Law applied by federal courts - State law in federal court

Learning Outcomes

This article explains how federal courts determine whether to apply state or federal law when adjudicating state-law claims in diversity and supplemental jurisdiction cases, including:

• The basic structure of the Erie doctrine and how it frames the state–federal choice-of-law analysis on the MBE
• How to identify when a valid federal statute or Federal Rule of Civil Procedure is “on point” and therefore displaces conflicting state law
• Techniques for classifying rules as substantive or procedural, with emphasis on statutes of limitations, burdens of proof, elements of claims, and damages rules
• How federal courts apply the forum state's conflict-of-laws rules to select which state's substantive law governs multi-state disputes
• How to handle statutes of limitations and tolling questions, including when filing and service “commence” an action for limitations purposes
• The limited role of federal common law after Erie and the specific contexts in which it still supplies governing rules
• A step-by-step Erie framework you can deploy under time pressure in MBE fact patterns
• Common exam traps involving outcome-determinative analysis, the twin aims of Erie, and the interaction between Erie issues and removal or transfer

MBE Syllabus

For the MBE, you are required to understand the law applied by federal courts in civil actions, with a focus on the following syllabus points:

• The Erie doctrine and its application in diversity and supplemental jurisdiction cases
• The distinction between substantive and procedural law in federal court
• The effect of a federal statute or Federal Rule of Civil Procedure that is “on point”
• Application of the forum state’s conflict-of-laws rules by federal courts
• Treatment of statutes of limitations and other time bars in diversity cases
• The limited domains in which federal common law exists

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.

1. In a federal diversity case, which law governs the statute of limitations for a state-law claim?
   1. Federal Rules of Civil Procedure
   2. Federal common law
   3. State law, as determined by the forum state's rules
   4. The law of the state where the defendant resides
2. When does a federal court sitting in diversity apply the conflict-of-laws rules of the forum state?
   1. Always, for both substantive and procedural matters
   2. Only for procedural matters
   3. Only for substantive matters
   4. For determining which state's substantive law applies
3. If a valid Federal Rule of Civil Procedure directly conflicts with a state law, which law does a federal court apply?
   1. The state law
   2. The federal rule, if it is valid and on point
   3. The law of the state with the greatest interest
   4. Federal common law

Introduction

When a federal court hears a case based on diversity jurisdiction (or exercises supplemental jurisdiction over a state-law claim), it must decide whether to apply state or federal law to each issue. The Supreme Court’s decision in Erie Railroad v. Tompkins reshaped this analysis and largely eliminated “general federal common law” in diversity cases.

The Multistate Bar Examination regularly tests this territory, usually by asking you to identify:

• Whether state or federal law governs a particular issue
• Whether a Federal Rule or federal statute displaces conflicting state law
• Which state’s substantive law a federal court applies when more than one state is connected to the dispute

Key Term: Erie Doctrine
The principle that a federal court adjudicating a state-law claim (typically in diversity or supplemental jurisdiction) must apply state substantive law and federal procedural law.

At a high level, the Erie analysis proceeds in three steps:

• Is there a federal constitutional provision, statute, or Federal Rule of Civil Procedure that is valid and directly on point?
• If not, is the issue one of state “substance” or federal “procedure” for Erie purposes?
• If the answer is not obvious, would ignoring state law be outcome determinative or encourage forum shopping and inequitable administration of the laws?

The remainder of this article develops those steps and shows how they appear in MBE-style questions.

Key Term: Forum State
The state in which the federal court sits; its substantive law and conflict-of-laws rules are the starting point for Erie analysis.

Federal Rule or Statute on Point (Hanna Step)

The first and most efficient Erie question is: is there a federal provision that directly addresses the issue?

Key Term: Federal Rule on Point
A federal statute or Federal Rule of Civil Procedure that directly regulates the disputed procedural issue in the case.

If a valid federal statute or Federal Rule of Civil Procedure directly conflicts with a state rule and is “on point,” the federal provision controls in federal court.

Key Term: Rules Enabling Act
The federal statute authorizing the Supreme Court to promulgate rules of practice and procedure for federal courts, provided the rules do not abridge, enlarge, or modify any substantive right.

Under Hanna v. Plumer and the Rules Enabling Act, a Federal Rule is valid so long as:

• It really regulates procedure (the judicial process for enforcing rights and duties), and
• It does not alter substantive rights in a way forbidden by the Act.

Federal Rules are almost always valid. The harder question on the MBE is usually whether the Rule is truly “on point.”

Examples:

• Federal Rule 4 allows certain methods of service; if a state bars a method that Rule 4 expressly permits, the federal court uses Rule 4.
• Federal Rule 23 governs class actions; a state statute prohibiting certain state-law claims from being brought as class actions will yield to Rule 23 in federal court (Shady Grove).

Sometimes the federal rule is not on point. For example, Federal Rule 3 says an action is commenced by filing the complaint, but the Supreme Court has held that Rule 3 does not speak to when a state statute of limitations is tolled. If state law says an action “commences” for limitations purposes only upon service, that state rule governs in a diversity case.

Substantive vs. Procedural Law

If there is no conflicting federal rule or statute, the court must decide whether the state rule at issue is substantive (and must therefore be followed) or procedural (and may be displaced by a federal practice).

Key Term: Substantive Law
Law that defines rights, duties, and remedies; for Erie purposes, rules that significantly affect the outcome of litigation or regulate primary conduct outside the courtroom.

Key Term: Procedural Law
Law that governs the methods and mechanics by which cases are litigated in court, including pleading, discovery, and trial management.

Some classifications are firmly settled for Erie purposes:

State rules that are substantive and must be applied:

• Statutes of limitations and rules for tolling limitations
• Elements of state-law claims and defenses
• Burdens of proof on elements of claims and defenses
• State measure-of-damages rules (caps, multipliers, availability of punitive damages)
• State choice-of-law (conflict-of-laws) rules

State rules that are typically procedural and can be displaced by federal practice:

• Form and content of pleadings (e.g., Rule 8 notice pleading)
• Joinder, class action, and intervention rules
• Discovery methods and scope (e.g., Rule 26)
• Jury trial mechanics (e.g., jury size, polling, special verdicts)

On the MBE, statutes of limitations, burdens of proof, and elements of claims are reliable signals that state law must be applied.

Key Term: Outcome-Determinative Test
An Erie consideration: if ignoring a state rule would substantially change the outcome of the case, the rule is more likely to be treated as substantive.

Key Term: Twin Aims of Erie
The goals of avoiding (1) forum shopping between state and federal court, and (2) inequitable administration of the laws due to different results in the two systems.

When the characterization is not obvious, courts ask:

• Would ignoring the state rule significantly affect the outcome?
• Would ignoring the state rule encourage plaintiffs to choose federal court to gain an advantage (forum shopping) or lead to materially different results for similarly situated litigants?

If the answer to these is yes, the state rule is likely treated as substantive and must be applied.

Conflict-of-Laws in Federal Court

When a federal court applies state substantive law, it must also decide which state’s substantive law governs. That choice is not made as a matter of federal common law.

Key Term: Conflict-of-Laws Rules
A state’s choice-of-law principles used to decide which jurisdiction’s substantive law applies to a dispute with multi-state contacts.

In diversity and supplemental jurisdiction cases, federal courts apply the conflict-of-laws rules of the forum state (Klaxon Co. v. Stentor). This remains true even when:

• The case is removed from state to federal court; the federal court uses the state rules of the state from which the case was removed.
• A case is transferred under 28 U.S.C. § 1404(a); the transferee federal court ordinarily applies the choice-of-law rules of the transferor forum.

Thus, the first “state law” the federal court must look to is the forum state’s choice-of-law rules.

Key Term: Forum State
The state where the federal court sits; its substantive law and conflict-of-laws rules are the starting point for determining applicable state law in diversity cases.

Statutes of Limitations and Time-Related Rules

Statutes of limitations are a classic Erie topic.

Federal courts sitting in diversity treat:

• The length of the limitations period, and
• State rules governing tolling, accrual, and relation back

as substantive for Erie purposes. A federal judge must follow forum-state law on these issues, unless a valid federal provision directly and clearly displaces it.

This is why Federal Rule 3 (stating that a civil action is commenced by filing a complaint) does not itself determine when a state statute of limitations is tolled in a diversity case. If the forum state requires service within a specified time for the action to be “commenced” for limitations purposes, that requirement governs.

Federal Common Law

Key Term: Federal Common Law
Judge-made law developed by federal courts in limited areas where important federal interests or the Constitution require a uniform federal rule.

After Erie, there is no general federal common law in diversity cases. However, federal common law still exists in narrow fields, including:

• Disputes between states (e.g., boundary disputes, water rights)
• Certain admiralty matters
• Cases involving uniquely federal interests such as foreign relations or the rights and obligations of the United States
• Certain preclusion issues arising from prior federal judgments

Federal common law does not allow a federal court to ignore state substantive law simply because a judge believes a different rule would be better policy.

Putting It Together: A Step-by-Step Erie Framework

In an MBE-style diversity or supplemental jurisdiction question involving a conflict between state and federal rules, apply this sequence:

1. Is there a federal constitutional provision, statute, or Federal Rule directly on point?

   • If yes, and the federal provision is valid and genuinely procedural, it governs.

2. If not, is the contested rule clearly substantive or procedural?

   • If it is a limitations rule, element of a claim, burden of proof, or choice-of-law rule, treat it as substantive and follow state law.

3. If the characterization is close, consider outcome and the twin aims of Erie.

   • Would ignoring the state rule affect the outcome substantially or encourage forum shopping and inequitable administration of the laws? If so, apply the state rule.

4. For which state’s substantive law do you look?

   • Use the conflict-of-laws rules of the forum state to select the governing state law.

The worked examples below illustrate how this plays out.

Worked Example 1.1

A resident of State A sues a resident of State B in federal court in State A for breach of contract. The contract was negotiated and performed in State C. State A’s conflict-of-laws rules select State C’s law for contract disputes. Which state’s substantive law does the federal court apply?

Answer:
The federal court applies State A’s conflict-of-laws rules, which direct application of State C’s substantive contract law. The federal court sitting in State A steps into the shoes of a State A court for choice-of-law purposes.

Worked Example 1.2

A federal diversity case involves a state-law personal injury claim. The forum state’s law requires claims to be filed and served within two years; under that state’s law, the action is timely “commenced” for limitations purposes only if service is completed within the two-year period. The complaint is filed in federal court within two years, but service is not made until two years and three months after the injury. The Federal Rules of Civil Procedure contain no specific limitations period and allow 90 days for service after filing. Which law governs timeliness?

Answer:
The federal court must apply the forum state’s statute of limitations and its rule that timely service is required to “commence” the action for limitations purposes. Statutes of limitations and tolling rules are substantive under Erie, so the claim is time-barred even though Rule 4 would otherwise allow later service.

Worked Example 1.3

In a diversity action, the forum state requires personal service of the summons and complaint; it does not permit leaving papers at the defendant’s home. Federal Rule of Civil Procedure 4 expressly authorizes leaving process at the defendant’s dwelling with a person of suitable age and discretion. The plaintiff serves the defendant by leaving the summons at his home with his spouse. The defendant moves to dismiss for improper service, arguing that state law forbids this method. How should the federal court rule?

Answer:
The court should deny the motion. Rule 4 is a valid Federal Rule that is directly on point regarding methods of service. Under Hanna, the federal rule governs, even though state service rules differ. The service is effective in federal court.

Worked Example 1.4

A diversity case in federal court involves a state-law wrongful death claim. The forum state has a statute capping non-economic damages in wrongful death cases at $500,000. Federal law contains no damages cap. The plaintiff argues that because the cap concerns the size of the verdict, it is procedural and should not apply in federal court. Which law governs damages?

Answer:
The damages cap is substantive for Erie purposes. It defines the extent of the defendant’s potential liability and would significantly affect the outcome. Ignoring it in federal court would encourage forum shopping and produce inequitable results. The federal court must apply the state damages cap.

Exam Warnings and Practice Pointers

• Substantive vs. procedural traps: Statutes of limitations, tolling rules, burdens of proof, elements of claims, and choice-of-law rules are tested as substantive. Do not treat them as mere procedure.
• Federal Rule not truly “on point”: Be cautious when a question hints at a Federal Rule; verify that the Rule actually addresses the specific issue (for example, Rule 3 does not itself govern limitations tolling).
• Two questions, not one: In conflicts problems, distinguish the “federal vs. state” Erie question from the separate “which state’s law” choice-of-law question.

Revision Strategy

When you see a federal court hearing a state-law claim:

• Ask: federal rule on point?
• If no, label the contested rule as substantive or procedural using the categories above.
• If necessary, apply the outcome-determinative and twin-aims tests.
• Then apply the forum state’s choice-of-law rules to select which state’s substantive law controls.

Key Point Checklist

This article has covered the following key knowledge points:

• Federal courts adjudicating state-law claims apply state substantive law and federal procedural law under the Erie doctrine.
• A valid Federal Rule of Civil Procedure or federal statute that is directly on point and genuinely procedural displaces conflicting state law in federal court.
• Statutes of limitations, tolling rules, elements of claims and defenses, burdens of proof, damages rules, and state choice-of-law rules are substantive for Erie purposes.
• Federal courts sitting in diversity apply the forum state’s conflict-of-laws rules to decide which state’s substantive law governs.
• Federal Rule 3 does not itself determine limitations tolling; state rules on when an action “commences” for limitations purposes control in diversity cases absent a contrary federal statute.
• Federal common law exists only in narrow areas involving dominant federal interests and does not allow federal courts to disregard state substantive law in ordinary diversity cases.
• Outcome-determinative effects and the twin aims of Erie (avoiding forum shopping and inequitable administration of the laws) guide hard classification questions.

Key Terms and Concepts

• Erie Doctrine
• Substantive Law
• Procedural Law
• Rules Enabling Act
• Conflict-of-Laws Rules
• Federal Common Law
• Forum State
• Federal Rule on Point
• Outcome-Determinative Test
• Twin Aims of Erie