5. Should the state court look to federal or state law to decide the effect of the judgment?

Once a final judgment on the merits has been rendered on a particular cause of action, the claimant is barred by claim preclusion (res judicata) from asserting the same cause of action in a later lawsuit. When the claimant wins the earlier lawsuit, the cause of action is said to have been «merged» into the judgment. When the defendant wins, the claimant is said to be «barred» by the earlier adverse judgment. Both terms simply mean that the claimant cannot sue again on the same cause. Before merger or bar apply, it must be shown that: (i) the earlier judgment is a valid, final judgment «on the merits»; (ii) the cases are brought by the same claimant against the same defendant — it is not enough that the same litigants were also parties in the previous case (it must be the same configuration of parties); and (iii) the same cause of action or claim is involved in the later lawsuit.

Federal Rule of Civil Procedure (FRCP) 41(b) governs the question of whether claim preclusion should bar a plaintiff whose initial suit ended in an involuntary dismissal from proceeding with a subsequent suit on the same claim. FRCP 41(b) establishes that an involuntary dismissal generally will bar a subsequent suit, but both the Rule and court decisions create exceptions where claim preclusion does not apply.

FRCP 41(b) provides three grounds for ordering an involuntary dismissal: (i) failure of the plaintiff to prosecute; (ii) failure of the plaintiff to comply with the FRCP or any order of court; and (iii) failure of the plaintiff to show by the close of his evidence a right to relief based upon the facts and the law.

FRCP 41(b) further specifies that all 41(b) dismissals and «any dismissal not provided for in this rule» are to operate as adjudications on the merits except for four types of dismissals. The four exceptions are: (i) dismissal for lack of jurisdiction; (ii) dismissal for improper venue; (iii) dismissal for failure to join a party under Rule 19; and (iv) dismissal that the court in its order specifies to be without prejudice.

Although the Erie decision made it clear that there is no general federal common law in the United States, there are still particular instances in which federal common law is applied. In particular, federal common law can be binding when a federal court sitting in diversity issues a judgment, and a state court must later decide claim preclusion effect that earlier judgment should be given. In Semtek Int'l Inc. v. Lockheed Martin Corp., the Supreme Court decided that under federal common law, a diversity judgment should have whatever preclusive effect that similar judgment issued by the state court in which the diversity court sits would have. Thus, the second state court must apply federal common law to determine how and whether it is bound by the prior diversity judgment.

Semtek notably also held that as a matter of federal common law, the dismissal has whatever effect on later action in other courts as such a dismissal would have if had been issued by the state where the federal diversity court sat.

A is correct. Preclusion cases involve two cases, so often choice of law issues arise when the second case is brought in a different jurisdiction. In Semtek International, Inc. v. Lockheed Martin Corporation, 531 US 497 (2001), the court held that federal common law governs the claim-preclusive effect of a dismissal by a federal court sitting in diversity. Therefore, in a preclusion case, where the first case was decided in federal court and the second case is filed in a different jurisdiction, a federal court sitting in diversity will apply federal preclusion laws. Here, the first case was decided in federal court, using federal law. Thus, the state court, hearing the second case, should apply federal preclusion laws to determine if case two can proceed.

B is incorrect. This is not how a choice of law analysis operates. When the first case was decided in federal court, the second court should apply federal preclusion laws.

C is incorrect. Here, the first case was decided in federal court using federal law. Therefore, the state court, hearing the second case, should apply federal law to determine if case two will be precluded. It does not matter that the judgment is in state court.

D is incorrect. Although it is true that federal general common law rules do not govern state claims, it may be used in federal courts. The call of the question, however, is specifically asking which law, federal or state, should be applied. The state court first must decide which to apply, state or federal preclusion law. Then the state court must analyze that law.