RDA/Erie Approach

The RDA provides that “The laws of the several states, except where the Constitution or treaties of the United States or Acts of Congress otherwise require or provide, shall be regarded as rules of decision in civil actions in the courts of the United States, in cases where they apply.” In Erie R.R. v. Tompkins, the Supreme Court held that federal courts must follow state law, whether common law or statue, in suits raising state claims (i.e. under diversity or supplemental jurisdiction).

The aim of the Erie doctrine is uniform enforcement of state-created rights and obligations. If federal and state courts applied different rules yielding different outcomes in otherwise similar cases, it would encourage forum shopping for the most favorable rules. This would result in the inequitable administration of the laws: People couldn’t be sure what legal rules apply to their activity until after they end up in court; but, because of the limits on diversity jurisdiction, only some parties would be able to take advantage of more favorable rules by litigating in federal court. Applying the same rules in federal and state court avoids this problem.

The RDA’s mandate only applies to substantive rules, i.e. those defining the rights, duties, liabilities, and available remedies under state law. It does not require that federal courts follow state procedures. Parties might still engage in forum shopping for more convenient or otherwise preferable procedures. But this doesn’t raise the same concern about inequity resulting from inconsistent enforcement of state-created rights and obligations.

In cases following Erie, the Court has developed an approach to classifying rules as substantive or procedural, rooted in the policy of achieving uniform enforcement of state-created rights. If applying different rules in federal and state court would promote forum shopping for more favorable outcomes and produce an inequitable administration of state laws, the rules will be regarded as substantive and a federal court must follow the state rule. But if the difference in the rules will not determine the outcome of the suit, or at least not strongly and predictably so, the rules will be regarded as procedural and the RDA will not control the choice. In this situation, federal courts may follow federal procedure, particularly where doing so furthers an important federal policy interest.

Byrd v. Blue Ridge Elec. Coop illustrates the analysis. Byrd sued for injuries he sustained while working for one of Blue Ridge’s contractors. Blue Ridge moved to dismiss, arguing that Byrd was a statutory employee of Blue Ridge under state workers’ compensation law (thus barred from bringing a civil suit for his on-the-job injury). The issue was who should decide Byrd’s employee status: the judge, as state law provided, or a jury, as was the practice under federal law. Either way, the same standard would apply to the question of whether Byrd was a statutory employee (a substantive matter on which the RDA mandated that state law applied). Even though juries and judges might reach different conclusions in the run of cases, the choice between judge and jury would not predictably determine the outcome in a given case. Concluding that the RDA did not compel the federal court to follow state law, the Court concluded that the countervailing federal policy interest in favor of the right to a jury tipped the scales in favor of following the federal practice.

REA/Hanna Approach

A different standard applies where the federal rule at stake comes from the FRCP. The REA declares that rules adopted in accordance with that statute–which includes the FRCP–have precedence over any conflicting rules. In Hanna v. Plumer, the Court held that the RDA/Erie analysis does not apply to a choice between state law and the FRCP. Instead, if there is a direct conflict between the two, then a federal court must follow the FRCP rule, as long as it is valid under the REA.

A direct conflict exists where it is not possible to comply with both rules, or where there FRCP rule is more permissive than state law. For example, in Hanna, the plaintiff served the complaint and summons by leaving copies with the defendant’s wife at their home, as permitted under the FRCP. State law specifically required personal service on the defendant. Even though this was also a valid method of service under the FRCP, the Court held that the more permissive FRCP rule applied.

A rule is valid under the REA if it was adopted in accordance with the statutory procedure and does “not abridge, enlarge or modify any substantive right.” The inquiry here is whether the federal rule really regulates procedure, i.e. the judicial process for hearing and deciding disputes over rights and duties created under substantive law. As long as a rule is rationally capable of classification as procedural, it will be considered valid under the REA, even if it may have some effect on outcomes. In practice, no FRCP rule has ever been held invalid under this test.

RDA/Erie Analysis

This question involves a choice between state and federal law on the enforceability of a contractual choice of forum clause. The federal rule here is not part of the FRCP, and there is no indication that it is from a federal statute (in which case the analysis would be similar to Hanna). Assuming it is a judge-made rule, the RDA/Erie analysis applies.

The difference between state and federal law here is not outcome determinative in the relevant sense under Erie. Of course, the choice will likely determine the outcome on the issue of whether the forum selection clause is enforceable, and thus whether a change of venue from NC to TN is granted. But the question under the RDA/Erie analysis is whether the choice of federal or state law would determine the ultimate outcome of the suit. In this case, it would not.

The situation here is similar to Byrd. There, the issue was whether the judge or a jury should decide whether the plaintiff was the defendant’s statutory employee under state law. Here, the issue is whether a NC or TN court should decide whether the defendant is liable for breach of contract and warranty. While each party likely perceives some advantages to litigating in their home state, such as greater convenience and a more sympathetic judge or jury, it is far from certain that the choice of forum will determine who wins the suit. As in Byrd, in either court, state law will apply to the underlying substantive question of whether the defendant is liable for breach of contract and warranty. (There might be a disagreement over which state’s law, NC or TN, applies; but that is a separate question not raised here.)

Consequently, the RDA/Erie policy of ensuring the uniform enforcement of state-created rights and obligations is not not stake here. As in Byrd, the choice of law is relatively unconstrained by the RDA. The federal court may follow the federal rule, particularly if it advances some important federal policy interest (e.g. favoring the freedom and enforcement of contacts). Or, if the court determines that there is no strong countervailing federal policy interest, but that the state rule furthers some important state policy interest (e.g. protecting consumers from overreaching by businesses), it may opt to adopt the state rule for the sake of consistency.

REA/Hanna Analysis

If the federal rule here was from a federal statute, the analysis would be similar to Hanna:

The first question would be whether there is a direct conflict between the federal and state rule. Under state law, the forum selection clause will be unenforceable, while under federal law, it will be enforceable. The rules are thus in direct conflict.

The next question would be whether the statute establishing the federal rule was a valid exercise of legislative power under the constitution. Assuming Congress has the constitutional authority (for example, under the contracts or commerce clause) to adopt a statute on the enforceability of contractual choices of forum, the statute will be valid and controlling by virtue of the supremacy clause.