Federal Common Law Applies State Preclusion Rules to Judgments in Diversity Cases

The Eleventh Circuit cleaned up some conflicting precedent this week and confirmed that state-law rules determine the preclusive effect of judgments rendered by federal courts in diversity cases. In deciding that question in CSX Transportation, Inc. v. General Mills, Inc., 2017 WL 393704 (11th Cir. Jan. 30, 2017), the court reversed the district court’s judgment and held that this question of federal common law is answered by incorporating state substantive law of collateral estoppel.

In an opinion by Judge William Pryor, the court turned first to Semtek International Inc. v. Lockheed Martin Corp., 531 U.S. 497 (2001), in which the Supreme Court held that federal common law applies state rules of res judicata (or claim preclusion) to judgments in diversity cases. Although Semtek did not involve collateral estoppel (or issue preclusion), Judge Pryor suggested that “collateral estoppel and res judicata are insufficiently distinct to warrant different treatment.”

But the Eleventh Circuit was not confronting this question for the first time and had its own complicated caselaw to examine, comprising “two lines of divergent precedent, neither of which acknowledges the other.” In one case, the court had stated that “federal preclusion principles apply to prior federal decisions, whether previously decided in diversity or federal question jurisdiction.” CSX Transp., Inc. v. Bhd. of Maint. of Way Emps. (Brotherhood), 327 F.3d 1309, 1316 (11th Cir. 2003). The court had also issued squarely conflicting holdings on whether to apply federal or state collateral estoppel rules to a decision from a diversity action in Palmer & Cay, Inc. v. Marsh & McLennan Cos., 404 F.3d 1297, 1310 (11th Cir. 2005), and in Tampa Bay Water v. HDR Engineering, Inc., 731 F.3d 1171, 1180 (11th Cir. 2013). The court held in the former case that state collateral estoppel rules govern and in the latter that federal collateral estoppel rules govern.

In parsing this contradictory caselaw, the Eleventh Circuit applied two principles to sort through its precedents. First, the holding of a decision constitutes precedent whereas the dicta do not. The court then identified the quote from Brotherhood as mere dicta because the question there concerned the preclusive effect of a federal court’s judgments in federal-question cases rather than diversity cases. Second, among two contradictory holdings, the court is bound to follow the earlier one unless it has been overruled or abrogated by the Supreme Court or the Eleventh Circuit sitting en banc. Under this prior-precedent rule, the first of the two decisions with opposite holdings established the controlling precedent because the second was decided without reference to it. Therefore, the court applied its earlier precedent from Palmer & Cay and held that federal common law borrows the state rule of collateral estoppel to determine the preclusive effect of a federal judgment where the court exercised diversity jurisdiction. It then remanded for the district court to make the initial determination concerning the element of identity of parties under Georgia law of collateral estoppel.

Posted by Keith Emanuel.

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