Klaxon Co. v. Stentor Elec. Mfg. Co.
Citation and Court
313 U.S. 487 (1941) — Supreme Court of the United States
Facts
Stentor Electric Manufacturing sued Klaxon in federal district court in Delaware under diversity jurisdiction for breach of contract. The district court applied New York’s choice-of-law rules (because the contract was made in New York) and included interest calculated under New York law. The Third Circuit affirmed.
Issue
Whether a federal court sitting in diversity must apply the choice-of-law rules of the state in which it sits, rather than independently determine which state’s substantive law applies.
Holding
Yes. A federal court sitting in diversity must apply the forum state’s choice-of-law rules; it may not exercise independent judgment about which state’s substantive law should apply.
Rule / Doctrine
Erie extension to choice-of-law: just as Erie R.R. v. Tompkins requires federal courts to apply the forum state’s substantive law, federal courts must also apply the forum state’s choice-of-law rules. To do otherwise would create disparities between federal and state courts in the same state, generating forum-shopping and inequitable administration of the law.
Significance
Klaxon is essential to diversity jurisdiction practice because it determines which state’s law a federal court will apply when the parties are from different states and the transaction has contacts with multiple states. It closes a potential loophole by preventing litigants from choosing a federal forum to obtain the application of a more favorable state’s law through an independent federal choice-of-law analysis.