Shareholders' derivative diversity suits were brought in federal
court in New York, alleging that the president of a Florida
corporation as a fiduciary, with others, used inside information
about projected corporate earnings for profit, and hence was liable
to the corporation for the unlawful profits. The District Court,
looking to New York's choice of law rules, held that, under Florida
law, which it held governed, the defendants were not liable, and
dismissed the complaints. The Court of Appeals reversed, finding
that Florida law, though controlling, was not decisive, and that,
in this situation, Florida "would probably" apply a certain New
York decision to impose liability.
Held: While resort to an available certification
procedure, such as is available in Florida, is not obligatory where
there is doubt as to local law, and its use in a given case is
discretionary resort to such procedure seems particularly
appropriate here in view of the novelty of the question, the
unsettled state of Florida law, and the fact that, when federal
judges in New York attempt to predict uncertain Florida law, they
act as "outsiders" not exposed to local law. Hence, the case is
remanded to the Court of Appeals to reconsider whether the
controlling issue of state law should be certified to the Florida
Supreme Court. Pp.
416 U. S.
389-392.
478 F.2d 817, vacated and remanded.
DOUGLAS, J., delivered the opinion for a unanimous Court.
REHNQUIST, J., filed a concurring opinion,
post, p.
416 U. S.
392.
Page 416 U. S. 387
MR. JUSTICE DOUGLAS delivered the opinion of the Court.
These cases are here on petitions for certiorari and raise one
identical question.
These are suits brought in the District Court for the Southern
District of New York. Lum's, one of the respondents in the Lehman
Bros. petition, is a Florida corporation with headquarters in
Miami. Each of the three petitions, which we consolidated for oral
argument, involves shareholders' derivative suits naming Lum's and
others as defendants, and the basis of federal jurisdiction is
diversity of citizenship, 28 U.S.C. § 1332(a)(1), about which there
is no dispute.
The complaints allege that Chasen, president of Lum's, called
Simon, a representative of Lehman Bros., and told him about
disappointing projections of Lum's earnings, estimates that were
confidential, not public. Simon is said to have told an employee of
IDS [
Footnote 1] about them. On
the next day it is alleged that the IDS defendants sold
Page 416 U. S. 388
83,000 shares of Lum's on the New York Stock Exchange for about
$17.60 per share. Later that day, the exchanges halted trading in
Lum's stock, and, on the next trading day, it opened at $14 per
share, the public being told that the projected earnings would be
"substantially lower" than anticipated. The theory of the
complaints was that Chasen was a fiduciary, but used the inside
information along with others for profit, and that Chasen and his
group are liable to Lum's for their unlawful profits.
Lehman and Simon defended on the ground that the IDS sale was
not made through them, and that neither one benefited from the
sales. Nonetheless, plaintiffs claimed that Chasen and the other
defendants were liable under
Diamond v. Oreamuno, 24
N.Y.2d 494, 248 N.E.2d 910 (1969).
Diamond proceeds on the
theory that "inside" information of an officer or director of a
corporation is an asset of the corporation which had been acquired
by the insiders as fiduciaries of the company and misappropriated
in violation of trust.
The District Court looked to the choice of law rules of the
State of New York,
Klaxon Co. v. Stentor Electric Mfg.
Co., 313 U. S. 487
(1941), and held that the law of the State of incorporation governs
the existence and extent of corporate fiduciary obligations, as
well as the liability for violation of them.
Diamond did,
indeed, so indicate, 24 N.Y.2d at 503-504, 248 N.E.2d at 915.
The District Court, in examining Florida law, concluded that,
although the highest court in Florida has not considered the
question, several district courts of appeal indicate that a
complaint which fails to allege both wrongful acts and damage to
the corporation must be dismissed. [
Footnote 2] The District Court went on to consider
whether, if Florida followed the
Diamond rationale,
defendants would be liable. It concluded that the
Page 416 U. S. 389
present complaints go beyond
Diamond, as Chasen, the
only fiduciary of Lum's involved in the suits, never sold any of
his holdings on the basis of inside information. The other
defendants were not fiduciaries of Lum's. [
Footnote 3] The District Court accordingly dismissed
the complaints,
335 F.
Supp. 329 (1971).
The Court of Appeals, by a divided vote, reversed the District
Court. 478 F.2d 817 (CA2 1973). While the Court of Appeals held
that Florida law was controlling, it found none that was decisive.
So it then turned to the law of other jurisdictions, particularly
that of New York, to see if Florida "would probably" interpret
Diamond to make it applicable here. The Court of Appeals
concluded that the defendants had engaged with Chasen "to misuse
corporate property,"
id. at 822, and that the theory of
Diamond reaches that situation, "viewing the case as the
Florida court would probably view it."
Ibid. There were
emanations from other Florida decisions [
Footnote 4] that made the majority on the Court of
Appeals feel that Florida would follow that reading of
Diamond. Such a construction of
Diamond, the
Court of Appeals said, would have "the prophylactic effect of
providing a disincentive to insider trading."
Id. at 823.
And so it would. Yet under the regime of
Erie R. Co. v.
Tompkins, 304 U. S. 64
(1938), a State can make just the opposite her law, providing there
is no overriding federal rule which preempts state law by reason of
federal curbs on trading in the stream of commerce.
The dissenter on the Court of Appeals urged that that court
certify the state law question to the Florida Supreme Court, as is
provided in Fla.Stat.Ann. § 25.031
Page 416 U. S. 390
and its Appellate Rule 4.61. 478 F.2d at 828. That path is open
to this Court and to any court of appeal of the United States. We
have, indeed used it before, [
Footnote 5] as have courts of appeals. [
Footnote 6]
Moreover when state law does not make the certification
procedure available, [
Footnote
7] a federal court not infrequently will stay its hand,
remitting the parties to the state court to resolve the controlling
state law on which the federal rule may turn.
Kaiser Steel
Corp. v. W. S. Ranch Co., 391 U. S. 593
(1968). Numerous applications of that practice are reviewed in
Meredith v. Winter Haven, 320 U.
S. 228 (1943), which teaches that the mere difficulty in
ascertaining local law is no excuse for remitting the parties to a
state tribunal for the start of another lawsuit. We do not suggest
that, where there is doubt as to local law and where the
certification procedure is available,
Page 416 U. S. 391
resort to it is obligatory. It does, of course, in the long run,
save time, energy, and resources, and helps build a cooperative
judicial federalism. [
Footnote
8] Its use in a given case rests in the sound discretion of the
federal court.
Here, resort to it would seem particularly appropriate in view
of the novelty of the question and the great unsettlement of
Florida law, Florida being a distant State. When federal judges in
New York attempt to predict uncertain Florida law, they act, as we
have referred to ourselves on this Court in matters of state law,
as "outsiders" lacking the common exposure to local law which comes
from sitting in the jurisdiction.
"Reading the Texas statutes and the Texas decisions as outsiders
without special competence in Texas law, we would have little
confidence in our independent judgment regarding the application of
that law to the present situation. The lower court did deny that
the Texas statutes sustained the Commission's assertion of power.
And this represents the view of an able and experienced circuit
judge of the circuit which includes Texas and of two capable
district judges trained in Texas law."
Railroad Comm'n v. Pullman Co., 312 U.
S. 496,
312 U. S. 499
(1941).
See also MacGregor v. State Mutual Life Assur.
Co., 315 U. S. 280,
315 U. S. 281
(1942);
Reitz v. Mealey, 314 U. S. 33,
314 U. S. 39
(1941).
The judgment of the Court of Appeals is vacated, and the cases
are remanded so that that court may reconsider
Page 416 U. S. 392
whether the controlling issue of Florida law should be certified
to the Florida Supreme Court pursuant to Rule 4.61 of the Florida
Appellate Rules.
So ordered.
* Together with No. 73-440,
Simon v. Schein et al., and
No. 73-495,
Investors Diversified Services, Inc., et al. v.
Schein et al., also on certiorari to the same court.
[
Footnote 1]
Investors Diversified Services, Inc., Investors Variable Payment
Fund, Inc., and IDS New Dimensions Fund, Inc., were defendants in
the
Schein case. Of those, only Investors Diversified
Services, Inc., is a defendant in the other derivative action
brought by Gregorio. The dismissal of the third derivative action
(Gildenhorn) was not pursued on appeal.
One Sit and one Jundt, defendants alleged to be employees of
IDS, Inc., were dismissed from the case by the District Court for
lack of personal jurisdiction. There was no appeal from that
dismissal.
[
Footnote 2]
E.g., Palma v. Zerbey, 189 So. 2d 510, 511 (Fla.App.
1966).
[
Footnote 3]
The District Court also held that whether Chasen would be liable
not for profiting himself from the inside information but for
revealing it to others could not be reached as Chasen, a
nonresident of New York, had not been properly served.
[
Footnote 4]
See, e.g., Quinn v. Phipps, 93 Fla. 805, 113 So. 419
(1927).
[
Footnote 5]
Aldrich v. Aldrich, 375 U. S. 249
(1963);
Dresner v. City of Tallahassee, 375 U.
S. 136 (1963).
[
Footnote 6]
Trail Builders Supply Co. v. Reagan, 430 F.2d 828 (CA5
1970);
Gaston v. Pittman, 413 F.2d 1031 (CA5 1969);
Martinez v. Rodriquez, 410 F.2d 729 (CA5 1969);
Moragne v. States Marine Lines, Inc., 409 F.2d 32 (CA5
1969),
rev'd on other grounds, 398 U. S. 398 U.S.
375 (1970);
Hopkins v. Lockheed Aircraft Corp., 394 F.2d
656 (CA5 1968);
Life Ins. Co. of Virginia v. Shiffet, 380
F.2d 375 (CA5 1967);
Green v. American Tobacco Co., 325
F.2d 673 (CA5 1963);
Sun Insurance Office v. Clay, 319
F.2d 505 (CA5 1963). The Fifth Circuit's willingness to certify is
in part a product of frequent state court repudiation of its
interpretations of state law.
See the cases summarized in
United Services Life Ins. Co. v. Delaney, 328 F.2d 483,
486-487 (CA5 1964) (Brown, C.J., concurring).
[
Footnote 7]
Certification procedures are available in several States,
including Colorado, Colo. Appellate Rule 21.1 (1970); Hawaii,
Haw.Rev.Stat. § 602-36 (1969); Louisiana, La.Rev.Stat.Ann. §
13:72.1 (Supp. 1973); Maine, Me.Rev.Stat.Ann., Tit. 4, § 57 (1964);
Maryland, Md.Ann.Code, Art. 26, § 161 (Supp. 1973); Massachusetts,
Mass.Sup.Jud.Ct. Rule 3:21 (1973); Montana, Mont.Sup.Ct. Rule 1
(1973); New Hampshire, N.H.Rev.Stat.Ann. § 490 App.R. 20 (Supp.
1973); and Washington, Wash.Rev.Code Ann. §§ 2.60.010-2.60.030
(Supp. 1972).
[
Footnote 8]
See Wright, The Federal Courts and the Nature and
Quality of State Law 13 Wayne L.Rev. 317 (1967); Kurland, Toward a
Co-Operative Judicial Federalism: The Federal Court Abstention
Doctrine, 24 F.R.D. 481 (1960); Note, Inter-Jurisdictional
Certification: Beyond Abstention Toward Cooperative Judicial
Federalism, 111 U.Pa.L.Rev. 344 (1963); Note, Florida's
Inter-jurisdictional Certification: A Reexamination To Promote
Expanded National Use, 22 U.Fla.L.Rev. 21 (1969).
MR. JUSTICE REHNQUIST, concurring.
The Court says that use of state court certification procedures
by federal courts "does, of course, in the long run, save time,
energy, and resources, and helps build a cooperative judicial
federalism."
Ante at
416 U. S. 391.
It also observes that "[w]e do not suggest that, where there is
doubt as to local law and where the certification procedure is
available, resort to it is obligatory,"
ante at
416 U. S.
390-301, and further states that "[i]ts use in a given
case rests in the sound discretion of the federal court."
Ante at
416 U. S. 391.
I agree with each of these propositions, but I think it appropriate
to emphasize the scope of the discretion of federal judges in
deciding whether to use such certification procedures.
Petitioners here were defendants in the District Court. That
court, applying applicable New York choice of law rules, decided
that Florida law governs the case and, finding that the
respondents' complaint requested relief which would extend the
substantive law even beyond New York's apparently novel decision in
Diamond v. Oreamuno, 24 N.Y.2d 494, 248 N.E.2d 910 (1969),
dismissed the complaint on the merits. The Court of Appeals agreed
that Florida law applied, but held that Florida law would permit
recovery on the claim stated by respondents. The opinion of the
dissenting judge of the Court of Appeals, disagreeing with the
majority's analysis of Florida law, added in a concluding paragraph
that, in light of the uncertainty of Florida law, the Florida
certification procedure should have been utilized by the Court of
Appeals. On rehearing,
Page 416 U. S. 393
petitioners requested the Court of Appeals to utilize this
procedure, but they concede that this is the first such request
that they made. Thus, petitioners seek to upset the result of more
than two years of trial and appellate litigation on the basis of a
point which they first presented to the Court of Appeals upon
petition for rehearing.
Cf. Hostetter v. Idlewild Liquor
Corp., 377 U. S. 324,
377 U. S. 329
(1964).
The authority which Congress has granted this Court to review
judgments of the courts of appeals undoubtedly vests us not only
with the authority to correct errors of substantive law, but to
prescribe the method by which those courts go about deciding the
cases before them.
Western Pacific Railroad Case,
345 U. S. 247
(1953). But a sensible respect for the experience and competence of
the various integral parts of the federal judicial system suggests
that we go slowly in telling the courts of appeals or the district
courts how to go about deciding cases where federal jurisdiction is
based on diversity of citizenship, cases which they see and decide
far more often than we do.
This Court has held that a federal court may not remit a
diversity plaintiff to state courts merely because of the
difficulty in ascertaining local law,
Meredith v. Winter
Haven, 320 U. S. 228
(1943); it has also held that unusual circumstances may require a
federal court having jurisdiction of an action to nonetheless
abstain from deciding doubtful questions of state law,
e.g.,
Louisiana Power & Light Co. v. City of Thibodaux,
360 U. S. 25
(1959);
Kaiser Steel Corp. v. W. S. Ranch Co.,
391 U. S. 593
(1968) (per curiam). In each of these situations, our decisions
have dealt with the issue of how to reconcile the exercise of the
jurisdiction which Congress has conferred upon the federal courts
with the important considerations of comity and cooperative
federalism which
Page 416 U. S. 394
are inherent in a federal system, both of which must be subject
to a single national policy within the federal judiciary.
At the other end of the spectrum, however, I assume it would be
unthinkable to any of the Members of this Court to prescribe the
process by which a district court or a court of appeals should go
about researching a point of state law which arises in a diversity
case. Presumably the judges of the district courts and of the
courts of appeals are at least as capable as we are in determining
what the Florida courts have said about a particular question of
Florida law.
State certification procedures are a very desirable means by
which a federal court may ascertain an undecided point of state
law, especially where, as is the case in Florida, the question can
be certified directly to the court of last resort within the State.
But in a purely diversity case such as this one, the use of such a
procedure is more a question of the considerable discretion of the
federal court in going about the decisionmaking process than it is
a question of a choice trenching upon the fundamentals of our
federal-state jurisprudence.
While certification may engender less delay and create fewer
additional expenses for litigants than would abstention, it entails
more delay and expense than would an ordinary decision of the state
question on the merits by the federal court.
See Clay v. Sun
Insurance Office, 363 U. S. 207,
363 U. S.
226-227 (1960) (dissenting opinion). The Supreme Court
of Florida has promulgated an appellate rule, Fla.Appellate Rule
4.61 (1967), which provides that, upon certification by a federal
court to that court, the parties shall file briefs there according
to a specified briefing schedule, that oral argument may be granted
upon application, and that the parties shall pay the costs of
the
Page 416 U. S. 395
certification.* Thus, while the certification procedure is more
likely to produce the correct determination of state law,
additional time and money are required to achieve such a
determination.
If a district court or court of appeals believes that it can
resolve an issue of state law with available research materials
already at hand, and makes the effort to do so, its determination
should not be disturbed simply because the certification procedure
existed, but was not used. The question of whether certification on
the facts of this case, particularly in view of the lateness of its
suggestion by petitioners, would have advanced the goal of
correctly disposing of this litigation on the state law issue is
one which I would leave, and I understand that the Court would
leave, to the sound judgment of the court making the initial
choice. But since the Court has today for the first time expressed
its view as to the use of certification procedures by the federal
courts, I agree that it is appropriate to vacate the judgment of
the Court of Appeals and remand the cases in order that the Court
of Appeals may reconsider certification in light of the Court's
opinion.
* Fla. Appellate Rule 4.61 (1967) provides in part:
"f. Costs of Certificate. The costs of the certificate and
filing fee shall be equally divided between the parties unless
otherwise ordered by this Court."
"g. Briefs and Argument. The appellant or moving party in the
federal court shall file and serve upon its adversary its brief on
the question certified within 30 days after the filing of said
certificate in the appellate court of this state having
jurisdiction. The appellee or responding party in the federal court
shall file and serve upon its adversary its brief within 20 days
after the receipt of appellant's or moving party's brief and a
reply brief shall be filed within 10 days thereafter."
"h. Oral Argument. Oral argument may be granted upon application
and, unless for good cause shown the time be enlarged by special
order of the Court prior to the hearing thereon, the parties shall
be allowed the same time as in other causes on the merits."