Swift v. Tyson, 41 U.S. 1 (1842), was a Supreme Court decision that allowed federal courts hearing diversity cases to disregard state court rulings on general commercial law questions and apply their own independent judgment instead. Justice Joseph Story wrote the opinion. The rule governed federal courts for nearly a century before the Supreme Court overturned it in Erie Railroad Co. v. Tompkins, 304 U.S. 64 (1938), which held that federal courts sitting in diversity must apply the law of the state where they sit.
The Dispute Behind the Case
John Swift, a Maine citizen, took a bill of exchange worth $1,540.30 as payment for a debt owed to him by two land speculators, Norton and Keith. Those speculators had drawn the bill on George Tyson, a New Yorker, as partial payment for Maine property they claimed to own. The claim was fraudulent — they had no title. When Swift presented the bill for payment, Tyson refused, citing the underlying fraud. Swift said he had taken the instrument in good faith and was entitled to be paid.1Justia. Swift v. Tyson, 41 U.S. 1 (1842)
The legal question was whether accepting a bill of exchange to settle a pre-existing debt counted as “valuable consideration.” New York court decisions said it did not, which would have let Tyson raise the fraud defense. The general body of commercial law elsewhere said it did, which would protect Swift. Because Swift and Tyson lived in different states, the case landed in federal court, and the federal circuit court sent the question up to the Supreme Court.1Justia. Swift v. Tyson, 41 U.S. 1 (1842)
What the Supreme Court Held
The dispute turned on Section 34 of the Judiciary Act of 1789, now codified at 28 U.S.C. § 1652, which required federal courts to treat “the laws of the several states” as rules of decision. The question was whether “laws” included state court decisions or only statutes passed by legislatures.2Office of the Law Revision Counsel. 28 USC 1652 – Rules of Decision
Justice Story took the narrow reading. He divided state law into two categories with sharply different treatment in federal court. Strictly local law — state statutes, decisions interpreting them, and rules governing things tied to a location such as land titles and real estate — bound federal judges completely. A federal court in New York deciding a property boundary had to apply New York law without deviation.1Justia. Swift v. Tyson, 41 U.S. 1 (1842)
General law was different. Commercial questions like the enforceability of bills of exchange, the interpretation of contracts, and rules governing insurance did not belong to any one state, Story reasoned. They were part of a broader commercial tradition that crossed borders. State court opinions on these questions were merely “evidence of what the law may be,” not the law itself. Federal judges could weigh them but were not obligated to follow them.1Justia. Swift v. Tyson, 41 U.S. 1 (1842)
Applying that framework, the Court concluded that a pre-existing debt does constitute valid consideration under general commercial law. Swift won. Tyson had to pay.1Justia. Swift v. Tyson, 41 U.S. 1 (1842)
Why the Rule Backfired: Forum Shopping
Story expected state and federal courts to converge over time on a shared body of commercial rules. That convergence never happened. Instead, litigants exploited the gap between state and federal answers by steering their disputes into whichever court offered the friendlier rule. This became known as forum shopping.
The most notorious example was Black & White Taxicab & Transfer Co. v. Brown & Yellow Taxicab & Transfer Co., 276 U.S. 518 (1928). A Kentucky taxicab company wanted an exclusive contract with a railroad to solicit passengers on railroad property. Kentucky common law likely would have voided the contract as against public policy. The company’s shareholders dissolved the Kentucky corporation, reincorporated in Tennessee, and transferred the assets to the new entity for the sole purpose of manufacturing diversity of citizenship so the dispute could be litigated in federal court under general common law rather than Kentucky’s rule. The Supreme Court upheld the maneuver and enforced the contract.3Justia. Black and White Taxicab and Transfer Company v. Brown and Yellow Taxicab and Transfer Company, 276 U.S. 518 (1928)
Justice Oliver Wendell Holmes dissented and attacked the foundation of the entire Swift doctrine. He rejected the idea that some transcendent common law floats above state authority waiting for federal judges to discover it. Law, he wrote, “does not exist without some definite authority behind it.” The common law of a state is whatever that state’s courts say it is, and a federal court substituting its own version amounts to what Holmes called “an unconstitutional assumption of powers by the courts of the United States.”3Justia. Black and White Taxicab and Transfer Company v. Brown and Yellow Taxicab and Transfer Company, 276 U.S. 518 (1928)
Erie Railroad Co. v. Tompkins Overrules Swift
Ten years later, the Supreme Court agreed with Holmes. The vehicle was a tort case, not a commercial one. Harry Tompkins, a Pennsylvania resident, was walking beside the Erie Railroad’s tracks in Hughestown, Pennsylvania, when something projecting from a passing freight car struck and injured him. Instead of suing in Pennsylvania state court, where state precedent on landowner liability favored the railroad, Tompkins filed his negligence claim in federal court in New York, where the railroad was incorporated.4Justia. Erie Railroad Co. v. Tompkins, 304 U.S. 64 (1938)
Justice Louis Brandeis, writing for the majority, used the case to overrule Swift v. Tyson. He declared that “there is no federal general common law.” Outside matters governed by the Constitution or federal statutes, a federal court must apply the law of the state where it sits. Brandeis characterized Swift not merely as a wrong reading of the Rules of Decision Act but as an unconstitutional intrusion on powers reserved to the states.5Library of Congress. Erie Railroad Co. v. Tompkins
Brandeis pointed to the accumulated evidence of nearly a century. State and federal courts had not converged on shared commercial rules. Identical disputes produced different outcomes depending on which courthouse the plaintiff chose, and the forum-shopping abuse crystallized in the Taxicab case showed the practical damage. The doctrine had produced the very unfairness it was supposed to prevent.4Justia. Erie Railroad Co. v. Tompkins, 304 U.S. 64 (1938)
What Governs Today
The rule since 1938 is straightforward: a federal court hearing a case based on diversity jurisdiction applies the substantive law of the state where it sits. Federal courts still use their own procedural rules, but on substantive questions — negligence standards, contract enforceability, tort liability — state law controls.5Library of Congress. Erie Railroad Co. v. Tompkins
The Supreme Court extended the principle three years later in Klaxon Co. v. Stentor Electric Manufacturing Co., 313 U.S. 487 (1941). That decision held that a federal court in a diversity case must also apply the forum state’s choice-of-law rules when a dispute touches more than one state. A federal court in Delaware cannot independently decide whether Delaware or New York law governs a contract — it uses whatever choice-of-law framework Delaware’s own courts would apply.6Justia. Klaxon Co. v. Stentor Electric Manufacturing Co., 313 U.S. 487 (1941)
Swift v. Tyson no longer states the law, and citing it as authority in a diversity case would be error. Its enduring value is as the counter-example that produced Erie: a nearly hundred-year experiment in federal judge-made general common law, ended because it invited manipulation and, in the Court’s later view, exceeded what the Constitution permitted federal courts to do.