Federal common law

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Federal common law is a term used in the United States to describe common law that is developed by the federal courts, instead of by the courts of the various states. Although the United States Supreme Court has effectively barred the creation of federal common law in areas traditionally under the authority of state courts, there are several areas where federal common law continues to govern.

Up until 1938, the federal courts followed the doctrine set forth in the case of Swift v. Tyson, 41 U.S. 1 (1842). In that case, the United States Supreme Court had held that federal courts hearing cases brought under their diversity jurisdiction (allowing them to hear cases between parties from different states) had to apply the statutory law of the states, but not the common law developed by state courts. Instead, the Supreme Court permitted the federal courts to make their own common law based on general principles of law.

The reasoning behind the decision in Swift v. Tyson was that the federal courts would craft a superior common law, and the states would choose to adopt it. This hope was not fulfilled, however, as states continued to diverge in their own legal practices. Some litigants began to abuse the availability of the federal courts for the specific purpose of having cases decided under the federal common law principles. In 1938, however, the Supreme Court decided Erie Railroad v. Tompkins, 304 US 64 (1938), which over-ruled Swift v. Tyson, holding instead that federal courts exercising diversity jurisdiction had to use all of the same substantive laws as the courts of the states in which they were located.

Nevertheless, there remain several areas of law where federal common law is allowed to continue, particularly where the Constitution of the United States gives the U.S. Congress power to make laws in an area, such as admiralty law, antitrust, bankruptcy law, interstate commerce, and civil rights. Congress often lays down broad mandates with vague standards, which are then left to the courts to interpret, and these interpretations eventually give rise to complex understandings of the original intent of Congress, informed by the courts' understanding of what is just and reasonable.

Furthermore, the U.S. Supreme Court has also determined that federal courts are allowed to fashion common law rules where a significantly important federal interest exists. The case of Clearfield Trust Co. v. United States, 318 U.S. 363 (1943), the court set forth three criteria for determining whether the court should create a federal common law rule:

1. Is there a federal competence to create law in this area—i.e. would Congress be able to adopt a law in such an area?
2. If there is federal competence, should state or federal law govern?
3. If federal law governs, should courts borrow state law or create a new federal rule?