Law Applied
The United States Supreme Court determined in Erie Railroad Co. v. Tompkins (1938) that the law to be applied in a diversity case would be the law of whatever state in which the action was filed. This decision overturned precedents that had held that federal courts could create a general federal common law, instead of applying the law of the forum state. This decision was an interpretation of the word "laws" in 28 U.S.C. 1652, known as the Rules of Decision Act.
Under the Rules of Decision Act, the 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.
The Court interpreted "laws" to include the states' judicial decisions, or "common law." Thus, it is an overstatement to state that Erie represents the notion that there is no federal common law. Federal courts do adjudicate "common law" of federal statutes and regulations.
Because the RDA provides for exceptions and modifications by Congress, it is important to note the effect of the Rules Enabling Act (REA), 28 U.S.C. 2072. The REA delegates the legislative authority to the Supreme Court to ratify rules of practice and procedure and rules of evidence for federal courts. Thus, it is not Erie, but the REA, which created the distinction between substantive and procedural law.
Thus, while state substantive law is applied, the Federal Rules of Civil Procedure and the Federal Rules of Evidence still govern the "procedural" matters in a diversity action, as clarified in Gasperini v. Center for Humanities. The REA, 28 U.S.C. 2072(b), provides that the Rules will not affect the substantive rights of the parties. Therefore, a federal court may still apply the "procedural" rules of the state of the initial filing, if the federal law would "abridge, enlarge, or modify" a substantive right provided for under the law of the state.
Read more about this topic: Diversity Jurisdiction
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