I. Horizontal Choice of Law in Federal Court
Thus far we have addressed how state courts determine which state’s substantive law to apply to a given case using choice of law rules. But what happens when a federal court sitting in diversity is faced with a horizontal choice of law question? Does it follow that state’s choice of law rule, or is there a federal rule as to choice of law?
This question was answered by the Supreme Court in Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487 (1941). The Court rejected the idea that there exists some “independent ‘general law’ of conflict of laws” that federal courts could apply, and instructed federal courts to apply the conflict of law rules of the states in which they sit.
The mandatory nature of this order was reaffirmed in Day & Zimmerman, Inc. v. Challoner, 423 U.S. 3 (1975), in which the Supreme Court remanded a case to a federal court in Texas that had originally declined to apply Texas’s choice of law rule, writing: “the conflict-of-law rules to be applied by a federal court in Texas must conform to those prevailing in the Texas state court.”
This is an especially significant order given the immense discretion states are given in determining when their own law applies. Remember that the constitutional limits on such determinations by states was articulated in Allstate Insurance Co. v. Hague, 449 U.S. 302 (1981). For the application of a given state’s substantive law to a conflict to be constitutionally permissible, “that State must have a significant contact or significant aggregation of contacts, creating state interests, such that choice of its law is neither arbitrary nor fundamentally unfair.” This decision gives significant leeway to states to determine and apply choice-of-law rules that favor the choice of their own substantive law. Following Klaxon, federal courts sitting in a state with a choice of law rule that favors that state’s own substantive law are bound to similarly favor the application of that state’s substantive law in any horizontal choice of law analysis.
Thus, while the Klaxon rule restricts opportunities for vertical forum shopping (by eliminating any strategic incentive in terms of choice-of-law analysis when choosing between state and federal courts in a given state), it facilitates more horizontal forum shopping. Plaintiffs know that bringing a case in a federal court in a state with a far-reaching choice of law provisions are likely to have that state’s law applied to their case.
II. Horizontal Choice of Law in Transferred Cases
A. Transfers under §1404 (Original Venue and PJ Proper)
The issue of choice of law in federal courts doesn’t end there, however. The Supreme Court addressed the more complicated issue of choice of law in cases transferred pursuant to 28 U.S.C. §1404(a) in Van Dusen v. Barrack, 376 U.S. 612 (1964). Remember, §1404(a) applies to cases in which venue was originally proper.
In Van Dusen, the defendant wanted to transfer the case from federal court in Pennsylvania to federal court in Massachusetts in the hopes of getting more favorable Massachusetts substantive law to apply. Although Erie would suggest that the transferee court (here, the federal court in Massachusetts) would be bound to apply the law of the state in which it sat (here, Massachusetts substantive law as the defendant hoped), the Supreme Court ruled that the transferee court was not so bound. Instead, it prescribed the continued application of the choice of law rules of the transferor court, explaining that “[a] change of venue under § 1404(a) generally should be, with respect to state law, but a change of courtrooms.” A defendant should not be able to get a different choice of law rule which could potentially lead to the choice of a different substantive law just by having the case transferred from a different (but originally proper) venue.
Thus, for cases transferred pursuant to §1404(a), the transferee court should use the choice of law provisions the transferor court would have applied. The Van Dusen rule leads to cases in which a federal court is obligated to apply the choice of law rules of a state other than the one in which it sits when the case has been transferred from federal court in a different state pursuant to §1404(a).
The Court’s decision in Ferens v. John Deere Co., 494 U.S. 516 (1990) made clear that the Van Dusen rule applies regardless of which party initiates the transfer. In Ferens, the plaintiff originally brought certain tort claims in federal court in Mississippi (where the statute of limitations was longer) and subsequently moved to transfer the action to federal court in Pennsylvania (where the claims would have been time-barred if brought there originally). Although the Pennsylvania court dismissed the transferred claims based on the Pennsylvania statute of limitations and the Court of Appeals affirmed, the Supreme Court reversed. The Court held that even if the plaintiff is the party later initiating a transfer under §1404(a), the Van Dusen rule still applies.
The opportunities for gamesmanship here should be clear. Even when the “interests of justice” clearly favor hearing the case in a different venue, the plaintiff may have already locked up a favorable substantive law through the initial filing of the case in an otherwise inconvenient forum. The ruling in Ferens, specifically, allows for a plaintiff to bring a case in an inconvenient forum with favorable law and then move for a §1404(a) transfer to end up with both favorable law and a favorable forum.
2014 Wrinkle - Atlantic Marine. But, it does not end there! If you remember from venue (184.108.40.206), in 2014, the Supreme Court decided Atlantic Marine v. U.S. District Court for W.D.T.X., 134 S.Ct. 568 (2014). As you may recall, Atlantic Marine had subcontracted with another company for construction work; their contract included a forum selection clause specifying that all disputes would be litigated in E.D.V.A.. However, the subcontractor sued Atlantic Marine in W.D.T.X. The Court held that § 1404 was proper (not § 1406 as Atlantic Marine had argued). Given that, the Court remanded with instructions to re-weigh the transfer factors.
Interestingly, as noted in 220.127.116.11 (but now you know so much more Civ Pro!) the Court also held that the forum selection clause negated the Van Dusen exception to Klaxon (that a federal court sitting in diversity applies the law of the state from which the action was initiated given proper jurisdiction and venue) and therefore the transferee court should apply the law of its own jurisdiction.
B. Transfers under §1404 and §1406 (Original Venue and/or PJ Lacking)
What about the applicability of the Ferens rule when the transfer is effected pursuant to §1406(a) rather than §1404(a)? (Remember, under §1404(a) original venue is proper while under §1406(a) original venue is not proper.) Or transfers effected under §1404(a) where personal jurisdiction over the defendant is lacking in the transferor court?
The Supreme Court ruled in Goldlawr, Inc. v. Heiman, 369 U.S. 463 (1962) that §1406 authorized discretionary transfers even when personal jurisdiction over the defendant was lacking in the court where the case was originally filed. While the majority found that a court had discretion to transfer a case under §1406 when venue was improper and personal jurisdiction was lacking, the dissent in Goldlawr was incredulous that the “interest of justice” would ever dictate a transfer when “both venue are personal jurisdiction are lacking in the district where the action is commenced.”
In terms of applicable choice of law rules in cases transferred under §1406 (and cases transferred under §1404(a) in which personal jurisdiction is lacking), courts have recognized that the plaintiff’s ability to force the application of favorable substantive law is not completely unfettered. For cases in which either venue is improper or personal jurisdiction over the defendant is lacking, courts have not required the application of the choice of law of the transferor court (where the case was originally improperly filed), but have required the application of the law of the transferee court (where the case should have been brought originally). The same rule applies when a case is transferred under §1631 (to cure a lack of personal jurisdiction).
Transfer Statute PJ in Transferor? Venue in Transferor? Follow law of:
§1404 YES YES Transferor
§1404 NO YES Transferee
§1406 YES NO Transferee