The Federal General Law (Part 1 of X)
The Substantial & Aggregate Effects of Diversity Jurisdiction
On Christmas Eve, 1814, the United States and Great Britain signed the Treaty of Ghent, tentatively ending the War of 1812. Parliament and the future-George IV ratified the Treaty on December 30. With President Madison signature, on the advice and consent of the Senate, the Treaty took effect on February 17, 1815. 8 Stat. 218. Delayed communication of the news contributed to several exciting events in New Orleans, Louisiana, not limited to future-President Jackson’s smashing victory over the redcoats on January 8.
Late in the evening of February 18, one Hector Organ negotiated the purchase of “111 hogsheads of tobacco” from a Francis Girault, of Peter Laidlaw & Co. Overnight, after negotiations had concluded, some “Messrs. Livingston, White, and Shephard brought from the British fleet news that a treaty of peace had been signed at Ghent” and, by extension, the cessation of the blockade which, to that point, had suppressed prices. White, apparently party to “one-third” of Mr. Organ’s expected profits, communicated this news to him directly, before it became public by handbill at 8:00 a.m. on the 19th.
Thus Organ called on Girault “soon after sunrise” that morning to perfect his bargain. According to trial testimony, “Girault asked if there was any news which was calculated to enhance the price.” Organ offering no reply, “the said purchase was then and there made.” By about 9:00 a.m., the price of tobacco in New Orleans “had risen from 30 to 50 per cent.” Laidlaw, understandably, refused to honor the sale. Organ sued. And, reasoning that “[T]here being no evidence that plaintiff had asserted or suggested any thing to the said Girault, calculated to impose upon him with respect to said news, and to induce him to think or believe that it did not exist,” the trial court in New Orleans “charged the jury to find for the plaintiff.”
On appeal to the United States Supreme Court, Chief Justice John Marshall reversed. While, in the ordinary course, Organ “was not bound to communicate” his special news to Girault, “at the same time, each party much take care not to say or do anything tending to impose on the other.” Having been directly asked, a jury could reasonably have construed Organ’s silence as deception, particularly given his gross windfall. 15 U.S. (2 Wheat.) 178 (1817). Or, as more simply put by one of the leading Contracts textbooks to this day: “Laidlaw teaches that by asking a question, one party can create for the other a duty to disclose.” Ian Ayres & Gregory Klass, Studies in Contract Law (Foundation Press 8th 2012).
As a matter of contract law, Laidlaw v. Organ strikes most students as no more than a routine and reasonable proposition of law, made memorable by some cute facts (oh, and the added quirk that Francis Scott Key (yes, that one) argued for Organ at the Supreme Court). But as a Constitutional matter, Laidlaw is astounding. What the hell is this case doing in Federal Court? It’s a routine contract case—that’s supposed to be a matter of State law. After all, the States govern our daily lives. There’s no Federal law involved in Laidlaw (sure, I guess we can call the Treaty of Ghent Federal news—but it doesn’t decide the case). So what gives?
The short answer, sufficient for contracts students, is that the Constitution grants the Federal Courts what is known as “diversity” jurisdiction. “The judicial Power shall extend . . . to Controversies between . . . Citizens of different States.” Art. III, sec. 2. (see also, 28 U.S. 1332). When citizens of different states sue each other, we don’t make them take it to some local state court, with a “judge” (aka, the sheriff’s cousin) who’s never crossed state lines and toothless, twangy (and smelly) jurors who’ve never been outside the county. Instead, we let these “diverse” parties litigate in Federal court, in the big city, before a learned Judge who has, of course, honed his wisdom and traveled the county.
Yet diversity jurisdiction doesn’t really provide a sufficient answer here. It tells us what the case is doing in Federal court, but it doesn’t tell us why the United States Supreme Court has assumed to “teach[]” a lasting point of contract law. If the States govern your daily life, as we are so often reminded, why is the Supreme Court making law instead of just parroting some established point of Louisiana law? Because, it’s worth emphasizing here, as far as I can tell, no one cites Louisiana statute or case law in Laidlaw. Chief Justice Marshall just lays down a rule of conduct for Americans going about their daily lives and occupations—again, the hallowed reserve of the States—on the basis of some technical jurisdictional point.
A few weeks back, we discussed the Supreme Court’s curtailment of the Congressional Commerce Power in United States v. Morrison. Chief Justice Rehnquist struck down the Violence Again Women Act not so much because sexual assault in the workplace wasn’t “economic” activity—by that logic, neither was refusal to sell wheat in Wickard or refusal to serve on the basis of race in Heart of Atlanta—but because:
The Constitution requires a distinction between what is truly national and what is truly local. In recognizing this fact we preserve one of the few principles that has been consistent since the Clause was adopted.
Rehnquist’s (and the Court’s continual) denial of Appomattox certainly deserves its own treatment (and will, eventually), but let’s tackle the easy points first. Unless we are willing to accept the absurd “synthesis” that under James Madison’s watchful eye the Federal Government may stop a McDonald’s frycook from misleading a woman about the price of her burger but cannot stop him from sexually assaulting her, Laidlaw puts the lie to Rehnquist’s assertion that “our Federalism” had always left “truly local” issues to the States.
And Laidlaw is hardly an outlier. Over the first 150 years of our nation, the Federal courts, and in particular the United States Supreme Court, promulgated as a matter of course what was known as the “general law”—a law of commerce including contract, property, and torts—under the remit of the courts’ “diversity jurisdiction.” The Court itself ratified this practice in 1842’s Swift v. Tyson, going so far as to say that Federal courts sitting in diversity did not have to follow State court decisions in the Federal judiciary’s exercise of its own independent judgment of this “general” commercial law. The analogy between this “general” law and Wickard’s modern commerce clause should be clear. Whether we called it “diversity jurisdiction” or the Commerce Clause, Federal law in some form has basically always governed where otherwise-local action causes interstate ripples.
Of course, the Court overruled Swift in 1938’s Erie Railroad v. Tompkins in a proclamation of State sovereignty eerily reminiscent of Morrison (it do come around like that, don’t it). And it hardly needs to be said that most Antebellum and pre-New Deal commentators would, a) have considered Swift to be indicative of an inchoate Congressional power, and b) have had a slew of explanations squaring Swift with “our Federalism.” But, to the former, I suspect Erie will be better understood as the Court stepping aside for the New Deal Congress. And to the latter, whatever excuses would have been given at the time, they do not overcome the fact that John Marshall, Chief Justice of the United States, wielded Federal authority to construct rules of conduct for your daily life. Rules which, in fact, we still inflict on new law students.
But that’s enough for today. I’ll be perusing random cases across the early Federal reports over the next few weeks to see what other interesting Swiftian examples I find. I’ll also read Swift v. Tyson and Erie v. Tompkins in the original reports (not just my textbooks) to see what else we can learn. And, don’t worry, I will also survey the objections or potential responses to my thesis to see where this all goes. More to come.
This is really interesting. Please dig deeper into Erie v Tomkins in the next instalment. All I remember from school is "there is no federal common law" but maybe there was (is)?