From the very creation of the United States of America in 1776 there was tension between the federal government and the various state governments as to power, taxation and control of the courts and legal systems. That tension continues even until today, with two parallel systems of courts still existing: the various state courts and the federal courts.
The United States Supreme Court long ago ruled that state law cannot violate federal statutes or the Constitution of the United States. It also ruled that certain interstate activities fall under the purview of the federal government, such as interstate commerce. Conversely, federal courts cannot be called upon to handle matters that occur under strictly state law or involve solely internal state matters that do not conflict with federal law. If such conflict does exist, federal law prevails. But within those sweeping rules are a myriad of exceptions, details and conflicting interpretations that can make the issue of federal versus state jurisdiction a hotly contested matter.
As an example, education is normally a state issue, largely funded and controlled by each state. However, from the 1950’s on the federal courts held that Constitutionally protected rights are involved in much of education, most importantly pertaining to Constitutionally mandated equal protection under the laws and thus the federal government ordered the racial integration of public schools in 1954. The same theory soon pertained to all areas of public accommodation in various businesses within each state so long as the facility, be it restaurant or public transport, was available to the public at large. Thus, restaurants could not racially segregate facilities. This was federal law imposed upon the states, with much resistance in the southern states, though all the states eventually passed their own state laws requiring racial integration as well under their state constitutions.
The typical vesting of jurisdiction for a federal court arises if a federal statute or Constitutional right is at issue or if there is “diversity” jurisdiction, the subject of this article.
In its most basic form, diversity jurisdiction arises when a party from one state is sued in the state courts of a different state. This can allow that party to “remove” the case to federal court. How and why is discussed below.
The Rationale of Diversity Jurisdiction:
In the eighteenth century it would take close to a month to travel from Massachusetts to South Carolina and their cultures were as different as today’s New York compared to Bolivia. There was little trust between the states and their various local laws differed widely. As the decades passed, the laws of the various states often remained diverse, with such states as Louisiana being based in large part on the Napoleonic Code as compared to the British tradition of the other states, but key areas of law, such as the legality of slavery, differed from state to state.
The states were often hostile to each other, disliking and condemning the different “cultures” and populations. It is important to recall that the Civil War, fought between 1861 and 1865, was largely based on those cultural difference and killed over five hundred thousand Americans…by far the deadliest war in American history. The states courts were not friendly locales to other states more often than not.
Thus, when a business owner in New York could face litigation in New Orleans, there was legitimate fear he or she would face local prejudice and hostility. Congress recognized this simple fact and realized that the danger could apply in reverse and would interfere with commerce and connection between the States.
Their solution was to allow a party sued in a foreign state to petition the federal court located in the foreign state to take jurisdiction of the case. The concept was that the federal court system located in that state would be less inclined to be prejudiced against the out of state party, having been appointed by the federal government, paid by the federal government, and operated by federal statutes.
This concept is called “diversity jurisdiction” and allows any party sued in the courts of a foreign state to immediately petition to “remove” the case from the foreign state court to the federal court located in that state.
There are restrictions. For diversity jurisdiction to apply, all the defendants sued must be out of state. The rationale is that if there is a mix of in state and out of state defendants, then the prejudice possible in the foreign state would not apply since some of the defendants are local.
Further, the federal courts have placed other limits on the right of a party to obtain diversity jurisdiction, such as amount in controversy.
The Usual Issues:
One immediately encounters key questions.
- If a party is an entity that exists in numerous jurisdictions, or engages in business or operations in numerous jurisdictions, including the one of the local state court, are they a “foreign” party that can invoke diversity jurisdiction? It usually depends on their connection to the local state. Occasional sales do not vest such jurisdiction, but a local plant or offices may. Thus, if there is a plant in State A and suit is brought in State A, expect a claim that true diversity does not exist for that party.
- If four or five parties are defendants, and one of them is resident in the state in which the state court is located, is there diversity? The answer is no. To achieve diversity jurisdiction, all the parties on a particular side must be “foreign.” This is termed, “complete diversity.” Realizing that doctrine, plaintiffs can seek to avoid removal to federal court by including defendants that are located within the home state. If even only one defendant is “local” then diversity will not apply.
This tactic can lead to motions to dismiss parties claimed to be not really part of the lawsuit and only sued to defeat diversity. If such is proven, it can lead to an angry court and sanctions by the federal judge, as more fully discussed below.
- What law applies to the dispute? There is a great deal of case law on that issue, but essentially state law applies to “substantive” issues and federal law to civil procedure. The gray areas between those two areas is what has led to much of the case law. Thus, for example, the time to answer a complaint or process to seek an injunction or to engage in discovery is set by the Federal Rules of Civil Procedure while what constitutes a valid defense of a contract or negligence is set by state law in that particular state.
- What happens to the state action? The state court normally dismisses the action or removes the action to federal court. Federal jurisdiction trumps state jurisdiction.
- What happens if federal law differs from state law? Federal law prevails over state law, but the federal courts will not contradict state law applying to the dispute unless federal issues or federal civil procedure are the issues at bar.
- What is the effect of the federal judgment? The judgment may be enforced the same as a state judgment.
Depending on the state, there may be advantages in seeking federal jurisdiction. Federal judges are often considered superior in background and education than state judges and are not elected as are many state judges. The federal system is often faster and more efficient than many state systems. Often the federal courts are better funded than the state courts, thus courtrooms and other resources more readily available. Most federal cases go to trial long before a similar case brought in a state court.
One key difference is that the case is normally assigned to a single judge from beginning to end. The judge “owns” the case, which is not common in state courts. This normally means that the court will be far more familiar with the case as the months go by and may take a very active role in controlling discovery, time of hearings and time of trial. The federal judges are known for insisting upon rapid time limits on pleadings and usually have requirements to make full disclosure of all facts of the case in various pleadings so that the court can insist upon stipulations on various issues and a rapid and shorter trial.
While a state case may languish for months or even years unless the attorneys press it forward, most federal judges personally force the case along a rigid and rapid set of procedures and if time limits are not met and there is not a valid excuse, can impose sanctions upon both the attorneys and the parties.
As such, parties in a hurry to either settle or go to trial are likely to prefer federal court to state court.
The inherent speed and court involvement in federal court also means that parties seeking to merely have a delay in meeting an obligation find themselves having to appear in court often, demonstrate to the court that they have a viable defense, and spend much in fees and costs to meet the various procedural requirements imposed by the court. Federal court often moves quickly and is not a place to hope to stall for long.
On the other hand, if the federal court determines that no true diversity jurisdiction exists and that parties twisted the true parties that should be part of the case to achieve diversity jurisdiction without good cause, the court can quickly impose severe sanctions on the attorneys and parties doing so and dismiss the case from the federal system. The already overloaded system does not want any case that does not properly belong there, and the judge will at times impose sanctions that include fines payable to the court and payment of all fees and costs of the other party.
As with so much in law, careful strategic analysis must be conducted before it can be concluded that true diversity jurisdiction exists…and that it should be utilized. Keep in mind that the party with a right to remove a matter to federal court need not do so. It is a choice that the party has, and various tactical advantages and disadvantages need to be considered.
The first time this writer was in federal court a tiny bald-headed judge, almost invisible behind the tall bench, began screaming at counsel appearing before him because that counsel had not filed the required documents before the court that the local federal rules imposed. The judge was furious and suddenly barked, “Did you bring your toothbrush?” to the poor lawyer and then ordered the bailiff to have the lawyer taken away to spend a night in jail. The entire court room was abashed, and we later learned that the court had the lawyer released about an hour later…but he had made his point.
One does not trifle with federal court. As one wise old lawyer once commented to the writer, “It’s the Big Leagues and one had better have one’s game face on…”