In 1842, the Supreme Court held in Swift v. Tyson that while federal courts were required to apply state law in diversity cases, the state law in question consisted only of statutory law and not the decisions of the state courts. As a result, federal courts developed and applied a “federal common law” based on general principles of commercial law that was more appealing to many corporate litigants than state laws which were sometimes hostile to out of state business interests. In the 1938 case of Erie Railroad Co. v. Tompkins, the Supreme Court overruled Swift and held that when considering state legal issues, federal courts were bound to apply the common law of the states in which they sat. The Erie decision had the effect of removing one of the major incentives for invoking diversity jurisdiction.

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