Under Article III of the Constitution, the judicial power of the united states extends to "Controversies between Citizens of different States … and between … the Citizens [of a State] … and foreign … Citizens or Subjects." This power is called diversity jurisdiction because its basis is the difference in citizenship of the parties.
The accepted justification for diversity jurisdiction has been the need to protect out-of-state citizens against discrimination in state courts. However, the extent of such discrimination as of the time the Constitution was written is uncertain, and there is evidence that financial and commercial interests supported diversity jurisdiction in the hope of finding shelter from state laws and judicial systems favorable to debtors.
In fact, the diversity jurisdiction authorized in Article III is not confined to situations in which out-of-state citizens require protection. For example, a plaintiff may file a diversity action in her home state's federal court if she can obtain personal jurisdiction over the defendant there. Also, it is constitutionally permissible for Congress to confer diversity jurisdiction even when citizens of the same state are on both sides of the litigation, so long as some out-of-state citizens are also parties. Congress has conferred jurisdiction in just such cases in the federal inter-pleader statute.
Congress has the power to determine how much of the constitutionally authorized diversity jurisdiction the lower federal courts may exercise. It has enacted a general statute that allows the federal courts to hear some but not all types of diversity cases either originally or on removal. Examples of excluded cases are those in which less than a required amount is in controversy, those in which there is incomplete diversity (that is, at least one plaintiff is from the same state as at least one defendant), and those which the defendant seeks to remove from his or her home state's court.
In 1946 Congress first provided expressly for diversity jurisdiction over suits involving citizens of the district of columbia and territories. In National Mutual Insurance Co. v. Tidewater Co. (1949), the Supreme Court upheld the law because two Justices were willing to declare that the District of Columbia was a "state" within the meaning of the diversity clause of Article III, and three Justices concluded that Congress could confer the jurisdiction even if it were not within the Article III judicial power.
The citizenship of parties for purposes of applying the general diversity statute is not always obvious. Some problems have been solved by statute. For example, problems arising from the Court's 1844 decision that a corporation is a citizen of its state of incorporation were resolved by a congressional declaration that a corporation is a citizen of both the state of its incorporation and of the state where its principal place of business is located. Others have been handled by judicial interpretation, which has held, for example, that an individual is a citizen of the state in which he or she is domiciled at the time suit is filed. Difficult interpretive problems remain, however.
Under the Rules of Decision Act, as interpreted in erie railroad v. tompkins (1938), a federal court hearing a diversity case must apply the substantive law of the state in which it is located. It must also employ that state's choice of law rules and any of the state's procedural rules that have a predictable effect on the outcome of the case and do not conflict with the federal rules of civil procedure or some overriding federal policy. In cases in which state law is unclear or has not yet been decided, the federal court must strive to resolve the case as the state's highest court would, drawing direction from trends and policies manifest in state judicial opinions at all levels. The state courts are not bound by the federal court's decisions interpreting state law.
It is doubtful that Congress could constitutionally enact a law giving to the federal courts or assuming for itself the power to develop substantive law for diversity cases. Although the Erie opinion avoided this constitutional issue, fundamental notions of state sovereignty and the limited role of the federal government dictated the decision's interpretation of the Rules of Decision Act. Notwithstanding these limitations, Congress may enact and has enacted rules of procedure regulating diversity cases, even though the rules also affect substantive rights. And because of the federal interest in the orderly and fair treatment of individuals engaged in multistate transactions, Congress likely could also constitutionally enact a body of federal choice of law rules applicable to diversity actions.
Declining concern over the need to protect out-of-state citizens against discrimination in state courts, coupled with rising distress over the heavy caseload of the federal courts, has spawned proposals to eliminate the federal courts' general diversity jurisdiction. While some continue to praise diversity jurisdiction for the continued acquaintance it offers federal judges with the common law process and the access it offers litigants (albeit selectively) to the often superior federal procedural system, those who support congressional repeal of diversity jurisdiction seem to be approaching success. Eventually it may come to be used only in complex, multistate cases, such as class actions and interpleaders, in which the federal courts' power to issue process nationwide offers substantial advantages over state jurisdiction.
Carole E. Goldberg -A mbrose
Ely, John Hart 1974 The Irrepressible Myth of Erie. Harvard Law Review 87:693–740.
Shapiro, David 1977 Federal Diversity Jurisdiction: A Survey and a Proposal. Harvard Law Review 91:317–355.