Swift v. Tyson

For almost one hundred years, the U.S. Supreme Court's decision in Swift v. Tyson, 41 U.S. (16 Pet.) 1, 10 L. Ed. 865 (1842), allowed the federal courts to create their own body of civil COMMON LAW in cases in which the parties were from different states. In exercising its diversity jurisdiction, a federal court was free to ignore the pertinent common law of the state in which it sat and apply federal common law. Though it was intended to encourage the development of a uniform set of COMMERCIAL LAW principles, the Swift decision was sharply criticized as an unwarranted intrusion into areas reserved to state courts.

Swift involved a legal dispute over the law of negotiable instruments. A negotiable instrument is a document by which one party promises to pay either money or goods to another party, called the bearer. For example, a check written on a person's bank account is a negotiable instrument. Negotiable instruments used by business are called COMMERCIAL PAPER and played an important role in the U.S. economy in the early nineteenth century. An unresolved issue was whether the bearer could assign a bill of exchange to a third party, who could then collect on the obligation.

The question of assignments was at the heart of Swift. A third-party assignee of a bill of exchange drawn in New York presented it for payment and was refused. The third party, who was not a New York resident, sued in New York federal district court. The New York common law held that a bill of exchange could not be assigned, and the federal judge ruled accordingly. Because New York was the leading commercial center in the United States, this ruling had serious implications for the national economy.

On appeal, the Supreme Court overturned the decision by reinterpreting the federal RULES OF DECISION ACT, originally section 34 of the JUDICIARY ACT OF 1789 (1 Stat. 73). In its original form, the act provided that "the laws of the several states … shall be regarded as rules of decision in trials at common law in the courts of the United States in cases where they apply." The main issue before the Court concerned the meaning of the word laws. Was the word limited to legislatively enacted statutes or did it include state common-law decisions as well?

Justice JOSEPH STORY, writing for a unanimous Court, concluded that the term laws did not include common-law decisions. Such decisions were "at most, only evidence of what the laws are, and are not, of themselves, laws." Except for decisions of a "local" nature, such as those dealing with real estate, a federal judge was not required to apply a "general" state commonlaw rule involving commerce to a diversitybased case. Under the act a federal judge could apply only state statutes to a legal dispute.

Story, who was the leading U.S. authority on commercial law and commercial paper, believed it was imperative for the growth of the U.S. economy that the United States develop a uniform national law of commerce for the federal courts to apply. Therefore, he declared that federal common law permitted the assignment of commercial paper. Economic and legal historians have concluded that Swift did contribute to the growth of multistate transactions and the national economy. Businesses were able to assign commercial paper without fear that a state would invalidate the assignment.

Nevertheless, the decision angered many who believed a federal common law interfered with the right of states to develop their own principles of commercial law. The Swift doctrine also led to situations in which the SUBSTANTIVE LAW applied to litigants might be determined simply by the fortuity of their residences. Two cases might have different legal results depending only on whether the plaintiff and the defendant were from the same state or from different states. This led to significant unfairness and forum shopping. For example, in Black & White Taxicab & Transfer Co. v. Brown & Yellow Taxicab and Transfer Co., 276 U.S. 518, 48 S. Ct. 404, 72 L. Ed. 681 (1928), a Kentucky corporation dissolved and reincorporated in Tennessee to obtain the benefit of substantive federal common law against another Kentucky corporation.

Faced with mounting criticism of Swift, in 1938 the Supreme Court overturned the decision in ERIE RAILROAD CO. V. TOMPKINS, 304 U.S. 64, 58 S. Ct. 817, 82 L. Ed. 1188. Federal courts were again required to apply state law, whether statutory or common, in diversity jurisdiction cases. In a radical shift from Swift, federal district courts periodically refer questions to state supreme courts, asking for a ruling on what the state law is on a specific issue.