have federal question jurisdiction and diversity jurisdiction. Federal question jurisdiction refers to cases that arise under federal law. Diversity jurisdiction allows parties from different states to file claims in federal court if the amount in dispute exceeds $75,000.

Federal courts also have exclusive jurisdiction over several types of cases, including:

• Bankruptcy cases
• Patent law disputes
• Cases against the United States government

State Courts

Each state has its own court system. The court systems differ between states. Typically, a state court system consists of the following:

• A trial court
• An intermediate appellate court
• The state’s highest court (often called a state supreme court)

Most litigants will file their civil cases in the state court system. State trial courts are typically courts of general jurisdiction. This means the court has jurisdiction to hear any dispute unless another court has jurisdiction over it.

Federal Diversity Jurisdiction Explained

Federal diversity jurisdiction allows litigants to file civil actions in a federal district court. To do so, they must meet the following requirements:

• Complete diversity of citizenship between the parties to the case
• The amount in dispute (i.e., the claimed relief) exceeds $75,000

These requirements are described in more depth below.

Complete Diversity of Citizenship

Complete diversity means that a party on one side of a lawsuit cannot share state citizenship with a party on the other side (Strawbridge v. Curtiss (1806)). If all parties on each side of the lawsuit are citizens of different states, the plaintiffs may file their case in federal court (assuming their claim exceeds $75,000). Complete diversity also applies to lawsuits involving citizens of foreign states.

Courts analyze where a party domiciles to determine whether it is a citizen of the state. A natural person may only domicile in one state.

Keep in mind that domicile and residence are not the same thing. A person’s domicile is where they have their “true, fixed, and permanent home.”

Another way to think of domicile is where a person “intends to return” when they are absent from it. Even if someone says they domicile in a state, courts analyze a person’s actions and intentions when they determine domicile for diversity purposes. A 1914 Supreme Court case notes that someone can change their domicile “in an instant” because intent is part of the domicile calculus.

Litigation Between Natural Persons

Complete diversity is relatively straightforward in litigation between two people. If the plaintiff and the defendant are citizens of different states, they satisfy the diversity requirement.

In litigation involving more than two parties, complete diversity may be harder to satisfy. To satisfy complete diversity, no party on one side of the case may share citizenship with any party on the other side of the case.

For example, suppose 10 plaintiffs sue 10 defendants in a single case. All 10 plaintiffs are Nevada citizens, and all 10 defendants are Arizona citizens. In that case, complete diversity is satisfied. However, if even one defendant was a Nevada citizen, the plaintiffs could not file a case in federal court based on diversity jurisdiction.

Litigation Between Legal Entities

The rules for determining citizenship for a partnership, business, or corporation are more complicated. Corporations are considered citizens in their state of incorporation and where their principal place of business is located. The Supreme Court has referred to a principal place of business as a company’s “nerve center.” (Hertz Corp. v. Friend (2010)).

Unincorporated entities, like partnerships and unions, do not follow the same rules as corporations. Instead, the court considers each member’s citizenship when determining whether diversity exists (Great Southern Fireproof Hotel Co. v. Jones (1900)).

Class Action Lawsuits

A class action lawsuit involves a named plaintiff who sues a defendant on their own behalf and on behalf of a group of people who alleged the defendant caused them similar injuries. Class sizes vary but sometimes consist of thousands of members.

The Class Action Fairness Act of 2005 (CAFA) provides that courts may exercise diversity jurisdiction to hear class action lawsuits so long as “minimal diversity” exists. The court only considers the named plaintiff’s citizenship for diversity purposes. Therefore, class members may share citizenship with the defendant.

Amount in Controversy

Per 28 U.S.C. § 1332, federal courts may only exercise diversity jurisdiction over disputes in which the relief claimed exceeds $75,000 in value. Therefore, if the plaintiff claims exactly $75,000.00, the court cannot exercise jurisdiction over the dispute.

CAFA also sets a $5 million amount in controversy requirement for class action lawsuits. Class members cannot aggregate the value of their claims to satisfy the requirement.

The amount in controversy requirement does not include interest and costs.

Examples

To better understand federal diversity jurisdiction, consider the following examples:

Scenario #1

Adam and Zach were involved in a car accident in Minnesota. Adam is a Minnesotan, and Zach is an Iowan.

Adam files a civil lawsuit against Zach in a federal district court in Minnesota. Adam claims $100,000 worth of property damage and medical bills stemming from the accident.

The court can hear the case because it meets all the diversity jurisdiction requirements:

• Adam, the plaintiff, is a Minnesota citizen, and Zach, the defendant, is an Iowa citizen. Therefore, the parties are completely diverse.
• Adam’s claim exceeds the $75,000 statutory requirement.

Therefore, the court may exercise diversity jurisdiction over Adam’s case.

Scenario #2

Paul, a Texas resident, was on vacation in Florida. He was riding his bicycle on the sidewalk. Kate, a Florida citizen, was walking her dog on the same sidewalk. Kate’s dog attacked Paul, causing him to fall off his bike and break his arm.

Paul filed a civil lawsuit against Kate in a Florida federal court. He claimed $25,000 for medical bills related to his broken arm.

The court could not hear Paul’s case. Although complete diversity exists between him and Kate, his claimed relief does not exceed the $75,000 statutory requirement.

Scenario #3

Mason ordered 10,000 candles from Karlie’s Candles, a candle manufacturer based in Wyoming. Karlie’s Candles is incorporated and has its principal place of business in Wyoming. Mason lives in Wyoming.

When Mason received the order, all the candles were missing their wicks. He filed a lawsuit against Karlie’s Candles in a federal court in Wyoming. He requested $100,000, which was the purchase price of the candles.

Although Mason’s claim satisfies the $75,000 amount in controversy requirement, both Mason and Karlie’s Candles are Wyoming citizens for purposes of diversity jurisdiction. Therefore, the court cannot exercise federal diversity jurisdiction over the case because there is no diversity of citizenship.

Historical Background of Diversity Jurisdiction

The Library of Congress notes that the records from the Constitutional Convention are silent as to why the Framers specifically gave the federal judiciary the power to resolve conflicts between citizens of different states. Since the Judiciary Act of 1789’s enactment, Congress has granted diversity jurisdiction to federal courts.

In 1809, Chief Justice John Marshall opined on the judicial power of the United States and diversity jurisdiction. He wrote that state courts must “administer justice as impartially” as federal courts.

However, he noted that the Constitution addresses the “possible fears and apprehensions” of foreign nationals and citizens from different states regarding fair trials. His opinion is the “traditional explanation” for why Congress gave federal courts diversity jurisdiction.

As the Library of Congress notes, the “essential difficulty” with diversity jurisdiction is that it “requires federal judges to decide issues of local import on the basis of their reading of how state judges would decide them.” It may also take extra time and labor for federal judges to do so compared to state court judges.

Choice of Law in Diversity Cases - The Erie Doctrine

Plaintiffs typically do not base their diversity cases upon federal laws. Instead, they usually involve disputes regarding state laws. The question then becomes which state’s laws apply to the lawsuit.

Two acts of Congress affect which law applies to a diversity case. Congress passed the Rules of Decision Act in 1789. It states that federal courts sitting in diversity must apply state laws unless federal law or the Constitution preempts state law.

Section 34 of the Federal Judiciary Act of 1789 also bears on the choice of law. The Supreme Court interpreted it to mean that federal judges could apply state laws to cases brought to federal court under diversity jurisdiction. For a while, federal judges also applied state court decisions to dispose of cases.

However, one of the Supreme Court’s early cases changed that procedure. In Swift v. Tyson (1842), the Court held that state court decisions did not bind federal judges in diversity cases.

Instead, the Court held that judges could generally rely on “federal common law” and give less weight to state or local laws. In other words, judges had discretion as to whether to apply state or federal common law to a dispute and how much weight to give to state common law interpretations.

Federal courts relied on the Swift rule for almost 100 years. In 1938, however, the Supreme Court issued its decision in Erie Railroad Co. v. Tompkins. That case involved a question of choice of law when no federal or state laws addressed the issue. The Court overruled itself and created the modern rule for applying state law in federal diversity cases.

Erie Railroad Co. v. Tompkins (1938)

The Erie Doctrine comes from the Erie case and applies to diversity cases. At its most basic level, it sets forth the following:

• In diversity cases, federal courts must generally apply state laws to substantive issues of law.
• Federal courts must apply federal laws to procedural issues presented in diversity cases.

Erie involved a dispute between the Erie Railroad Company (a New York corporation) and Harry Tompkins (a Pennsylvania citizen). Tompkins was walking near railroad tracks in New York when one of the Erie Railroad Company’s trains struck him.

Tompkins filed a lawsuit against the Erie Railroad Company in a New York federal court. He invoked diversity jurisdiction to file the case in federal court.

Erie Railroad argued at trial that the court should use Pennsylvania state law to decide the case. Under Pennsylvania state law, Tompkins would have likely been trespassing on the train tracks. If they had prevailed on their argument, Erie would likely not have been liable for negligence.

The U.S. District Court for the Southern District of New York denied Erie’s request. Based on precedent to that point, the federal judge held that federal common law applied to the case. Federal common law labeled Tompkins as a licensee, and, therefore, he was allowed on the premises.

The jury found Erie liable for Tompkins’ damages and awarded him $30,000. The U.S. Court of Appeals for the Second Circuit affirmed the verdict. Then, Erie Railroad appealed to the Supreme Court.

In a 6-2 decision, the Supreme Court overruled Swift and ruled in favor of Erie. Justice Louis Brandeis first wrote about how the Court incorrectly interpreted Section 34 of the Judiciary Act of 1789. He noted that the correction interpretation was that federal courts must use state statutory and common law in diversity cases unless a federal statute explicitly conflicted with the law.

Justice Brandeis then noted the defects of the Swift doctrine. These included the following:

• State courts’ persistence in ruling on common law issues led to uniformity issues between federal courts.
• It allowed noncitizens to discriminate against citizens of another state because noncitizens could decide to file the case in federal court rather than in state court.

The Court also wrote that there is no “federal common law.” Instead, states created laws via statute, common law, or through their highest courts’ rulings. The Constitution does not give the judiciary a constitutional right to declare laws applicable in a state. In short, the Swift doctrine was unconstitutional.

The Court reversed the Second Circuit’s ruling and remanded the case to a lower court. The Court instructed the lower court to consider the case in light of its ruling that Pennsylvania law was appropriate to apply in the case.

In summary, the Erie Doctrine states that federal courts sitting in diversity must apply state substantive law to the substantive issues in a case. They must also apply federal law to procedural issues. It also clarifies that state court decisions bind federal courts in diversity cases. The only exception is when a federal law conflicts with state law (due to the Supremacy Clause).

The Erie Doctrine’s Effect and Evolution

Erie was a landmark Supreme Court case regarding civil procedure and federalism. Legal scholars have noted that no case in the twentieth century impacted the “distribution of judicial power between the federal government and the states as has [Erie].” It was also the only time in American history that the Court acknowledged that it had violated the Constitution.

The Erie Doctrine has evolved since 1938. For example, if the state’s highest court has not decided an issue, federal courts “are to give careful consideration to lower state court decisions.” However, the federal court “generally must construe the state law themselves” in such situations.

In diversity cases where two state laws conflict, the Supreme Court has ruled that the federal court must apply its own state law. For example, suppose a diversity case involves conflicting state laws from Oregon and Idaho. The plaintiff filed their case in an Oregon federal court, but the Idaho state laws apply to the case. In that situation, the federal court would apply Oregon’s conceptions of the applicable Idaho state law. (Klaxon Co. v. Stentor Manufacturing Co. (1941)).