The framers of the Constitution granted the federal courts jurisdiction over both common-law actions and suits in equity. Equity was a centuries-old system of English jurisprudence in which judges based decisions on general principles of fairness in situations where rigid application of common-law rules would have brought about injustice. Judges exercised equitable jurisdiction based on a distinct set of procedures and remedies—most notably, without a jury—that allowed them greater flexibility to hear cases and resolve disputes. The exercise of equity jurisdiction periodically led to debate about the power and discretion of federal judges.
Article III, section 2, clause 1, of the U.S. Constitution extended the federal judicial power to "all Cases, in Law and Equity, arising under this Constitution, the Laws of the United States, and Treaties made, or which shall be made, under their Authority." In section 11 of the Judiciary Act of 1789, Congress provided the circuit courts with original jurisdiction over equity cases in which more than $500 was in dispute when the United States was plaintiff or petitioner, an alien was a party, or the suit was between a citizen of the state where suit was brought and a citizen of a different state. A traditional limit on equity, incorporated into United States law, provided that federal courts would have equity jurisdiction only over cases in which no sufficient legal remedy existed. Section 25 of the act enabled the Supreme Court—under the same limited circumstances applying to cases in law—to review an equity decision made by the highest court of a state.
The federal courts' equity jurisdiction, rather than encompassing certain types of suits, pertained to situations that could arise in virtually any sort of litigation. As Alexander Hamilton explained in Federalist , no. 80, "there is hardly a subject of litigation between individuals, which may not involve those ingredients of fraud, accident, trust, or hardship, which would render the matter an object of equitable rather than of legal jurisdiction." Hamilton elaborated in Federalist, no. 83, that "the great and primary use of a court of equity is to give relief in extraordinary cases, which are exceptions to general rules." Supreme Court Justice Joseph Story, who authored Commentaries on Equity Jurisprudence in 1836, echoed Hamilton, writing that "cases must occur to which the antecedent rules cannot be applied without injustice, or to which they cannot be applied at all."
Some states in the early republic followed the English tradition of maintaining separate courts for law and equity. Others, however, vested their courts with both types of jurisdiction, as Congress did with respect to the federal courts. While section 34 of the 1789 Act mandated that federal courts apply state law in diversity cases involving common law, no such requirement applied to equity jurisdiction. In the Process Act of 1792, Congress provided that equity cases proceed "according to the principles, rules and usages which belong to courts of equity . . . as contradistinguished from courts of common law," to ensure that the two types of actions remained distinct and that judges did not unduly enlarge their discretion by applying equitable doctrines to actions properly governed by common law. The Process Act provided further that the Supreme Court could issue its own rules governing equity procedure in the federal courts. In determining what rules to apply under the Process Act, federal judges sitting in equity were directed by a 1792 rule issued by Chief Justice John Jay to look to the precedents of the English Court of Chancery. The Supreme Court promulgated detailed sets of rules in 1822, 1842, and 1912, with the dual aims of maintaining the strict separation between equity and common law jurisdiction and ensuring uniformity in federal equity jurisprudence. English chancery practices continued to supply the default rules for situations not covered by the Supreme Court equity rules.
The English rules of equity, as modified by the Supreme Court, empowered federal courts sitting in equity to provide relief in exceptional cases by, for example, ordering that restitution be made to victims of fraud for whom common law provided no sufficient remedy; enforcing specific obligations reflecting the intent of contracting parties despite the accident or mistake of one of the parties; issuing injunctions in cases where a party might otherwise be subjected to irreparable harm; and adjudicating disputes relating to trusts not within the scope of the common law.
State law became of greater importance to federal equity in 1839, when the Supreme Court held that federal courts sitting in equity were bound to apply state laws that created or eliminated a substantive right, whether or not such a right existed in English chancery. Federal courts were not bound by state law, however, with respect to questions of procedure and remedies. A federal court could, therefore, grant a traditional equitable remedy even if the state had abolished it, and, conversely, could deny a particular remedy the state had created, unless the remedy in question was inseparable from a substantive right.
The federal courts did not hear many equity cases in the early years of the republic. According to an 1802 report to Congress, circuit courts in some small states had virtually no equity business; for example, New Hampshire, Maryland, and Rhode Island had two, one, and zero equity cases, respectively, between 1790 and 1801. Even in larger states with more equity business, such cases constituted a relatively minor portion of the circuit court docket. Over the same period, Pennsylvania had 722 common law cases and 68 in equity; Georgia had 817 and 78; and Virginia had 1,942 and 195.
The types of equity cases filed in federal courts varied by region. Commercial cases dominated in the Southern District of New York, while disputes over federal land grants and surveys were prevalent in Kentucky. The District of Columbia saw a mixture of traditional equity suits, including those involving mistakes in contracts, dower rights, and the construction of wills, as well as a large number of petitions for freedom filed by enslaved African Americans.
From an average of 20 petitions per year before the Civil War, federal courts' equity caseloads increased to an average of 70 petitions per year from 1865 to 1880. Reflecting the growth of the nation's commerce and industry, 40 percent of equity cases in those years were pleas for injunctions to protect patents, trademarks, and copyrights, and another 20 percent were suits to prevent waste by bankruptcy receivers. Another frequent type of case, particularly from the 1880s onward, involved a landowner's request for an injunction to eliminate or reverse damages caused by industrial pollution. In such cases, courts often balanced the harm caused by the pollution against the harm that would be caused by granting an injunction, pursuant to a doctrine known as "balance of equity." The result was frequently to protect industry—particularly large polluters upon whom an injunction would have imposed significant costs. In the early twentieth century, however, balance of equity evolved into a more flexible tool that judges used to conduct wide-ranging factual inquiries, taking into account such factors as the public interest and a community's quality of life. The newer version of the doctrine, resting primarily on judicial discretion rather than a simple balancing of harms, often resulted in outcomes more favorable to petitioners.
In the late nineteenth century, federal equity jurisdiction expanded in other ways as well, as federal courts increasingly granted injunctions to stop state regulatory actions, particularly with respect to railroad rates. Federal courts utilized their equity powers to establish receiverships for interstate railroads, a procedure that allowed the large corporations to avoid liquidation and to reorganize their finances. In addition, federal courts frequently enjoined the collection of state taxes, the enforcement of state laws outlawing "yellow dog" contracts (under which employees agreed as a condition of employment to forgo union membership), and, most controversially, labor strikes. The Supreme Court's 1908 decision in Ex parte Young expanded federal equity further by providing federal courts the power to enjoin state criminal proceedings if the constitutionality of the criminal statute in question was then being challenged before a federal court. State legislatures attempted to deprive federal courts of equity jurisdiction over some types of cases by providing adequate legal remedies, but these efforts failed, as the Supreme Court in the 1920s established the principle that a legal remedy, if not available in federal court, was insufficient to nullify federal equity jurisdiction.
While many states, beginning in the mid-nineteenth century, enacted legal codes that abolished distinctions between law and equity jurisdiction, the Supreme Court resisted following suit. Chief Justice Roger Taney, in an 1851 opinion, asserted that the distinction was a constitutional requisite. Law and equity remained separate forms of action in the federal courts until the adoption in 1938 of the Federal Rules of Civil Procedure, which combined the two into a single type of case, called a "civil action." Although equity was no longer formally labeled as such or considered a distinct area of jurisdiction, federal courts retained the ability to recognize equitable rights and to issue equitable relief. Also in 1938, the Supreme Court decided Erie Railroad Co. v. Tompkins , which barred federal courts from applying a separate system of non-state legal rules in diversity cases. While Erie directly addressed only common-law cases, the Supreme Court decided soon after that its holding also applied to equity. In determining the parties' substantive rights, federal courts, which already looked to state statutes, were to look to state court precedents as well. Subsequent Supreme Court decisions, however, established that federal courts were not required to follow state law with respect to equitable remedies and instead retained independent authority in crafting appropriate relief.
Two later Supreme Court decisions clarified the scope of the equity exception to the Erie doctrine. In Guaranty Trust Co. v. York (1945), the Court reaffirmed that federal courts were not bound by state law in crafting appropriate equitable remedies. In determining which questions could be classified as ones of procedure or remedy, rather than of substantive rights, so that uniform federal rules would apply, the Court was guided by the goal of Erie that the outcome of a suit not be determined by whether it was litigated in federal or state court. Thus, federal courts could continue to apply uniform federal rules in situations where doing so would not materially affect the outcome of the case in question. In York, for example, a failure to apply a state statute of limitations barring the action would have created a new substantive right for the plaintiff. This result mandated the application of the state rule, despite the fact that statutes of limitations were often classified as procedural. A year later, in Holmberg v. Ambrecht , the Court made clear that its holding in York applied only to cases in which the claims arose under state law. In cases involving rights arising under federal statutes and enforceable in equity, the concern for state sovereignty reflected by Erie was not present, leaving federal courts free to apply traditional federal equity rules.
Kristin A. Collins, "'A Considerable Surgical Operation': Article III, Equity, and Judge-Made Law in the Federal Courts." Duke Law Journal 60, no. 2 (Nov. 2010): 249-343.
John T. Cross, "The Erie Doctrine in Equity." Louisiana Law Review 60, no. 1 (Fall 1999): 173-232.
Peter C. Hoffer, The Law's Conscience: Equitable Constitutionalism in America. Chapel Hill: The University of North Carolina Press, 1990.
Henry L. McClintock, Handbook of the Principles of Equity, Second Edition . St. Paul: West Publishing Co., 1948.
Gary L. McDowell, Equity and the Constitution: The Supreme Court, Equitable Relief, and Public Policy. Chicago: The University of Chicago Press, 1982.
Michael T. Morley, "The Federal Equity Power." Boston College Law Review 59, no. 1 (Jan. 2018): 217-279.
Edward A. Purcell, Jr., " Ex parte Young and the Transformation of the Federal Courts, 1890-1917." University of Toledo Law Review 40, no. 4 (Summer 2009): 931-970.