Article III, Section 2, Clause 1 — Diversity Jurisdiction

ArtIII.S2.C1.16.1 Overview of Diversity Jurisdiction

Article III, Section 2, Clause 1, as interpreted by the Supreme Court, authorizes Congress to grant federal courts subject matter jurisdiction over controversies between citizens of different states—commonly known as “diversity jurisdiction.”¹ Although Justice Joseph Story concluded in the early case Martin v. Hunter’s Lessee that “the language of [Article III]. . . . is manifestly designed to be mandatory upon the legislature,” such that “Congress could not, without a violation of its duty, have refused to carry it into operation,”² numerous subsequent Supreme Court decisions repudiated this stance, recognizing instead that Article III’s grant of subject matter jurisdiction is permissive and subject to congressional discretion.³

Congress has invoked this authority and enacted legislation granting federal courts diversity jurisdiction since the Judiciary Act of 1789.⁴ That statute conferred diversity jurisdiction only when a suit was between a citizen of the state in which the suit was brought and a citizen of another state.⁵ The Judiciary Act of 1789 further limited diversity jurisdiction to cases where the amount in controversy—that is, the value of the relief sought—was at least $5,000.⁶ The Judiciary Act of 1875 eliminated the requirement that one of the parties be a citizen of the forum state, requiring only diverse citizenship and a minimum jurisdictional amount in controversy.⁷ The current diversity jurisdiction provision is codified at 28 U.S.C. § 1332, and grants federal court jurisdiction in all civil actions between citizens of different states and between a citizen of a state and a subject of a foreign state if the amount in controversy exceeds $75,000.

Although the broad strokes of these requirements have remained the same since 1875, the statute has grown increasingly complex over the years. For instance, Congress amended the statutory provision via the Class Action Fairness Act of 2005 (CAFA).⁸ Among other changes, CAFA expanded federal courts’ jurisdiction over class actions by substituting in these cases a minimal diversity-of-citizenship requirement in place of the usual complete diversity requirement, which requires each plaintiff be a citizen of a different state from each defendant. Under the minimal diversity requirement, federal courts possess diversity jurisdiction over a class action when any one of the plaintiffs is a citizen of a different state from any defendant.⁹ CAFA also imposed an amount-in-controversy threshold of $5,000,000 in class actions, and allowed plaintiffs to aggregate their monetary claims to calculate the statutory amount in controversy.¹⁰

The following essays do not cover the extensive case law interpreting the various statutory requirements for diversity jurisdiction.¹¹ They instead provide an overview of the constitutional parameters of diversity jurisdiction, including a historical perspective on the purpose of diversity jurisdiction; the Supreme Court’s interpretations of the meaning of “citizens of different states” under Article III; and related federalism principles implicated by diversity jurisdiction.

ArtIII.S2.C1.16.2 Historical Background on Diversity Jurisdiction

The records of the Constitutional Convention do not shed substantial light on why the Framers included diversity jurisdiction among the judicial powers of the federal courts.¹ The traditional explanation most often cited by judges and legal scholars is that the Framers provided diversity jurisdiction to address the concern that state courts would be prejudiced against out-of-state litigants, particularly if one party was an in-state resident.²

Writings and statements of several Framers support this traditional explanation. For instance, at the Virginia Convention, James Madison stated his belief that the diversity jurisdiction clause was “salutary,” citing the possibility that “a strong prejudice may arise in some states, against the citizens of others, who may have claims against them.”³ In the Federalist Papers, Alexander Hamilton similarly argued that a national Judiciary “ought to preside in all cases in which one State or its citizens are opposed to another State or its citizens” to ensure “the inviolable maintenance of [the] equality of privileges and immunities to which the citizens of the Union will be entitled.”⁴ Hamilton contended that a federal court, “having no local attachments, will be likely to be impartial between the different States and their citizens.”⁵ Chief Justice John Marshall likewise explained in an early case that, while it might be true that state courts would “administer justice as impartially” as federal courts, “it is not less true that the [C]onstitution itself either entertains apprehensions on this subject, or views with such indulgence the possible fears and apprehensions of suitors” as to warrant the establishment of diversity jurisdiction in the federal courts.⁶

Historians have proffered other explanations for the Constitution’s diversity-jurisdiction provision.⁷ As the volume of diversity litigation in federal court has grown over the years, commentators continue to debate the purpose of diversity jurisdiction.⁸ Given that contemporary society has evolved significantly from the conditions that existed in 1789, questions have arisen periodically concerning the continued need for diversity jurisdiction, including whether to retain, abolish, or curtail to some degree the statutory grant of this form of federal subject matter jurisdiction.⁹

ArtIII.S2.C1.16.3 Citizens of Different States and Diversity Jurisdiction

The constitutional grant of diversity jurisdiction extends to controversies between “Citizens of different States.” Since Congress first exercised its constitutional prerogative to vest diversity jurisdiction in the federal courts in the Judiciary Act of 1789, the Supreme Court has considered the meaning of “Citizens of different States,” and the constitutional reach of diversity jurisdiction, on numerous occasions.

In Hepburn v. Ellzey,¹ Chief Justice John Marshall confined the meaning of the word “state” as used in the Constitution to “the members of the American confederacy,” ruling that a citizen of the District of Columbia thus could not maintain a suit against a citizen of Virginia in federal court on the basis of diversity jurisdiction. Chief Justice 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 [citizens of the District of Columbia].—But this is a subject for legislative not for judicial consideration.”² The Court subsequently applied the same rule to citizens of the U.S. territories.³

Whether the Chief Justice had in mind a constitutional amendment or a statute when he spoke of legislative consideration remains unclear. Congress addressed the issue in 1940 by statutorily conferring on federal district courts jurisdiction over 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.”⁴ In National Mutual Ins. Co. v. Tidewater Transfer Co.,⁵ the Court upheld that amendment in a 5-4 decision, but a majority of Justices could not agree on the reasoning. Two Justices thought that Chief Justice Marshall’s 1804 decision should be overruled, but the other seven Justices disagreed. Three of the seven Justices thought the statute could be sustained under Congress’s power to enact legislation for District of Columbia inhabitants, 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 upon, seven Justices rejected one and six the other. The result, attributable to “conflicting minorities in combination,”⁶ means that Hepburn v. Ellzey is still good law insofar as it holds that the District of Columbia is not a state for purposes of Article III, but is overruled insofar as it holds that District citizens may not invoke federal diversity jurisdiction.⁷

In a typical two-party case, “diversity” exists if a citizen of one state sues a citizen of another state. In a multiparty case, Chief Justice Marshall established in an early case, Strawbridge v. Curtiss, that there must be complete diversity—that is, no party on one side could be a citizen of any state of which any party on the other side was a citizen.⁸ In State Farm Fire & Casualty Co. v. Tashire, the Court clarified that this complete diversity requirement flows from the diversity jurisdiction statute, rather than from the constitutional grant of authority,⁹ noting that Chief Justice Marshall, in Strawbridge, “purported to construe only ‘[t]he words of the act of congress.’”¹⁰ Article III’s diversity requirement, the Court held in Tashire, requires only that “any two adverse parties are not co-citizens” and thus “poses no obstacle to the legislative extension of federal jurisdiction” by requiring only minimal diversity.¹¹

ArtIII.S2.C1.16.4 Citizenship of Natural Persons and Corporations

For purposes of diversity jurisdiction, state citizenship of an individual is determined by the concept of domicile¹ rather than residence.² While the Supreme Court’s definition has varied across cases,³ this generally means that a person is a citizen of the state that is his or her true, fixed, and permanent home and principal establishment, and to which he or she intends to return whenever he or she is absent from it.⁴ Actions may disclose this intention more clearly and decisively than statements.⁵ A person may change his or her domicile in an instant by taking up residence in a new place with the intention of remaining there indefinitely; he or she may obtain the benefit of diversity jurisdiction by making this change alone,⁶ provided the change is more than a temporary expedient.⁷

Whether corporations, which are not explicitly referenced in Article III, should be treated as citizens of a certain state or states for purposes of diversity jurisdiction is a question with which the Supreme Court has long wrestled. The Court first directly addressed the issue in Bank of the United States v. Deveaux,⁸ in which Chief Justice John 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 that case because the members of the bank as a corporation were citizens of one state and the opposing party was a citizen of another. The holding that corporations were citizens of the states where their stockholders lived was reaffirmed a generation later,⁹ but pressures were building for change. While corporations were assuming an ever more prominent economic role, the Strawbridge rule, which required complete diversity between each plaintiff and each defendant,¹⁰ operated to close the doors of the federal courts to corporations with stockholders in many states.

The Supreme Court overruled Deveaux in 1844, when 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 . . . capable of being treated as a citizen of that state, as much as a natural person.”¹¹ Ten years later, the Court abandoned that 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.”¹² “State of incorporation” remained the guiding rule for determining the place of corporate citizenship until Congress amended the jurisdictional statute in 1958.¹³ Concern over growing dockets and companies incorporating in states of convenience 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.”¹⁴ The right of foreign corporations to invoke diversity jurisdiction is not one that a state may require corporations to waive as a condition of doing business in that state.¹⁵

Unincorporated associations, such as partnerships, joint stock companies, labor unions, governing boards of institutions, and the like, do not enjoy the same status as corporations. The actual citizenship of each of its members must be considered in determining whether diversity exists.¹⁶

ArtIII.S2.C1.16.5 Insufficient or Manufactured Diversity

Historically, regardless of the parties’ diverse citizenship, the Supreme Court has recognized two substantive exceptions to diversity jurisdiction: the domestic relations exception¹—which precludes federal courts from issuing divorce, alimony, or child custody decrees—and the probate exception—which precludes federal courts from probating a will or administering an estate.² In Ankenbrandt v. Richards, the Court clarified that the domestic relations exception exists as a matter of statutory interpretation, and that Article III, Section 2 “does not mandate the exclusion of domestic relations from federal-court jurisdiction.”³ In Marshall v. Marshall, the Court similarly interpreted the probate exception as a matter of statutory construction, confirming its narrow scope as “reser[ving] to state probate courts the probate or annulment of a will and the administration of a decedent’s estate,” and “preclud[ing] federal courts from endeavoring to dispose of property that is in the custody of a state probate court.”⁴

A litigant who, because of diversity of citizenship, has the option to sue in state or federal court, will generally consider the relative advantages and disadvantages of each forum in deciding where to pursue litigation. Where diversity is lacking, a litigant who perceives an advantage in 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.⁵ Nevertheless, a person could create diversity by a bona fide change of domicile even if that is the sole motive of creating domicile.⁶

Similarly, one could create diversity, or defeat it, by choosing a personal representative of the requisite citizenship.⁷ 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.⁸ For a time, the Supreme Court tended to look disapprovingly at collusory incorporations and the creation of dummy corporations for purposes of creating diversity.⁹ As discussed further in the next essay, however, the Court, in Black & White Taxicab & Transfer Co. v. Brown & Yellow Taxicab & Transfer Co.,¹⁰ upheld diversity in a case in which the plaintiff-corporation, a Kentucky corporation, dissolved itself and obtained a charter as a Tennessee corporation in order to file the action in federal court. At the time, federal courts applied federal common law rules that, compared to relevant state laws, were more favorable to the plaintiff.¹¹

ArtIII.S2.C1.16.6 State Law in Diversity Cases and the Erie Doctrine

Because a federal court’s subject matter jurisdiction in diversity cases is predicated upon the fact that the opposing litigants are from different states, rather than upon questions of federal law, a foundational question in these cases is which law—federal or state—should apply. In the 1938 decision Erie Railroad v. Tompkins,¹ the Supreme Court set forth what is now commonly known as the Erie doctrine, which generally requires a federal court to apply state substantive law, unless the matter before it is governed by federal law. In so holding, Erie repudiated a prior body of jurisprudence based upon the Court’s 1842 decision in Swift v. Tyson.² As legal commentators have noted, “[p]robably no Supreme Court decision rendered during the twentieth century has had as significant an impact on the distribution of judicial power between the federal government and the states as has [Erie].”³

In both Swift and Erie, the Supreme Court considered Section 34 of the Judiciary Act of 1789, which provided that “[t]he laws of the several states” should generally apply in federal courts unless applicable federal laws require otherwise.⁴ In Swift, Justice Joseph Story ruled for the Court that state court decisions were not “laws” within the meaning of Section 34.⁵ Thus, while such state decisions were entitled to respect, they were generally not binding on federal judges except with regard to matters of a “local nature,” such as statutory interpretations pertaining to real estate and other things of permanent locality.⁶ For nearly a century after Swift, the Court issued a series of decisions that expanded the areas in which federal judges were free to construct a federal common law, while restricting the definition of “local” laws.⁷

Although there was some dissatisfaction with Swift,⁸ it was the Supreme Court’s decision in Black & White Taxicab & Transfer Co. v. Brown & Yellow Taxicab & Transfer Co.⁹ that brought disagreement on these choice-of-law issues to its apex. In Black & White, a Kentucky corporation that sought the application of more favorable federal common law was permitted to create diversity jurisdiction by reincorporating in another state, even though the only change made to the corporation was its state of incorporation; the corporation’s name, officers, shareholders, and location of the business all remained the same.¹⁰ A Court majority, over a strong dissent by Justice Oliver Wendell Holmes,¹¹ found no collusion and upheld diversity jurisdiction. The resulting application of federal common law allowed the corporation to prevail on its claims when it would have otherwise lost under state law had it sued in state court.¹² Perhaps more than any other decision, Black & White precipitated Erie’s overruling of Swift.¹³

In Erie, a citizen of Pennsylvania sued a railroad incorporated in New York for injuries caused by the defendant’s train while the plaintiff was walking along the tracks.¹⁴ Relevant Pennsylvania law, according to the defendant, would have limited the railroad’s liability because the plaintiff was a trespasser, while applicable federal common law would permit him to recover for negligence as a licensee who was allowed on the premise.¹⁵ After the plaintiff sued and recovered in a New York federal court, the railroad appealed, eventually presenting the issue to the Supreme Court as to whether the matter concerned a question of “local” law under Swift.¹⁶

Writing for the Court in Erie, Justice Louis Brandeis overruled Swift. He explained that the Swift rule failed to bring about uniformity of decisions as intended.¹⁷ Moreover, its application prompted those seeking to avail themselves to more favorable federal rules to create diversity jurisdiction, resulting in discrimination against citizens of a state by noncitizens.¹⁸ Justice Brandeis further concluded the Swift rule was also unconstitutional because “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,” and “[n]o clause in the Constitution purports to confer such a power upon the federal courts.”¹⁹ Justice Brandeis also clarified that the unconstitutional assumption of power was 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.”²⁰

As legal commentators have observed:

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.²¹

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.

The precise constitutional basis of Erie has been the subject of debate, however, with the Court at times seemingly distancing itself from Erie’s constitutional holding.²² Nonetheless, in the years since the decision, the Court has reaffirmed the constitutional basis of Erie under which “neither Congress nor the federal courts can, under the guise of formulating rules of decisions for federal courts, fashion rules which are not supported by a grant of federal authority contained in Article I or some other section of the Constitution; in such areas state law must govern because there can be no other law.”²³ Erie ultimately appears to derive from the federalism principles embodied in the Tenth Amendment, which limits the federal government, including Congress and the federal courts, to the authority delegated to it by the Constitution and reserves those powers not so delegated to the states or to the people.²⁴

Since the Supreme Court’s landmark 1938 decision, Erie Railroad v. Tompkins,²⁵ the Court’s jurisprudence on federal courts’ application of state law in diversity cases has evolved. At first, the Supreme Court indicated that federal courts sitting in diversity were bound by state court decisions even when such decisions were not binding on other state judges. That is, federal courts sitting in diversity must follow not only the decisions of the highest court of a state, but also decisions of intermediate appellate courts²⁶ and courts of first instance.²⁷ The Court subsequently concluded that federal judges are to give careful consideration to lower state court decisions, but they generally must construe the state law themselves if the state’s highest court has not spoken definitively on the question.²⁸ 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 subsequently changed the applicable law.²⁹

ArtIII.S2.C1.16.7 Conflicts-of-Law and Procedural Rules in Diversity Cases

In diversity jurisdiction cases that present conflicts-of-law issues—that is, in cases in which the laws of two or more states could apply to the dispute—the Court has reiterated that the district court is to apply the conflict-of-law rules of the state in which it sits. In other words, in a federal court case in State A in which the law of State B applies under State A’s conflict-of-law rules, perhaps because a contract was made in State B or a tort was committed there, the federal court is to apply State A’s conception of State B’s law.¹

The greatest difficulty in applying the Erie doctrine, which generally directs federal courts sitting in diversity to apply state substantive law but federal procedural law, has been in cases in which the distinction between substantive and procedural rules is blurred.² In 1945, in Guaranty Trust Co. of New York v. York, the Court held that a state statute of limitations, which was at times deemed a matter of “procedure” but would have barred suit in state court, applied to bar the case in federal court.³ The Court regarded the substance-procedure distinction as immaterial. Instead, “since 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.”⁴ This outcome-determinative standard, the Court explained, was compelled by Erie’s “intent,” which was to ensure that, in all cases where a federal court is exercising jurisdiction solely because of the parties’ diverse citizenship, “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.”⁵

The Supreme Court’s application of the outcome-determinative standard created substantial doubt that the Federal Rules of Civil Procedure were valid in diversity jurisdiction cases.⁶ In 1965, however, the Court, in Hanna v. Plumer, limited the standard’s application in matters governed by the Federal Rules.⁷ Under Hanna and its progeny, the outcome-determinative standard is not the proper test when the question is the application of one of the Federal Rules of Civil Procedure. Instead, if the rule is valid under the Rules Enabling Act—which authorizes the Supreme Court to prescribe general rules of practice and procedure and rules of evidence for the federal courts—and the Constitution, it is to be applied regardless of state law to the contrary.⁸

Some uncertainty remains as to which law to apply—state or federal—in the absence of a federal statute or a Federal Rule of Civil Procedure. In Byrd v. Blue Ridge Rural Electric Cooperative, Inc., the Supreme Court said that “outcome” was no longer the sole determinant, and that countervailing considerations expressed in federal policy on the conduct of federal trials should be considered.⁹ Under this balancing standard, the Court held that a state rule that requires a judge (rather than a jury) to decide whether a particular defense applied in a tort action had to yield to a federal policy favoring juries, as reflected by the Seventh Amendment.¹⁰

Later, in Gasperini v. Center for Humanities, Inc., the Supreme Court considered whether to apply a state statute—which gave state appellate courts the authority to determine if a damages award is excessive or inadequate if it deviates materially from what would be reasonable compensation—or a federal court-created practice of reviewing awards to determine whether they were so exorbitant that it shocked the conscience of the court.¹¹ The Court first determined that the state statute was both substantive and procedural, and that substantial variation in damage awards would result depending on whether the state or the federal approach was applied.¹² It then followed the mode of analysis under York, emphasizing the importance of federal courts reaching the same outcome as would the state courts,¹³ rather than what had been the prevailing standard under Byrd, in which the Court balanced state and federal interests to determine which law to apply.¹⁴ The Court’s evolving approach to deciding whether state or federal law applies in these cases reflects a continuing difficulty of accommodating “the constitutional power of the states to regulate the relations among their citizens” on the one hand, and “the constitutional power of the federal government to determine how its courts are to be operated” on the other hand.¹⁵

Although it seems clear that Erie applies in non-diversity cases in which the source of the right sued upon is state law,¹⁶ it is also evident that Erie is not always applicable in diversity cases, regardless of whether the issue is substantive or procedural. For instance, it may be that there is an overriding federal interest that compels national uniformity of rules, such as a case involving the appropriate rule for determining a bank’s liability for guaranteeing a forged federal check;¹⁷ whether a tortfeasor is liable to the United States for hospitalization of a soldier and loss of his services;¹⁸ or the validity of a defense raised by a federal officer sued for allegedly committing libel in the course of his official duties.¹⁹ In such cases, when the issue is controlled by federal law, common or otherwise, the result is binding on state as well as on federal courts.²⁰ As a result, notwithstanding Justice Louis Brandeis’s oft-quoted statement that there is “no federal general common law,”²¹ there are areas of law where “federal judges may appropriately craft the rule of decision.”²² Nonetheless, because legislative power is vested in Congress, federal common law plays a “necessarily modest role”²³ under the Constitution; such common lawmaking must be “necessary to protect uniquely federal interests.”²⁴