Restatements and Diversity Jurisdiction

This Director's Letter was originally published in the fall 2018 edition of The ALI Reporter.

Two law professors with leadership roles at the ALI—Samuel Issacharoff, a member of the ALI Council and Reporter on the already completed Principles of Aggregate Litigation, and Florencia Marotta-Wurgler, a Reporter on our ongoing Restatement of Consumer Contracts—recently have written an important article that might be a harbinger of a significant shift in the way in which the ALI does its work in producing some of its Restatements in the future. Their piece, The Hollowed Out Common Law, focuses on the electronic marketplace—an important subset of the transactions covered by our Restatement of Consumer Contracts. Florencia and Sam describe two important shifts in the manner in which contract claims involving the electronic marketplace are adjudicated:

“One arises from a steady decline in the number of cases adjudicated in state court relative to federal courts, which by 2015 adjudicate the vast majority of cases. The other stems from a rise in class actions, which is intimately tied to the migration of cases to federal court. The result is that today the vast majority of cases are class actions brought in federal court. The increase in class actions is not surprising given the relatively small stakes of most transactions and the little incentive that creates for individual consumer litigation.”

The dominance of the federal district courts as the adjudicators of these claims has significant consequences for the development of the common law:

“[T]he common law is being elaborated in federal court in suits arising under diversity jurisdiction. In turn, those federal courts are largely bereft of any state law moorings as they develop the common law of the electronic marketplace. Erie Railroad v. Tompkins notwithstanding, the common law is driven by federal court decisions, building incrementally on each other rather than state law.” 

And, because the common law in this area is developing in federal court rather than in state court “there is no apex court that can define conclusively the law of any jurisdiction.” This litigation pattern poses a significant challenge to the traditional view of state supreme courts as the primary expositors of the common law: “Diversity jurisdiction allows federal courts to predict how they believe state common law would develop, but binds no state courts in the affected jurisdiction, and does not even bind federal courts in the same Circuit ....” How do dominant rules emerge under these conditions?: “[W]e identify a ‘tournament effect’ in which the law settles on one or a few influential decisions, regardless of the state law that the case may have arisen under.”

As Florencia and Sam recognize, these shifts affect the way in which the ALI produces Restatements: “[T]he traditional ALI approach has been to identify the majority rule from the most recent decisions of the highest state courts.” But in the electronic marketplace, the situation is quite different: “The normal process of hierarchical filtration does not occur. Looking at high state courts in this area would offer only a stale and incomplete reflection of current law.”

So, how does a legal rule become dominant under these circumstances? Florencia and Sam explain:

“[T]he weight of decisional law is how innovative, dispositive and persuasive it is. This translates into a constant tournament for authority, unlike the normal hierarchy of state law controlled by the state supreme court. Law likes clarity and in the absence of clarity through hierarchy, there is clarity through tournament. But, as with the U.S. Open, the first rounds are entertaining, but at some point we need to reach the finals. The law’s search for clarity in the absence of hierarchy might increase the likelihood of producing tournament winners.”

They suggest that for cases that are viable only as class actions and are therefore adjudicated primarily in federal court under diversity jurisdiction (a pattern they attribute to multidistrict litigation and the Class Action Fairness Act), the ALI must search for these tournament winners to determine its Restatement rules. And, they point out that empirical techniques are well suited for this task.

This new pattern of cases does not require a reconceptualization of the ALI’s work. The goal remains the same. In the words of our Style Manual, Restatement rules must be “clear formulations of common law,” which “reflect the law as it presently stands or might appropriately be stated by a court.” Regardless of how claims are adjudicated, our Restatements are designed to guide the exercise of judicial discretion. But somewhat different techniques are called for to determine what rules should form part of Restatements when the relevant litigation takes place primarily in the federal courts under diversity jurisdiction: simply counting how many state supreme courts adopted a particular rule will not do the trick.