The Judicial Power—Diversity of Citizenship Clause

The judicial Power shall extend . . . to Controversies . . . between Citizens of different States. . . .

—Stephen E. Sachs

Introduction

Article III, Section 2, Clause 1 extends the federal judicial power to “Controversies . . . between Citizens of different States.” The Framers designed this form of jurisdiction, commonly called “diversity jurisdiction,” to offer out-of-state litigants an independent federal tribunal and guard against home-field advantage in state courts. When federal courts hear state-law cases, however, they often face complex questions about the structure of our federal system.

History Before 1787

At the time of Independence, “prejudice against those from other states was rampant.”¹ In 1783, George Washington noted that Americans “from the different parts of the Continent” had entered the Continental Army with “the most violent local prejudices.”² These prejudices did not stop at the courthouse door. In “state admiralty courts,” for example, when the parties came from different states, “[o]ut-of-state or foreign litigants could be denied justice.”³ The pleas of out-of-state litigants to the Confederation Congress produced “little effective relief”⁴ because the Articles of Confederation did not establish national courts to handle disputes between citizens of different states. State judges might refuse to enforce Congress’s decrees or might retry cases before new juries until the local party won.⁵ Nor were these juries themselves free from prejudice.⁶

The Constitutional Convention

Many of the Framers of the Constitution argued that there should be independent national courts to try cases of national interest. Early in the Constitutional Convention, the Virginia Plan suggested that federal courts should be able to hear cases “in which . . . citizens of other States . . . may be interested.”⁷ The Committee of Detail included diversity jurisdiction among those “questions [that] involve the National peace and harmony.”⁸

Some delegates, such as Luther Martin of Maryland, opposed the creation of any federal trial courts.⁹ Others, including James Madison of Virginia, contended that only these courts could prevent “improper Verdicts in State tribunals obtained under the biassed directions of a dependent Judge, or the local prejudices of an undirected jury.”¹⁰ The final version of the Constitution included both judicial power over “Controversies . . . between Citizens of different States”¹¹ and a power in Congress to create “inferior Courts . . . from time to time.”¹²

The Ratification Debates

Diversity jurisdiction was a significant topic during ratification. Anti-Federalists such as George Mason of Virginia feared that defendants would be forced to litigate “a thousand miles from home.”¹³ Federalists defended diversity jurisdiction as a means of enforcing the Constitution’s substantive protections. For example, the Constitution bars states from “coin[ing] Money” or “impairing the Obligation of Contracts.”¹⁴ Edmund Pendleton of Virginia argued that a state law violating these provisions might still be enforced by state courts. Without a federal trial court to hear the case in diversity jurisdiction, an out-of-state creditor might be forced to wait for long-delayed review from the Supreme Court—and, in the meantime, to accept payment in depreciated state currency.¹⁵ By contrast, a federal trial court could be trusted to respect the Constitution from the outset.

Federalists also worried about the roadblocks facing out-of-state creditors.¹⁶ In Federalist No. 80, Alexander Hamilton wrote that federal courts could secure the Constitution’s parchment guarantees “against all evasion and subterfuge” and suggested that federal jurisdiction should extend to cases “in which the State tribunals cannot be supposed to be impartial and unbiased.”

Some Anti-Federalists like Agrippa worried that the federal courts, sitting in diversity, would apply newly invented laws.¹⁷ In the Virginia Convention, John Marshall belittled such arguments. He contended that federal courts would decide cases according to familiar choice-of-law rules—regulating contracts, for example, “[b]y the laws of the State where the contract was made,” whether of Maryland or of “the East-Indies.”¹⁸

What Are “Controversies”?

Article III refers to “Cases” and “Controversies.” The latter have long been read as purely civil, while the former may be civil or criminal.¹⁹ Some scholarship suggests that “controversies” also require adverse parties.²⁰ But in certain cases concerning probate matters or domestic relations, the courts act in rem—that is, with regard to a particular property interest or legal status—and there need not be adversity among the parties.²¹ Perhaps for this reason, courts have recognized long-standing “probate” and “domestic relations” exceptions to diversity jurisdiction.²²

Whom Are “Controversies . . . Between”?

The Judiciary Act of 1789 provided for jurisdiction in a suit “between a citizen of the State where the suit is brought, and a citizen of another State.”²³ This rule is easy enough to follow when there is one plaintiff and one defendant, but what happens when there are multiple plaintiffs and multiple defendants? In Strawbridge v. Curtiss (1806), Chief Justice John Marshall held that this statute required all parties on one side of the case to be diverse from all their opponents on the other side of the case so that each party was “competent to sue, or liable to be sued,” in federal court.²⁴ This reading might have made diversity jurisdiction less effective in resolving complex cross-state disputes.²⁵ However, Strawbridge was consistent with common-law rules that did not allow special jurisdictional privileges to be shared with unprivileged parties to joint actions.²⁶

The modern diversity jurisdiction statute (28 U.S.C. § 1332) is still read to require “complete diversity”: no plaintiff and defendant in a diversity case may be from the same state.²⁷ A few statutes require only “minimal diversity” with at least one plaintiff and defendant hailing from different states.²⁸ In 1967, the U.S. Supreme Court held that this minimal diversity was constitutional under the Diversity of Citizenship Clause.²⁹ However, the Court decided the point without briefing or argument, based on twentieth-century sources rather than original history. The Court also failed to explain why Chief Justice Marshall would have read the similar language of the Judiciary Act differently.³⁰

Who Are “Citizens of Different States”?

Diversity jurisdiction is for citizens of “States.”³¹ The Marshall Court recognized that the District of Columbia was not a state in the sense of “a member of the union” and held that its residents therefore could not sue in diversity.³² It soon reached the same result as to citizens of U.S. territories.³³ In 1940, however, Congress extended diversity jurisdiction to citizens of the District of Columbia, Puerto Rico, and the territories.³⁴ A fractured Court upheld this extension of diversity jurisdiction in National Mutual Insurance Co. of D.C. v. Tidewater Transfer Co. (1949), whether as an exercise of Congress’s territorial powers or by giving “States” a broader construction.³⁵ Scholars examining this case have proposed a variety of solutions for D.C. or territorial residents, but most regard the Court’s suggestions as unsuccessful on originalist grounds.³⁶

A harder question is posed by corporations and other legal entities that may sue or be sued under their own names. In 1799, both sides before the Supreme Court assumed that the “President, Directors, and Company of the Bank of North-America” could sue in diversity, noting that its president and directors were all Pennsylvania citizens.³⁷ In Bank of the United States v. Deveaux (1809), Chief Justice Marshall held that a corporation “is certainly not a citizen.”³⁸ However, the Court again ruled that “the rights of the members” who compose the corporation may “be exercised in their corporate name” so that the Article III “controversy” is “between those persons” and the opposing party.³⁹ For diversity purposes, Marshall described “the universal understanding on the subject” as treating a corporation’s lawsuit as if all of its members were suing or being sued together.⁴⁰

Deveaux, however, made it difficult for widely held corporations to achieve complete diversity, because its rule required counting the citizenship of each member (equivalent to the modern shareholder). In 1844, the Taney Court suggested that Marshall had “regret[ted]” Strawbridge and Deveaux.⁴¹ The Court abandoned Deveaux and presumed corporations to be citizens of their states of incorporation.⁴² The Court soon declared this presumption irrebuttable.⁴³ Deveaux’s rule remains in place for noncorporate entities such as limited partnerships and limited liability corporations.⁴⁴ Some modern scholars, however, reject legal entities’ use of diversity jurisdiction altogether.⁴⁵

What Law Will Courts Sitting in Diversity Apply?

Once a controversy between citizens of different states is properly before a federal court, what law should that court apply? The Constitution gives controversies involving federal laws their own route to federal court for all cases “arising under . . . the Laws of the United States.”⁴⁶ Diversity cases typically involve some other type of law. Would it be the law of the plaintiff’s state, or of the defendant’s state, or of the state where the court is located? Or would the federal court follow a choice-of-law rule that depends on the events in the case? And what if the federal court and the state courts would understand that law differently?

In a provision of the Judiciary Act of 1789 known as the Rules of Decision Act, Congress declared “the laws of the several states” to be “rules of decision in trials at common law . . . in cases where they apply.”⁴⁷ The instruction to apply state laws “where they apply” was not circular, because it presupposed an already existing system of choice-of-law rules. For example, a contract’s substance was regulated by “the law of the country where it is made,” but remedies for breaching the contract were determined by the local court’s “modes of proceeding.”⁴⁸ These standards were recognized under “the general rule admitted by the comity of nations.”⁴⁹ Diversity jurisdiction thereby preserved whatever legislative powers the states had previously enjoyed “within the ordinary functions of legislation.”⁵⁰

In identifying those state laws, federal courts were expected to defer to state court decisions when interpreting a state’s statutes or describing its local customs.⁵¹ They were not, however, required to treat court decisions about state laws as if they were “laws” themselves.⁵² Nor were federal judges required to take state judges’ word as final on questions that were “not subject to state regulations” or that state law did not answer.⁵³ These might have included questions of English common law, international law, or other forms of “general” law to which a state’s law might have cross-referred.⁵⁴ In Swift v. Tyson (1842), the Court addressed those cases that were governed neither by “local statutes” nor by “local usages” and that a state had left up to “general principles of commercial law.”⁵⁵ In such cases, it held, the federal and state courts were to decide independently, with “the state tribunals . . . called upon to perform the like functions as ourselves.”⁵⁶

Erie Railroad Co. v. Tompkins (1938) overruled Swift, holding that “[t]here is no federal general common law” and that federal courts had no “power to use their judgment as to what the rules of common law are.”⁵⁷ Federal courts had to assume that “the law of the state” was “‘not the common law generally’” but whatever had been declared to be state law by the “highest [state] court in a decision.”⁵⁸ The Court made no exceptions for cases in which a state’s legislature had specified that the common law should be used⁵⁹ or in which the state’s constitution had not granted its courts such declarative power.⁶⁰ The Court instead rooted its holding in a misreading of the Judiciary Act’s legislative history and in its own view of the nature of law.⁶¹

The Court soon applied its new Erie doctrine to choice of law. In 1941, it held that federal courts should not make an impartial assessment under the Rules of Decision Act of “where” state laws “apply” but should apply whichever laws would be applied by the courts of the state in which they sit.⁶² This change promoted “vertical” uniformity between the federal and state courts in each state, but it destroyed the “horizontal” uniformity among different federal courts—something that diversity jurisdiction had previously guaranteed to out-of-state litigants across the country and that some scholars have identified as the main benefit of diversity jurisdiction.⁶³

1. Deirdre Mask & Paul MacMahon, The Revolutionary War Prize Cases and the Origins of Diversity Jurisdiction, 63 Buff. L. Rev. 477, 508 (2015). ↩︎
2. George Washington, Farewell Address to the Army (Nov. 2, 1783), https://perma.cc/8R3Z-FTDJ. ↩︎
3. Henry J. Bourguignon, The First Federal Court: The Federal Appellate Prize Court of the American Revolution, 1775–1787, at 320 (1977). ↩︎
4. Id. ↩︎
5. Mask & MacMahon, supra at 506–07. ↩︎
6. Robert L. Jones, Finishing a Friendly Argument: The Jury and Historical Origins of Diversity Jurisdiction, 82 N.Y.U. L. Rev. 997, 1041–43 (2007). ↩︎
7. 1 Farrand’s 22. ↩︎
8. 2 Farrand’s 39, 186. ↩︎
9. Id. at 45–46. ↩︎
10. 1 Farrand’s 124. ↩︎
11. Art. III, § 2, cl. 1. ↩︎
12. Art. III, § 1; Art. I, § 8, cl. 9. ↩︎
13. 10 DHRC 1387, 1405. ↩︎
14. Art. I, § 10, cl. 1. ↩︎
15. 10 DHRC 1428. ↩︎
16. Henry J. Friendly, The Historic Basis of Diversity Jurisdiction, 41 Harv. L. Rev. 483, 496 (1928). ↩︎
17. 4 DHRC 406, 407 (Agrippa); 10 DHRC 1422 (Patrick Henry). ↩︎
18. 10 DHRC 1434. ↩︎
19. St. George Tucker, 1 Blackstone’s Commentaries: With Notes of Reference to the Constitution and Laws of the Federal Government of the United States and of the Commonwealth of Virginia app. E, at 420–21 (1803). ↩︎
20. James E. Pfander & Daniel B. Birk, Article III Judicial Power, the Adverse-Party Requirement, and Non-Contentious Jurisdiction, 124 Yale L.J. 1346, 1424 (2015). ↩︎
21. Id. at 1367, 1457–58; James E. Pfander & Emily K. Damrau, A Non-Contentious Account of Article III’s Domestic Relations Exception, 92 Notre Dame L. Rev. 117, 147–48 (2016). ↩︎
22. Pfander & Birk, supra at 1458 (citing Gaines v. Fuentes, 92 U.S. 10 (1875)); Pfander & Damrau, supra at 147–49. ↩︎
23. Ch. 20, § 11, 1 Stat. 73, 78 (1789). ↩︎
24. 7 U.S. (3 Cranch) 267, 267 (1806); Patrick Woolley, Diversity Jurisdiction and the Common-Law Scope of the Civil Action, 99 Wash. U. L. Rev. 573, 573–74, 587–93, 606–07 (2021). ↩︎
25. Charles J. Cooper & Howard C. Nielson, Jr., Complete Diversity and the Closing of the Federal Courts, 37 Harv. J.L. & Pub. Pol’y 295, 310 (2014). ↩︎
26. 1 Matthew Bacon, A New Abridgment of the Law 8 (Henry Gwillim ed., 5th corr. ed., 1798); Mark Moller, Complete Diversity: The Origin Story, 76 Fla. L. Rev. 1224, 1236–59 (2024). ↩︎
27. Lincoln Prop. Co. v. Roche, 546 U.S. 81, 84, 88–89 (2005). ↩︎
28. 28 U.S.C §§ 1332(d), 1335. ↩︎
29. State Farm Fire & Cas. Co. v. Tashire, 386 U.S. 523, 530–31 (1967). ↩︎
30. Id. at 530, 531 n.7. ↩︎
31. Art. I, § 2, cl. 1. ↩︎
32. Hepburn v. Ellzey, 6 U.S. (2 Cranch) 445, 452–53 (1805). ↩︎
33. Corp. of New-Orleans v. Winter, 14 U.S. (1 Wheat.) 91 (1816). ↩︎
34. 28 U.S.C. § 1332(e); Nat’l Mut. Ins. Co. of D.C. v. Tidewater Transfer Co., 337 U.S. 582, 584 (1949) (opinion of Jackson, J.). ↩︎
35. Tidewater, 337 U.S. at 589; id. at 623–26 (opinion of Rutledge, J.). ↩︎
36. Henry M. Hart, Jr. & Herbert Wechsler, The Federal Courts and the Federal System 371–72 (1953); James E. Pfander, The Tidewater Problem: Article III and Constitutional Change, 79 Notre Dame L. Rev. 1925, 1978–79 (2004); Mila Sohoni, The Puzzle of Procedural Originalism, 72 Duke L.J. 941, 977 (2023). ↩︎
37. Turner v. Bank of N. Am., 4 U.S. (4 Dall.) 8, 10–11 (1799). ↩︎
38. 9 U.S. (5 Cranch) 61, 86 (1809). ↩︎
39. Id. at 86–87. ↩︎
40. Id. at 88. ↩︎
41. Louisville, Cincinnati & Charleston R.R. Co. v. Letson, 43 U.S. (2 How.) 497, 555 (1844). ↩︎
42. Id. ↩︎
43. Marshall v. Balt. & Ohio R.R. Co., 57 U.S. (16 How.) 314, 327–29 (1855); 28 U.S.C. § 1332(c)(1). ↩︎
44. Carden v. Arkoma Assocs., 494 U.S. 185 (1990). ↩︎
45. Mark Moller & Lawrence B. Solum, The Article III “Party” and the Originalist Case Against Corporate Diversity Jurisdiction, 64 Wm. & Mary L. Rev. 1345 (2023). ↩︎
46. Art. III, § 2, cl. 1; 28 U.S.C. § 1331. ↩︎
47. Judiciary Act § 34, 1 Stat. at 92. ↩︎
48. Camfranque v. Burnell, 4 F. Cas. 1130, 1131 (C.C.D. Pa. 1806) (No. 2342) (Washington, Circuit Justice). ↩︎
49. Golden v. Prince, 10 F. Cas. 542, 543 (C.C.D. Pa. 1806) (No. 5509). ↩︎
50. Id. at 543. ↩︎
51. Caleb Nelson, A Critical Guide to Erie Railroad Co. v. Tompkins, 54 Wm. & Mary L. Rev. 921, 941–43 (2013). ↩︎
52. Id. at 956–59 (rebutting Charles Warren, New Light on the History of the Federal Judiciary Act of 1789, 37 Harv. L. Rev. 49, 52, 88 (1923)). ↩︎
53. Golden, 10 F. Cas. at 543. ↩︎
54. Nelson, supra at 943–49, 959. ↩︎
55. 41 U.S. (16 Pet.) 1, 18 (1842). ↩︎
56. Id. at 19; William A. Fletcher, The General Common Law and Section 34 of the Judiciary Act of 1789: The Example of Marine Insurance, 97 Harv. L. Rev. 1513, 1515 (1984). ↩︎
57. 304 U.S. 64, 78 (1938). ↩︎
58. Id.; id. at 79 (quoting Black & White Taxicab & Transfer Co. v. Brown & Yellow Taxicab & Transfer Co., 276 U.S. 518, 533 (1928) (Holmes, J., dissenting). ↩︎
59. Nelson, supra at 937 & n.49; Stephen E. Sachs, Finding Law, 107 Calif. L. Rev. 527, 573 (2019). ↩︎
60. Nelson, supra at 980–84; Sachs, supra at 574–77; Michael Steven Green, Erie’s Suppressed Premise, 95 Minn. L. Rev. 1111, 1112–13 (2011). ↩︎
61. Erie, 304 U.S. at 73 n.5 (citing Charles Warren, New Light on the History of the Federal Judiciary Act of 1789, 37 Harv. L. Rev. 49 (1923)); id. at 79; Nelson, supra at 954–56. ↩︎
62. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941). ↩︎
63. Nelson, supra at 967–68; Douglas Laycock, Equal Citizens of Equal and Territorial States, 92 Colum. L. Rev. 249, 282 (1992). ↩︎