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Federal jurisdiction over disputes between citizens of different states, commonly known as diversity jurisdiction, enabled federal courts to hear cases involving only state law. Diversity jurisdiction, as well as the establishment by federal judges of rules of decision that diverged from those of the state courts, led to frequent debate about the role of the federal courts in protecting litigants against potential prejudice in state courts and about the proper balance between federal and state jurisdiction.
Article III of the U.S. Constitution included controversies "between Citizens of different States" as within the judicial power of the United States. In section 11 of the Judiciary Act of 1789, Congress granted the circuit courts jurisdiction, concurrent with the state courts, over cases "between a citizen of the State where the suit is brought, and a citizen of another State," provided that more than $500 was in dispute. Section 12 of the Act provided further that in suits commenced in state court by a citizen of the state in which the suit was brought against a citizen of another state, the defendant could petition the state court to "remove," or transfer, the case to the U.S. circuit court for the district in which the case originated. The Supreme Court limited diversity jurisdiction in the 1806 case of Strawbridge v. Curtiss when it held that jurisdiction under sections 11 and 12 required "complete diversity," meaning that in cases with multiple parties no plaintiff could share citizenship with any defendant.
Individuals engaged in interstate commerce made up the most prevalent class of litigants in diversity jurisdiction cases before the Civil War. Despite the mandate in section 34 of the Judiciary Act of 1789 that federal courts apply state law in diversity cases, the U.S. circuit courts in the antebellum years gradually developed their own set of rules governing commercial transactions, particularly with respect to the negotiability of commercial instruments. In Swift v. Tyson (1842), a case involving a bill of exchange through which a resident of New York was indebted to a resident of Maine, the Supreme Court held that the decisions of the New York state courts did not constitute the "state law" that federal courts must apply in diversity cases. Instead, the Swift decision held that federal courts possessed the authority to interpret and apply general commercial law, thus dramatically expanding federal judicial power. In the decades that followed, many plaintiffs involved in interstate commerce viewed this "federal common law" as more sympathetic to their interests and a further incentive to invoke diversity jurisdiction and file suit in federal court.
During Reconstruction, a Congress dominated by Radical Republicans expanded access to federal courts in an effort to protect freed slaves and Union officials from bias in state courts of the former Confederacy. Two statutes in particular facilitated removal based on diversity of citizenship. Following the Civil War, white southerners who sued out-of-state "carpetbaggers" in state court often added a defendant from their own state to eliminate "complete diversity" and thereby prevent the removal of the cases to federal court, a tactic known as "joinder." In 1866, in what became known as the Separable Controversy Act, Congress provided that an out-of-state defendant sued by a resident plaintiff could remove a portion of the suit if that controversy could be settled without the participation of the other defendants named in the suit. A year later, Congress amended the act of 1866 with what came to be known as the Local Prejudice Act, which provided that any out-of-state party, whether plaintiff or defendant, could petition at "any time before the final hearing or trial of the suit" to remove a case to a federal court upon asserting a fear of local prejudice in the state court. In the Jurisdiction and Removal Act of 1875, Congress replaced the Separable Controversy Act with a much broader removal provision that allowed either a plaintiff or a defendant who was a party to a separable controversy to remove the entire suit of which that controversy was a part. For the first time, federal courts could hear a controversy between citizens of the same state even when no federal question existed between them. In addition, the act of 1875 overturned the rule that diversity jurisdiction could be invoked only when one party was a citizen of the state in which the suit was brought.
The expansion of federal jurisdiction during the Reconstruction era and the resulting rise in Supreme Court caseloads led to efforts in Congress in the 1880s to curtail diversity jurisdiction, resulting in the Judiciary Act of 1887-1888. That statute raised to $2,000 the minimum amount in controversy required for diversity cases and rescinded the right of plaintiffs to remove qualified cases from a state court to a federal court. In addition, the 1887-1888 statute reinstated the requirement that removal could occur only in controversies between a citizen where the suit was brought and a citizen of another state.
In the decades following Reconstruction, it was large interstate business corporations, especially railroads and insurance companies, that most took advantage of federal diversity jurisdiction. Corporations, which were deemed by the Supreme Court to be citizens of the state in which they were chartered, sought to remove contract and tort suits against them from state courts, where, business leaders argued, they were subject to local anticorporate prejudice. At the same time, plaintiffs seeking to recover from corporations fought to keep their suits in state courts through the increased use of joinder. In the mid-to-late 1890s, the Supreme Court issued a series of decisions making it easier for corporations to remove suits to a federal court. In the early twentieth century, however, the Supreme Court, signaling the beginning of a shift in the federal courts away from private law issues and toward questions of federal law, changed course and issued several decisions making removal more difficult.
In the early twentieth century, personal injury cases constituted the largest proportion of diversity litigation, with contract disputes and insurance cases making up another third of diversity cases. In 1911, in response to rising caseloads, Congress sought to reduce the number of diversity cases by raising the amount in controversy to $3,000.
In 1938, in Erie Railroad Co. v. Tompkins , the Supreme Court overruled Swift v. Tyson and held that when considering state legal issues, which were the basis of most diversity cases, federal courts were bound to apply the common law of the states in which they sat, rather than a federal common law. The Erie decision had the effect of removing one of the major incentives for invoking diversity jurisdiction. Further limits on diversity suits came in 1958, when Congress raised the amount in controversy to $10,000, barred removal in workers' compensation cases, and made corporations citizens of their primary places of business as well as their chartering states. These measures effectively ended the pattern of diversity litigation whereby parties used removal and joinder to move cases to what they expected to be a more favorable forum.
Although forum preferences were weaker after 1958, corporations remained parties to a high percentage of diversity cases, many of which were insurance, personal injury, libel, and property suits. In the following decades, many members of the legal profession argued for the abolition of diversity jurisdiction, viewing it as a burden on the federal courts, an infringement on state sovereignty, and of little practical use following the Erie decision. Others opposed abolition, claiming that protection of out-of-state litigants was still important, that diversity jurisdiction continued to promote interstate commerce, and that the federal courts were of higher quality than those of the states. In 1990, the congressionally appointed Federal Courts Study Committee recommended abolition; Congress did not act on the committee's suggestion, but did restrict diversity jurisdiction further by raising the minimum amount in controversy to $50,000 in 1988 and $75,000 in 1996.
Despite the belief of many that diversity jurisdiction was no longer needed, Congress enacted three statutes between 1990 and 2005 that resulted in its expansion with respect to class actions. The first, in 1990, provided for supplemental jurisdiction over claims, including those involving the joinder of additional parties, that formed "part of the same case or controversy" as claims over which the courts already had jurisdiction. In 2005, the Supreme Court interpreted the statute to allow federal courts to exercise supplemental diversity jurisdiction over class action plaintiffs whose claims fell short of the amount in controversy requirement. In 2002, a statute eliminated the complete diversity requirement in cases in which a single-location accident caused 75 or more deaths. In 2005, Congress passed the Class Action Fairness Act, providing for federal jurisdiction over class actions in which minimum diversity existed and the aggregate of all claims was in excess of $5 million, making nearly all multistate class actions cognizable in federal court.
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