By FindLaw Staff | Legally reviewed by Renee Guolee, J.D. | Last reviewed June 15, 2022
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The Constitution grants the Supreme Court jurisdiction to hear cases. One of the requirements a case or controversy must have to be heard is diversity of jurisdiction. Diversity jurisdiction means that the parties must be citizens of different states and the dollar amount in question must be over a certain amount. If the case or controversy does not meet the diversity jurisdiction requirements, it cannot be heard in federal court.
Article III, Section 2, Clause 1:
The judicial Power shall extend to all Cases, in Law and Equity, arising under this Constitution, the Laws of the United States, and Treaties made, or which shall be made, under their Authority;—to all Cases affecting Ambassadors, other public Ministers and Consuls;—to all Cases of admiralty and maritime Jurisdiction; to Controversies to which the United States shall be a Party;—to Controversies between two or more States; between a State and Citizens of another State, between Citizens of different States,—between Citizens of the same State claiming Lands under Grants of different States, and between a State, or the Citizens thereof, and foreign States, Citizens or Subjects.
United States Library of Congress, The Constitution of the United States of America: Analysis and Interpretation
The records of the Federal Convention are silent on why the Framers included controversies between citizens of different states among the judicial power of the United States,1 but Congress has given "diversity jurisdiction" in one form or another to the federal courts since the Judiciary Act of 1789.2 The traditional explanation remains that offered by Chief Justice Marshall. "However true the fact may be, that the tribunals of the states will administer justice as impartially as those of the nation, to parties of every description, it is not less true that the Constitution itself either entertains apprehensions on this subject, or views with such indulgence the possible fears and apprehensions of suitors, that it has established national tribunals for the decision of controversies between aliens and a citizen, or between citizens of different states."3 Other explanations have been offered and controverted,4 but diversity cases constitute a large bulk of cases on the dockets of the federal courts today, though serious proposals for restricting access to federal courts in such cases have been before Congress for some time.5 The essential difficulty with this type of 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, an oftentimes laborious process, which detracts from the time and labor needed to resolve issues of federal import.
In Hepburn v. Ellzey,6 Chief Justice Marshall for the Court confined the meaning of the word "state" as used in the Constitution to "the members of the American confederacy" and ruled that a citizen of the District of Columbia could not sue a citizen of Virginia on the basis of diversity of citizenship. Marshall noted that it was "extraordinary that the courts of the United States, which are open to aliens, and to the citizens of every state in the union, should be closed upon them. But this is a subject for legislative, not for judicial consideration."7 The same rule was subsequently applied to citizens of the territories of the United States.8
Whether the Chief Justice had in mind a constitutional amendment or a statute when he spoke of legislative consideration remains unclear. Not until 1940, however, did Congress attempt to meet the problem by statutorily conferring on federal district courts jurisdiction of civil actions, not involving federal questions, "between citizens of different States, or citizens of the District of Columbia, the Territory of Hawaii, or Alaska and any State or Territory."9 In National Mutual Ins. Co. v. Tidewater Transfer Co.,10 this act was upheld in a five-to-four decision but for widely divergent reasons by a coalition of Justices. Two Justices thought that Chief Justice Marshall's 1804 decision should be overruled, but the other seven Justices disagreed; however, three of the seven thought the statute could be sustained under Congress's power to enact legislation for the inhabitants of the District of Columbia, but the remaining four plus the other two rejected this theory. The statute was upheld because a total of five Justices voted to sustain it, although of the two theories relied on, seven Justices rejected one and six the other. The result, attributable to "conflicting minorities in combination,"11 means that Hepburn v. Ellzey is still good law insofar as it holds that the District of Columbia is not a state, but is overruled insofar as it holds that District citizens may not use federal diversity jurisdiction.12
For purposes of diversity jurisdiction, state citizenship is determined by the concept of domicile13 rather than of mere residence.14 That is, while the Court's definition has varied throughout the cases,15 a person is a citizen of the state in which he has his true, fixed, and permanent home and principal establishment and to which he intends to return whenever he is absent from it.16 Acts may disclose intention more clearly and decisively than declarations.17 One may change his domicile in an instant by taking up residence in the new place and by intending to remain there indefinitely and one may obtain the benefit of diversity jurisdiction by so changing for that reason alone,18 provided the change is more than a temporary expedient.19
If the plaintiff and the defendant are citizens of different states, diversity jurisdiction exists regardless of the state in which suit is brought.20 Chief Justice Marshall early established that in multiparty litigation, there must be complete diversity, that is, that no party on one side could be a citizen of any state of which any party on the other side was a citizen.21 It has now apparently been decided that this requirement flows from the statute on diversity rather than from the constitutional grant and that therefore minimal diversity is sufficient.22 The Court has also placed some issues beyond litigation in federal courts in diversity cases, apparently solely on policy grounds.23
In Bank of the United States v. Deveaux,24 Chief Justice Marshall declared: "That invisible, intangible, and artificial being, that mere legal entity, a corporation aggregate, is certainly not a citizen; and consequently cannot sue or be sued in the courts of the United States, unless the rights of the members, in this respect, can be exercised in their corporate name." Nevertheless, the Court upheld diversity jurisdiction in the case because the members of the bank as a corporation were citizens of one state and Deveaux was a citizen of another. The holding that corporations were citizens of the states where their stockholders lived was reaffirmed a generation later,25 but pressures were building for change. While corporations were assuming an ever more prominent economic role, the Strawbridge rule, which foreclosed diversity suits if any plaintiff had common citizenship with any defendant,26 was working to close the doors of the federal courts to corporations with stockholders in many states.
Deveaux was overruled in 1844, when, after elaborate argument, a divided Court held that a corporation created by and doing business in a particular state, is to be deemed to all intents and purposes as a person, although an artificial person, an inhabitant of the same state, for the purposes of its incorporation, capable of being treated as a citizen of that state, as much as a natural person.27 Ten years later, the Court abandoned this rationale, but it achieved the same result by "indulg[ing] in the fiction that, although a corporation was not itself a citizen for diversity purposes, its shareholders would be conclusively presumed citizens of the incorporating State."28 "State of incorporation" remained the guiding rule for determining the place of corporate citizenship until Congress amended the jurisdictional statute in 1958. Concern over growing dockets and companies incorporating in states of convenience then led to a dual citizenship rule whereby "a corporation shall be deemed to be a citizen of any State by which it has been incorporated and of the State where it has its principal place of business."29 The right of foreign corporations to resort to federal courts in diversity is not one that the states may condition as a qualification for doing business in the state.30
Unincorporated associations, such as partnerships, joint stock companies, labor unions, governing boards of institutions, and the like, do not enjoy the same privilege as a corporation; the actual citizenship of each of its members must be considered in determining whether diversity exists.31
A litigant who, because of diversity of citizenship, can choose whether to sue in state or federal court, will properly consider where the advantages and disadvantages balance, and if diversity is lacking, a litigant who perceives the balance to favor the federal forum will sometimes attempt to create diversity. In the Judiciary Act of 1789, Congress exempted from diversity jurisdiction suits on choses of action in favor of an assignee unless the suit could have been brought in federal court if no assignment had been made.32 One could create diversity by a bona fide change of domicile even with the sole motive of creating domicile.33 Similarly, one could create diversity, or defeat it, by choosing a personal representative of the requisite citizenship.34 Most attempts to manufacture or create diversity have involved corporations. A corporation cannot get into federal court by transferring its claim to a subsidiary incorporated in another state,35 and for a time the Supreme Court tended to look askance at collusory incorporations and the creation of dummy corporations for purposes of creating diversity.36 But, in Black & White Taxicab & Transfer Co. v. Brown & Yellow Taxicab & Transfer Co.,37 it became highly important to the plaintiff company to bring its suit in federal court rather than in a state court. Thus, Black & White, a Kentucky corporation, dissolved itself and obtained a charter as a Tennessee corporation; the only change made was the state of incorporation, the name, officers, shareholders, and location of the business remaining the same. A majority of the Court, over a strong dissent by Justice Holmes,38 saw no collusion and upheld diversity, meaning that the company won whereas it would have lost had it sued in the state court. Black & White Taxicab probably more than anything led to a reexamination of the decision on the choice of law to be applied in diversity litigation.
By virtue of § 34 of the Judiciary Act of 1789,39 state law expressed in constitutional and statutory form was regularly applied in federal courts in diversity actions to govern the disposition of such cases. But, in Swift v. Tyson,40 Justice Story for the Court ruled that state court decisions were not laws within the meaning of § 34 and though entitled to respect were not binding on federal judges, except with regard to matters of a "local nature," such as statutes and interpretations thereof pertaining to real estate and other immovables, in contrast to questions of general commercial law as to which the answers were dependent not on "the decisions of the local tribunals, but in the general principles and doctrines of commercial jurisprudence."41 The course of decision over the period of almost one hundred years was toward an expansion of the areas in which federal judges were free to construct a federal common law and a concomitant contraction of the definition of "local" laws.42 Although dissatisfaction with Swift v. Tyson was almost always present, within and without the Court,43 it was the Court's decision in Black & White Taxicab & Transfer Co. v. Brown & Yellow Taxicab & Transfer Co.44 that brought disagreement to the strongest point and perhaps precipitated the overruling of Swift v. Tyson in Erie Railroad Co. v. Tompkins.45
"It is impossible to overstate the importance of the Erie decision. It announces no technical doctrine of procedure or jurisdiction, but goes to the heart of the relations between the Federal Government and the states, and returns to the states a power that had for nearly a century been exercised by the federal government."46 Erie was remarkable in a number of ways aside from the doctrine it announced. It reversed a 96-year-old precedent, which counsel had specifically not questioned; it reached a constitutional decision when a statutory interpretation was available though perhaps less desirable; and it marked the only time in United States constitutional history when the Court has held that it had undertaken an unconstitutional action.47
Tompkins was injured by defendant's train while he was walking along the tracks. He was a citizen of Pennsylvania, and the railroad was incorporated in New York. Had he sued in a Pennsylvania court, state decisional law was to the effect that, because he was a trespasser, the defendant owned him only a duty not to injure him through wanton or willful misconduct;48 the general federal law treated him as a licensee who could recover for negligence. Tompkins sued and recovered in federal court in New York and the railroad presented the issue to the Supreme Court as one covered by "local" law within the meaning of Swift v. Tyson. Justice Brandeis for himself and four other Justices, however, chose to overrule the early case.
First, it was argued that Tyson had failed to bring about uniformity of decision and that its application discriminated against citizens of a state by noncitizens. Justice Brandeis cited recent researches49 indicating that § 34 of the 1789 Act included court decisions in the phrase "laws of the several States." "If only a question of statutory construction were involved we should not be prepared to abandon a doctrine so widely applied throughout nearly a century. But the unconstitutionality of the course pursued has now been made clear, and compels us to do so."50 For a number of reasons, it would not have been wise to have overruled Tyson on the basis of arguable new discoveries.51
Second, the decision turned on the lack of power vested in Congress to prescribe rules for federal courts in state cases. "There is no federal general common law. Congress has no power to declare substantive rules of common law applicable in a State whether they be local in their nature or 'general,' be they commercial law or a part of the law of torts. No clause in the Constitution purports to confer such a power upon the federal courts."52 But having said this, Justice Brandeis made it clear that the unconstitutional assumption of power had been made not by Congress but by the Court itself. "[W]e do not hold unconstitutional § 34 of the Federal Judiciary Act of 1789 or any other Act of Congress. We merely declare that in applying the doctrine this Court and the lower courts have invaded rights which in our opinion are reserved by the Constitution to the several States."53
Third, the rule of Erie replacing Tyson is that "[e]xcept in matters governed by the Federal Constitution or by Acts of Congress, the law to be applied in any case is the law of the State. 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."54
Since 1938, the effect of Erie has first increased and then diminished, as the nature of the problems presented changed. Thus, the Court at first indicated that not only were the decisions of the highest court of a state binding on a federal diversity court, but also decisions of intermediate appellate courts55 and courts of first instance,56 even where the decisions bound no other state judge except as they were persuasive on their merits. It has now retreated from this position, concluding that federal judges are to give careful consideration to lower state court decisions and to old, perhaps outmoded decisions, but that they must find for themselves the state law if the state's highest court has not spoken definitively within a period that would raise no questions about the continued viability of the decision.57 In the event of a state supreme court reversal of an earlier decision, the federal courts are, of course, bound by the later decision, and a judgment of a federal district court, correct when rendered, must be reversed on appeal if the state's highest court in the meantime has changed the applicable law.58 In diversity cases that present conflicts of law problems, the Court has reiterated that the district court is to apply the law of the state in which it sits, so that in a case in State A in which the law of State B is applicable, perhaps because a contract was made there or a tort was committed there, the federal court is to apply State A's conception of State B's law.59
The greatest difficulty in applying the Erie doctrine has been in cases in which issues of procedure were important.60 The process was initiated in 1945 when the Court held that a state statute of limitations, which would have barred suit in state court, would bar it in federal court, although as a matter of federal law the case still could have been brought in federal court.61 The Court regarded the substance-procedure distinction as immaterial. "[S]ince a federal court adjudicating a state-created right solely because of the diversity of citizenship of the parties is for that purpose, in effect, only another court of the State, it cannot afford recovery if the right to recover is made unavailable by the State nor can it substantially affect the enforcement of the right as given by the State."62 The standard to be applied was compelled by the "intent" of Erie, which "was to insure that, in all cases where a federal court is exercising jurisdiction solely because of the diversity of citizenship of the parties, the outcome of the litigation in the federal court should be substantially the same, so far as legal rules determine the outcome of a litigation, as it would be if tried in a State court."63 The Court's application of this standard created substantial doubt that the Federal Rules of Civil Procedure had any validity in diversity cases.64
But, in two later cases, the Court contracted the application of Erie in matters governed by the Federal Rules. Thus, in the earlier case, the Court said that "outcome" was no longer the sole determinant and countervailing considerations expressed in federal policy on the conduct of federal trials should be considered; a state rule making it a question for the judge rather than a jury of a particular defense in a tort action had to yield to a federal policy enunciated through the Seventh Amendment of favoring juries.65 Some confusion has been injected into consideration of which law to apply—state or federal – in the absence of a federal statute or a Federal Rule of Civil Procedure.66 In an action for damages, the federal courts were faced with the issue of the application either of a state statute, which gave the appellate division of the state courts the authority to determine if an award is excessive or inadequate if it deviates materially from what would be reasonable compensation, or of a federal judicially created practice of review of awards as so exorbitant that it shocked the conscience of the court. The Court determined that the state statute was both substantive and procedural, which would result in substantial variations between state and federal damage awards depending whether the state or the federal approach was applied; it then followed the mode of analysis exemplified by those cases emphasizing the importance of federal courts reaching the same outcome as would the state courts,67 rather than what had been the prevailing standard, in which the Court balanced state and federal interests to determine which law to apply.68 Emphasis upon either approach to considerations of applying state or federal law reflects a continuing difficulty of accommodating "the constitutional power of the states to regulate the relations among their citizens . . . [and] the constitutional power of the Federal Government to determine how its courts are to be operated."69 Additional decisions will be required to determine which approach, if either, prevails. The latter ruling simplified the matter greatly. Erie is not to be the proper test when the question is the application of one of the Rules of Civil Procedure; if the rule is valid when measured against the Enabling Act and the Constitution, it is to be applied regardless of state law to the contrary.70
Although it seems clear that Erie applies in nondiversity cases in which the source of the right sued upon is state law,71 it is equally clear that Erie is not applicable always in diversity cases whether the nature of the issue be substantive or procedural. Thus, it may be that there is an overriding federal interest which compels national uniformity of rules, such as a case in which the issue is the appropriate rule for determining the liability of a bank which had guaranteed a forged federal check,72 in which the issue is the appropriate rule for determining whether a tortfeasor is liable to the United States for hospitalization of a soldier and loss of his services73 and in which the issue is the appropriate rule for determining the validity of a defense raised by a federal officer sued for having libeled one in the course of his official duties.74 In such cases, when the issue is found to be controlled by federal law, common or otherwise, the result is binding on state courts as well as on federal.75 As a result, notwithstanding Justice Brandeis's oft-quoted statement that there is "no federal general common law,"76 there are areas of law where "federal judges may appropriately craft the rule of decision."77 Nonetheless, because legislative power is vested in Congress, federal common law plays a "necessarily modest role"78 under the Constitution, and such common lawmaking must at a minimum be "necessary to protect uniquely federal interests."79
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