In defense of the substance-procedure dichotomy.

Author:Hendricks, Jennifer S.

Table of Contents I. The Three Phases of Erie. A. Phase One: Deference to the States B. Phase Two: The Imperial Rules C. Phase Three: A Third Way to Nowhere 1. Gasperini v. Center for the Humanities 2. Semtek v. Lockheed Martin 3. Shady Grove v. Allstate II. What's Wrong With the Third Way A. The Chorus of Criticism B. The Supreme Court Should Not Freelance on Choice-of-Law Questions 1. The Trouble With Semtek: The Court's Inherent Powers Cannot Logically Exceed the Power of the Court and Congress Acting Together 2. The Trouble With Gasperini: The RDA Does Not Authorize a Body of Federal Common Law C. The REA and the Scope of State Legislative Authority. 1. Echoes of the First Two Phases. 2. Separating Substance and Procedure to Improve State Lawmaking III. Ending Phase Three. A. The Third Phase Has No Traction in the Lower Courts B. Containing Semtek C. Containing Gasperini Conclusion In the last fifteen years, the Supreme Court has been taking legal realism a bit too seriously. "We were all brought up on sophisticated talk about the fluidity of the line between substance and procedure," (1) but for many years, when presented with a thorny problem of vertical choice of law, the Supreme Court hemmed and hawed about the subtleness of the distinction--and picked one. Ultimately, a decision had to be made; either the federal courts would follow a particular state law in diversity cases or they would not.

In the First Phase of Erie doctrine, (2) state law was ascendant and usually deemed binding. (3) In the Second Phase, after Hanna v. Plumer, (4) the Federal Rules reigned supreme, sweeping aside state laws in or near their path. (5) While the Supreme Court's decisions in both phases sometimes strained credulity, they did answer the question "Does this state law govern in federal court?" with a "yes" or a "no." Beginning with Gasperini v. Center for Humanities, (6) however, a shifting coalition of justices has pursued a third path, declaring state law neither wholly applicable nor wholly inapplicable. Instead, these justices have claimed for themselves the prerogative to fashion law that purportedly accommodates the interests of both sovereigns. (7) With the cover of an intellectual critique of the substance-procedure dichotomy, this new approach represents a nascent Third Phase of Erie doctrine, which would replace "yes" or "no" with "Let's see what we can work out."

This new venture--so far, Gasperini, Semtek! (8) and, most recently, four or five justices in Shady Grove (9)--has been the object of "a chorus of academic criticism." (10) Most of this criticism focuses on problems of administrability, lack of adequate guidance to lower courts, and the continuing absurdity of reading a Federal Rule to mean one thing in federal cases and another in diversity. (11)

This Article adds a new level of critique. It argues that the Phase-Three approach and its blurring of the substance-procedure dichotomy are inappropriate uses of federal judicial power and are based on a misguided aspiration to accommodate state substantive policies at the expense of federal procedure. This thesis includes both a descriptive and a prescriptive claim.

Descriptively, in order to have a dichotomy, it is necessary to have two poles. This Article therefore demonstrates that the distinction between substance and procedure is appropriately represented by a single-dimensional spectrum. That is, even though there are several different ways of making the distinction--the Rules of Decision Act ("RDA") approach, (12) the Rules Enabling Act ("REA") approach, (13) the inherent powers approach (14)--the tests for these approaches can be understood as marking different points along the same linear continuum. With pure substance at one end and pure procedure at the other, all legal rules can be thought of as lying at some point between these two poles. Part of what the Court has done wrong is to ignore this linear relationship by insisting, for example, in Semtek, that res judicata is "too substantive" to be addressed in the Federal Rules yet procedural enough to be governed by federal common law under the RDA. (15)

Normatively, this Article defends the dichotomy between substance and procedure. Given the linearity of substance and procedure, one could imagine the distinction either as a dichotomy of black and white, with every legal rule falling into one category or the other, or as a spectrum of gray, with many or even most legal rules falling in the mushy middle. Descriptively, of course, the latter view is more accurate. This Article claims, however, that the Court should, with full awareness of the grayness of all things, nevertheless classify each legal rule as black or white, rather than try to accommodate both its procedural and its substantive aspects. The classification need not be the same for all purposes and in all contexts. The Court has good reasons for drawing the line between substance and procedure differently under the RDA, under the REA, and in other contexts. (16) Within each context, however, a particular legal rule should be classified as either black or white: either substantive or procedural, governed by either federal or state law.

This Article offers two reasons for preferring the black-white approach. First, the governing statutes contemplate a dichotomy between substance and procedure, and the Court is not authorized to use the ambiguity in that distinction to replace the statutory scheme with its own discretionary treatment of state law. In the face of an already delicate choice between state and federal law, trying to create nuanced accommodations between the two allows the perfect to become the enemy of the good. The Phase-Three approach may be feasible in the Supreme Court or in scholarly articles, but it does not produce good doctrine on the ground.

Second, eschewing Phase Three and returning to the black-white approach would promote democratic transparency in the states. Specifically, in addition to traditional Erie concerns about judicial lawmaking, Congress has set a policy of establishing a uniform body of transsubstantive procedural law. (17) State lawmakers know this, and there is nothing wrong with federal courts expecting them to act accordingly. If they, as Representative Dingell famously offered, (18) prefer to manipulate procedure in order to undermine the substantive rights they purport to have created, the threat of fixed procedures in diversity could and should restrain them. Too often, the Supreme Court treats legislative enactments as fixed, so that the game begins when the litigants start their forum shopping. The game begins earlier, in the legislature, and the ad hoc, accommodating approach to state law in Erie's Third Phase creates the wrong incentives for that game.

Part I of this Article describes Erie's three phases and identifies a key characteristic of each phase's treatment of the relationship between state law and the Federal Rules. For those readers fortunate enough to have escaped law school before the Phase-Three approach emerged, Part I.C describes Gasperini, Semtek, and Shady Grove in detail. Part I shows that while the First Phase was characterized by deference to state policy and the Second Phase by the ascendency of the Federal Rules, the nascent Third Phase is characterized by judicial discretion in formulating the law that controls in diversity cases. Part II.A argues that courts lack authority for exercising this discretion: the Phase-Three approach presents itself as creative problem solving that crafts accommodations to serve state and federal interests; the proper role of the courts in this context is more limited. Part II.B argues that the Phase-Three approach also undermines separation of powers principles at the state level. The justices using this approach have justified it by the purported need to vindicate state policy choices. However, state-level democracy would be better served by forcing state lawmakers to enact their policy choices into substantive law, rather than allowing them to manipulate outcomes through procedure. (19) One way to encourage them to do so is to adhere to a uniform system of federal procedure, rather than modifying procedure on an ad hoc basis as the Court did in Gasperini and Semtek. Thus, the justification for the Phase-Three approach in Gasperini and Semtek--the need to protect state lawmaking prerogatives--is misguided. Part III offers suggestions for minimizing the damage of Gasperini and Semtek: confining them to their facts and returning to the conceptual structure of Phase Two.

  1. The Three Phases of Erie

    Vertical choice-of-law doctrine has developed in three stages since Erie was decided. In Phase One, the Supreme Court held that most state laws it encountered were "substantive" for purposes of the RDA. (20) The Court adopted a posture of deference, holding state law to be applicable in federal court even to the point of neglecting or downplaying the force of the Federal Rules of Civil Procedure. The result was a broad understanding of what made a legal rule "substantive," focused on whether a discrepancy in that legal rule would affect a litigant's ex ante choice of forum.

    In Phase Two, the Court reversed course, holding that most things were not only procedural but also already covered by federal law. (21) It construed the Federal Rules more broadly to displace state law and adhered to a generous test for the permissible scope of the Rules. While the Federal Rules had fared poorly in Phase One, state law fared poorly in Phase Two. In both of these phases, however, the Court honored the need to choose: state law either did or did not apply.

    The Phase-Three approach strikes out in a new direction. (22) It began, in Gasperini, with the long-acknowledged observation that substance and procedure are inextricably intertwined. (23) A law that on its face regulates procedure may be intended to serve a substantive policy. In Phases...

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