17. Should the State B court grant the defendant's motion to dismiss?

The jurisdiction of federal courts is concurrent with state courts. This means that a particular controversy that is litigable in federal court may also be brought in state court. Where jurisdiction is concurrent, the plaintiff makes the initial decision whether to use state or federal court by filing his case. The defendant may then choose to remove or remain under the state court's jurisdiction.

When determining whether to do an Erie analysis, the threshold question is whether there is a controlling Federal Rule of Civil Procedure (FRCP) or federal statute. If any federal law controls (is «on point»), there is no Erie problem. However, in the absence of a controlling federal statute or Rule, the question becomes whether the issue at hand is substantive or procedural.

In the Erie decision, the U.S. Supreme Court held that a federal court sitting in diversity must apply state substantive law of the state in which it sits on all substantive issues in a case. This includes the state's conflict of law rules. For all procedural issues, a federal court sitting in diversity must apply federal procedural rules (the FRCP).

Exam tip: When a potential Erie analysis arises on the MBE, pay close attention to the facts. If the court is not sitting in diversity and is exercising federal question jurisdiction, federal law will apply and there is no need to examine applicable state law.

Federal common law is a term used to describe common law that is developed by federal courts instead of the various state courts. Even though Erie made it clear that there is no general federal common law, there are particular instances when federal common law applies. Simply put, occasionally, the federal court is free to disregard state law in making judicial interpretations.

Federal common law may apply when the basis for the federal district court's jurisdiction is diversity. For example, federal common law governs when a federal court sitting in diversity issues a judgment and a state court must later decide the preclusive effect of the earlier judgment on the current claim.

In Semtek Int'l Inc. v. Lockheed Martin Corp., the U.S. Supreme Court held that under federal common law, an earlier diversity judgment has the same preclusive effect that a similar judgment issued by the state court in which the diversity court sat would have had. Therefore, the second state court must apply federal common law to determine how and whether it is bound by the prior diversity judgment. As a matter of federal common law, the earlier dismissal has the same effect on a later action that such a dismissal would have if it had been issued by the state court where the federal diversity court was sitting.

B is correct. The preclusive effect of a federal court's judgment in diversity is determined by federal common law. Under Semtek, the diversity judgment should have the same preclusive effect that a judgment issued by the state court (in which the diversity court sits) would have.

Here, State B must apply federal common law to determine whether it is bound by the earlier diversity judgment, which was a dismissal with prejudice in State A federal court. Under federal common law, this dismissal will have a preclusive effect in State B, so the defendant's motion should be granted.

A is incorrect. This answer reaches the correct answer with incorrect legal reasoning. While the defendant's motion should be granted, it is not because State A law governs this substantive issue. Rather, federal common law, which does incorporate State A law, is the outcome-determinative basis for granting the motion to dismiss. This question does not require an analysis of procedural versus substantive issues. Under Semtek, federal common governs cases where a party tries to file the same lawsuit in a state court after another state's federal court, sitting in diversity, has dismissed the case.

C is incorrect. There is no such constitutional limitation. In Semtek, the Court specifically held that preclusive effects on a federal diversity judgment are a matter of federal common law, which should apply the preclusion law of the forum state (i.e., the state where the federal court that issued the judgment sits).

D is incorrect. As explained above, federal common law is binding here. It will enforce the diversity judgment, meaning that the preclusive effect of the prior judgment from the federal court sitting in diversity is the same in another state's court. State B's law is irrelevant because State A's federal court already issued a dismissal with prejudice, which will preclude another lawsuit in State B.