Facts
- Stentor Electric Manufacturing Co., Inc. (a New York corporation) transferred its business to Klaxon Co. (a Delaware corporation) under a 1918 contract executed and initially performed in New York.
- Klaxon agreed to use its best efforts to manufacture and sell patented devices, with Stentor to receive a share of profits.
- Stentor dissolved under New York law but retained capacity to sue through a statutory representative.
- In 1929, Stentor filed a diversity action in the U.S. District Court for the District of Delaware alleging Klaxon breached the “best efforts” obligation.
- In 1939, a jury awarded Stentor $100,000.
- After verdict, Stentor sought to amend the judgment to add 6% interest from the filing date under N.Y. Civil Practice Act § 480, which mandated interest in contract actions whether damages were liquidated or unliquidated.
- The district court added interest, and the Third Circuit affirmed, treating the New York statute as governing.
- The Supreme Court granted review limited to whether § 480 applied in a federal diversity action in Delaware.
Issues
- In a diversity case, must a federal court apply the forum state’s conflict-of-laws rules when deciding whether to apply another state’s law?
- Is the applicability of New York’s pre-verdict interest statute in a Delaware federal court a conflict-of-laws question governed by Delaware’s choice-of-law rules?
- Does the Full Faith and Credit Clause require application of New York’s interest statute as an incident of damages on a contract connected to New York?
Decision
- The Supreme Court reversed and remanded.
- A federal court sitting in diversity must apply the conflict-of-laws rules of the state in which it sits.
- Whether New York’s § 480 interest provision applies is a choice-of-law question that must be decided under Delaware conflict-of-laws rules, not by an independent federal approach or a court’s view of the “better” rule.
- Full Faith and Credit did not compel Delaware to apply New York’s interest statute where the statute concerned an incidental item of damages and conflicted with Delaware policy.
Legal Principles
- In diversity cases, Erie requires federal courts to apply state substantive law, and that requirement includes the forum state’s conflict-of-laws rules.
- There is no free-standing federal “general” conflicts law for diversity cases; the federal court’s task is to determine and apply the forum state’s choice-of-law doctrine.
- The applicability of a foreign statute governing pre-verdict interest on a contract recovery is a conflict-of-laws question.
- Full Faith and Credit does not require a forum state to enforce another state’s rule on interest as an incidental item of damages when doing so would contravene the forum’s policy choices.
Conclusion
The Court held that federal diversity courts must follow the forum state’s choice-of-law rules; therefore, the Delaware federal court had to use Delaware conflicts law to decide whether New York’s pre-verdict interest statute applied, and Full Faith and Credit did not mandate applying the New York interest rule as a matter of damages.