## 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

1. 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?
2. 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?
3. 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.


Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487 (1941)