Under Article III of the Constitution, the JUDICIAL POWER OF THE UNITED STATES extends to "Controversies between Citizens of different States ? and between ? the Citizens [of a State] ? and foreign ? Citizens or Subjects." This power is called diversity jurisdiction because its basis is the difference in CITIZENSHIP of the parties.
The accepted justification for diversity jurisdiction has been the need to protect out-of-state citizens against discrimination in state courts. However, the extent of such discrimination as of the time the Constitution was written is uncertain, and there is evidence that financial and commercial interests supported diversity jurisdiction in the hope of finding shelter from state laws and judicial systems favorable to debtors.
In fact, the diversity jurisdiction authorized in Article III is not confined to situations in which out-of-state citizens require protection. For example, a plaintiff may file a diversity action in her home state's federal court if she can obtain personal JURISDICTION over the defendant there. Also, it is constitutionally permissible for Congress to confer diversity jurisdiction even when citizens of the same state are on both sides of the litigation, so long as some out-of-state citizens are also parties. Congress has conferred jurisdiction in just such cases in the federal inter-pleader statute.
Congress has the power to determine how much of the constitutionally authorized diversity jurisdiction the lower federal courts may exercise. It has enacted a general statute that allows the federal courts to hear some but not all types of diversity cases either originally or on REMOVAL. Examples of excluded cases are those in which less than a required amount is in controversy, those in which there is incomplete diversity (that is, at least one plaintiff is from the same state as at least one defendant), and those which the defendant seeks to remove from his or her home state's court.
In 1946 Congress first provided expressly for diversity jurisdiction over suits involving citizens of the DISTRICT OF COLUMBIA and TERRITORIES. In National Mutual Insurance Co. v. Tidewater Co. (1949), the Supreme Court upheld the law because two Justices were willing to declare that the District of Columbia was a "state" within the meaning of the diversity clause of Article III, and three Justices concluded that Congress could confer the jurisdiction even if it were not within the...