PastPaperHero | Law applied by federal courts

Learning Outcomes

This article explains how and when federal courts apply federal common law in civil cases, including:

the historical shift from “general” federal common law to the Erie regime and why that shift matters for issue-spotting on the MBE;
the criteria federal courts use to decide when a uniquely federal interest justifies creating a federal common law rule instead of borrowing state rules;
the principal federal common law enclaves (federal government interests, interstate disputes, admiralty, foreign relations, and statutory gap-filling), with emphasis on patterns that recur in bar exam questions;
how to distinguish situations governed by federal common law from those requiring application of state substantive law under the Erie doctrine and the Rules of Decision Act;
how federal common law interacts with federal statutes, the Supremacy Clause, and preemption analysis, including when federal common law can displace conflicting state rules;
how federal common law governs the preclusive effect of federal judgments—especially diversity judgments—and common MBE traps involving limitations periods, choice-of-law rules, and mislabeling ordinary state-law disputes as matters of federal common law.

MBE Syllabus

For the MBE, you are required to understand the circumstances in which federal courts apply federal common law instead of state law, with a focus on the following syllabus points:

When a federal court may create or apply federal common law as a rule of decision.
The effect of Erie Railroad v. Tompkins on “general” federal common law.
How to distinguish federal common law from state law under the Erie doctrine.
Recognized enclaves of federal common law (federal government interests, interstate disputes, admiralty, foreign relations, and certain statutory schemes).
The relationship between federal statutes, federal common law, and state law, including preemption.
Use of federal common law to determine the preclusive effect of federal judgments.
How to analyze MBE fact patterns that ask whether federal or state law governs in federal court.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

In a federal diversity case, which law generally governs substantive issues?
1. Federal common law
2. State law of the forum state
3. Federal statutory law only
4. The law of any state with an interest
Which of the following is a recognized area for federal common lawmaking?
1. All contract disputes
2. Disputes between two states over water rights
3. All tort claims between private parties
4. All property disputes
Under the Erie doctrine, when may a federal court create federal common law?
1. Whenever Congress has not legislated
2. Only in areas of uniquely federal interest or where Congress has authorized it
3. Whenever the federal court disagrees with state law
4. In all diversity cases
A federal court sitting in diversity dismisses a case as time-barred under the forum state’s statute of limitations, “on the merits and with prejudice.” The plaintiff refiles the same claim in another state court. Which law determines the preclusive effect of the federal judgment?
1. The second state’s preclusion law
2. The Federal Rules of Civil Procedure
3. Federal common law, which generally incorporates the first state’s preclusion law
4. General federal common law chosen by the second court
Two ships collide on navigable waters, and the case is filed in federal court under admiralty jurisdiction. There is no federal statute on point. Which law will most likely supply the rule of decision?
1. Only the law of the forum state
2. Federal common law of admiralty, possibly borrowing state rules
3. General federal common law under Erie
4. The law of any coastal state the judge prefers

Introduction

Federal courts sometimes apply rules that are not found in federal statutes or the Constitution—this is known as federal common law. However, the power of federal courts to create or apply such law is sharply limited.

Before Erie Railroad Co. v. Tompkins, federal courts claimed power to apply a “general” federal common law whenever they sat in diversity. Erie rejected that practice. Today, most civil cases in federal court—especially those based on diversity jurisdiction—are governed by state law for substantive issues. Federal judges are not free to create their own general body of tort, contract, or property law.

The main exceptions are:

When there is a uniquely federal interest that requires a federal rule, and Congress has not occupied the field.
When Congress expressly or impliedly authorizes federal courts to formulate interstitial rules to implement a federal statute or constitutional provision.

Understanding when federal common law applies, and when it does not, is essential for MBE success.

Key Term: Federal Common Law
Judge-made federal rules of decision, created and applied by federal courts in the absence of controlling federal statutes or constitutional provisions, but only in limited, recognized areas of uniquely federal interest.

Key Term: Erie Doctrine
The principle that federal courts sitting in diversity must apply state substantive law (including the forum state’s choice-of-law rules) and may not create general federal common law, except in specific, authorized areas.

Key Term: Uniquely Federal Interest
An area in which the federal government’s interests are so dominant (e.g., rights and duties of the United States, interstate disputes, foreign relations, admiralty) that federal law must govern, and limited federal common law may be created if Congress has not spoken.

Key Term: Preemption
The principle that valid federal law—federal statutes, regulations, and in some settings federal common law—overrides conflicting state law under the Supremacy Clause.

Key Term: Rules of Decision Act
A federal statute directing that, in civil actions where federal law does not supply a rule, federal courts apply the “laws of the several states,” which Erie interprets to include state substantive law and state conflict-of-laws rules.

Key Term: Outcome-Determinative Test
An Erie-related consideration: if ignoring a state rule in a diversity case would substantially affect the outcome (and encourage forum shopping), that rule is usually treated as substantive and must be applied by the federal court.

Federal common law sits at the intersection of these ideas: the Rules of Decision Act, the Erie doctrine, federal interests, and preemption. The rest of this article unpacks that intersection for MBE purposes.

Federal Common Law: Scope and Limits

The Erie Doctrine

Erie Railroad Co. v. Tompkins abolished the notion of “general” federal common law. The Court held that, in diversity cases, federal courts must apply state substantive law instead of inventing federal rules. This was grounded in both the Rules of Decision Act and federalism concerns.

The Erie analysis on the MBE almost always follows this sequence:

Ask why the case is in federal court:
- If it is based on a federal question, the Constitution or a federal statute usually supplies the rule of decision.
- If it is based solely on diversity, Erie is in play.
Ask whether there is a federal directive on point:
- A federal constitutional provision, federal statute, or valid Federal Rule of Civil Procedure (FRCP) that directly conflicts with state law.
- If there is, and it is valid, the federal directive controls.
If there is no federal directive on point, ask whether the issue is substantive or procedural for Erie purposes:
- Substantive → apply state law.
- Procedural → federal courts may apply federal practice.

Some categories are clearly substantive for Erie purposes and are frequently tested:

Statutes of limitations and rules for tolling limitations periods.
State choice-of-law rules.
Elements of claims and defenses, including burdens of proof on those elements.
Rules that affect the measure of damages or the availability of a new trial based on excessiveness.

In closer cases (which are more common on essays than on the MBE), the Supreme Court has used several overlapping considerations:

Outcome-determinative test (Guaranty Trust v. York): would ignoring the state rule substantially affect the outcome?
Balance of interests (Byrd v. Blue Ridge): does the state or the federal system have the stronger interest in applying its rule?
Forum-shopping deterrence (Hanna v. Plumer): would failing to apply the state rule encourage litigants to flock to federal court?

For the MBE, most fact patterns avoid these gray areas and instead test the clearly substantive categories above.

The key connection to federal common law is this: Erie does not forbid all federal common law, only “general” federal common law. It still allows federal courts to make federal common law in limited enclaves where federal interests demand it.

When Is Federal Common Law Permitted

Federal common law is only allowed in a few categories. These show up repeatedly in NCBE questions:

Disputes involving the federal government
- Contracts to which the United States is a party (e.g., procurement contracts, federal loan guarantees).
- Suits involving the rights and obligations of the United States as sovereign (e.g., negotiability of government checks, certain aspects of the Federal Tort Claims Act).
- Liability of federal officers performing official duties, where federal interests in uniform standards are strong.
Interstate disputes
- Boundary disputes between states.
- Interstate water-rights controversies.
- Interpretation and enforcement of congressionally approved interstate compacts.
Admiralty and maritime law
- Maritime collisions, cargo claims, and personal injuries on navigable waters.
- The Constitution extends federal judicial power to “all Cases of admiralty and maritime jurisdiction,” and courts have crafted a largely uniform body of federal maritime common law, which may sometimes borrow state rules.
Foreign relations and international law
- Cases implicating foreign sovereign immunity, recognition of foreign governments, or conflict between state law and treaties or executive agreements.
- State laws that intrude into the conduct of foreign affairs can be displaced by federal common law (sometimes described as foreign affairs preemption).
Federal regulatory schemes and statutory “gap-filling”
- When Congress enacts a detailed federal statute but leaves gaps, federal courts may be understood to have authority to fill those gaps with federal common law if:
  - Congress expressly authorizes it, or
  - uniform federal rules are necessary for the scheme to function.

Examples include certain aspects of ERISA, labor law, and securities law where the Supreme Court has recognized implied federal causes of action or uniform federal standards.

Preclusion effect of federal judgments
- Determining the claim- and issue-preclusive effect of a prior federal judgment is itself a matter of federal law.
- When the earlier judgment was a diversity judgment, federal common law usually adopts the preclusion rules that the state in which the federal court sat would apply.

In all other areas, federal courts must apply state law and may not invent federal rules just because they dislike state law or believe uniformity would be helpful.

Exam framing: If the fact pattern involves the federal government as a party, interstate disputes, admiralty, foreign relations, or implementation of a complex federal statute, consider whether federal common law may apply. Otherwise, start from the presumption that state law governs.

Federal Common Law vs. State Law

If a case falls outside the recognized federal common law categories, federal courts must apply state law—even if there is no federal statute on point. This includes most contract, tort, and property disputes between private parties, even when the case is in federal court under diversity jurisdiction.

However, even within a federal common law enclave, the federal court has options:

It can formulate a uniform federal standard.
It can borrow a suitable state rule as the federal rule of decision.

The Supreme Court has taken both approaches:

In some settings, such as negotiability of federal checks, the Court has insisted on a uniform federal rule because varying state rules would unduly burden federal operations.
In other settings, such as defining “children” under the federal copyright statute, the Court has borrowed state-law definitions, reasoning that there was no need for a special federal definition and that parties would expect state law to apply.

Regardless of whether the federal court creates a uniform rule or borrows a state rule, the resulting doctrine is still federal law and, under the Supremacy Clause, can preempt contrary state law.

Federal Common Law and Preemption

Because federal common law is federal law, it can displace conflicting state law just like a statute:

If federal common law supplies the rule of decision in an area of uniquely federal interest, state law that conflicts with that rule is preempted.
Examples include state laws that interfere with federal foreign-affairs positions or that attempt to regulate federal instruments (such as federal checks) in ways inconsistent with federal interests.

At the same time, there is a presumption against preemption in areas of traditional state regulation (health, safety, and welfare). Federal common law will not lightly be inferred to override state choices in those areas absent a strong federal interest.

Worked Example 1.1

A federal contractor sues the United States in federal court for breach of contract. There is no federal statute directly governing the dispute. Should the court apply federal common law or state law?

Answer:
The court may apply federal common law because the case involves a contract to which the United States is a party—a recognized area of uniquely federal interest. The court might formulate a uniform federal rule or borrow an appropriate state contract rule as the federal rule of decision, but the source of law is federal, not state.

Worked Example 1.2

A federal court hears a negligence case between two private citizens from different states. There is no federal statute on point. May the court create a federal common law rule for negligence?

Answer:
No. Under the Erie doctrine, the court must apply the substantive law of the forum state, including its choice-of-law rules. Federal common law is not permitted in ordinary tort cases between private parties simply because the case is in federal court under diversity jurisdiction.

Federal Judgments and Federal Common Law

A particularly examable application of federal common law is the preclusive effect of federal judgments, especially diversity judgments.

When a federal court sitting in diversity enters a final judgment, later courts—state or federal—must decide what preclusive effect (claim preclusion or issue preclusion) that judgment has. That question is itself one of federal law, but federal law in this area typically incorporates state law:

Federal common law provides that a federal diversity judgment has the same preclusive effect that a court of the state in which the federal court sat would give a comparable judgment.
Thus, a later court usually looks to the law of the original forum state, as adopted by federal common law.

This is a classic example of federal courts using federal common law to “borrow” state preclusion rules.

Worked Example 1.3

A plaintiff filed a diversity action in federal court in State A, alleging business tort claims. Applying State A’s two-year statute of limitations, the federal court dismissed the claims as time-barred “on the merits and with prejudice.” The plaintiff then files the same claims against the same defendant in State B state court. The defendant moves to dismiss based on the prior federal judgment. Which law tells State B’s court what preclusive effect to give the federal judgment?

Answer:
Federal common law governs the preclusive effect of the prior federal judgment. Under federal common law, a diversity judgment generally has the same preclusive effect that a judgment of the state courts in the original forum (State A) would have. The State B court will therefore apply State A’s preclusion law, as incorporated through federal common law, and will likely dismiss the case.

Federal Common Law and Admiralty

Admiralty and maritime cases are a classic enclave of federal common law:

The Constitution extends federal judicial power to all cases of admiralty and maritime jurisdiction.
Federal courts have developed a largely uniform federal maritime common law governing:
- Liability for collisions on navigable waters.
- Maritime contracts and liens.
- Personal injury claims of seamen and longshore workers, subject to federal statutes.

State law can still play a role, but only where it does not conflict with established federal maritime rules and where applying state law would not disrupt maritime uniformity.

Worked Example 1.4

Two ships collide on navigable waters. A passenger sues in federal court under admiralty jurisdiction. No federal statute directly addresses the contributory negligence rule. The forum state follows strict contributory negligence; most other states and maritime cases follow comparative fault. May the federal court develop a federal rule instead of using the forum state’s contributory negligence rule?

Answer:
Yes. Admiralty is a recognized area of federal common law. The federal court may adopt a uniform federal maritime rule, such as comparative fault, rather than follow the forum state’s contributory negligence rule, if it concludes that a uniform standard is necessary to preserve maritime uniformity. The federal maritime rule will then displace inconsistent state law.

Erie, Statutes of Limitations, and Federal Common Law

An area where Erie and federal common law intersect on the exam is statutes of limitations:

In diversity cases, statutes of limitations and related tolling rules are substantive for Erie purposes. Federal courts must apply the forum state’s limitations rules.
Federal common law cannot be used to create a different limitations period just because the judge thinks a longer or shorter period is “better.”

Worked Example 1.5

A diversity case is filed in federal court in State X. The forum state, State X, has a two-year statute of limitations for personal injury claims; the law of State Y (where the injury occurred) has a three-year period. The claim would be timely under State Y’s law but untimely under State X’s law. May the federal court apply a federal common law limitations period or simply choose State Y’s longer period?

Answer:
No. Under Erie and the Rules of Decision Act, statutes of limitations and tolling rules are substantive. The federal court must apply State X’s limitations rules, including State X’s choice-of-law approach to limitations, rather than inventing a federal common law limitations period. The court also may not simply adopt State Y’s rule unless State X’s choice-of-law rules direct it to do so.

Exam Warning

On the MBE, do not assume that federal courts may create federal common law whenever there is a gap in federal statutes or when the judge dislikes state law. Unless the case falls within a recognized enclave of uniquely federal interest (such as disputes involving the federal government, interstate disputes, admiralty, or foreign affairs) or Congress has clearly authorized judicial gap-filling, state law governs.

Revision Tip

When reviewing practice questions, first label the basis of federal subject-matter jurisdiction (federal question or diversity). Then ask:

Is there a federal statute, constitutional provision, or FRCP on point?

If not, is the issue clearly substantive (e.g., limitations, choice of law, elements of a claim)?

Does the fact pattern involve a recognized federal common law enclave?
This structured approach helps you avoid reflexively invoking federal common law where it does not belong.

Summary

Federal courts may apply federal common law, but only in limited, well-defined areas. Erie eliminated general federal common law in diversity cases and requires federal courts to apply state substantive law, including state choice-of-law rules and statutes of limitations, absent a controlling federal directive.

Federal common law remains appropriate where:

The rights and obligations of the United States as sovereign are at stake.
Two or more states are litigating disputes over boundaries, water rights, or interstate compacts.
Admiralty and maritime matters require uniform national rules.
Foreign affairs and international obligations would be undermined by divergent state rules.
Congress has created a comprehensive federal scheme and implicitly or explicitly authorized judicial gap-filling.

Even in these enclaves, federal courts may decide either to craft a uniform federal rule or to borrow a state rule as the federal standard. In either case, the resulting doctrine is federal law and can preempt inconsistent state law under the Supremacy Clause.

For MBE purposes, the key tasks are to:

Recognize when Erie forbids judicial creation of “general” federal common law.
Identify the relatively small number of situations where federal common law is proper.
Understand how federal common law interacts with state law and preemption.
Apply these ideas systematically in multiple-choice fact patterns.

Key Point Checklist

This article has covered the following key knowledge points:

Erie abolished general federal common law in diversity cases and requires application of state substantive law absent a controlling federal directive.
Federal common law survives only in specific enclaves of uniquely federal interest, such as disputes involving the federal government, interstate disputes, admiralty, and foreign relations.
In some federal statutory schemes, courts may create federal common law rules to fill gaps, but only when Congress has authorized or clearly contemplated that role.
Federal courts apply federal common law to determine the preclusive effect of prior federal judgments, usually by incorporating the forum state’s preclusion rules.
Even in federal common law areas, courts may borrow state rules as the federal standard when uniformity is unnecessary and expectations favor applying state law.
Federal common law, like federal statutes and regulations, can preempt conflicting state law under the Supremacy Clause.
Statutes of limitations, tolling rules, and choice-of-law rules are substantive for Erie purposes and cannot be replaced by federal common law in diversity cases.
On the MBE, federal common law should not be invoked to govern ordinary contract, tort, or property disputes between private parties simply because the case is in federal court.

Key Terms and Concepts

Federal Common Law
Erie Doctrine
Uniquely Federal Interest
Preemption
Rules of Decision Act
Outcome-Determinative Test

Law applied by federal courts - Federal common law