CERTIORARI TO THE UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
1. Under 28 U. S. C. §1291, appeal may be taken from an order of
a Federal District Court denying a corporation's motion that the
plaintiff in a stockholder's derivative action be required,
pursuant to a state statute, to give security for reasonable
expenses of the defendants, in connection with the action. Pp.
337 U. S.
(a) The matters embraced in such an order are not of such an
interlocutory nature as to affect, or to be affected by, a decision
on the merits. P. 337 U. S.
(b) The order is appealable because it is a final disposition of
a claimed right which is not an ingredient of the cause of action
and does not require consideration with it. Pp. 337 U. S.
2. A state statute providing that, in any stockholder's
derivative action pending at the time of its enactment or
thereafter brought, in which the plaintiff's interest as a
shareholder is less than 5% of the value of all outstanding shares
and has a market value of less than 50,000, he may be required at
any stage of the proceeding to give security for the reasonable
expenses, including counsel fees, which the corporation may incur
or for which it may become liable, does not violate the Federal
Constitution. Pp. 337 U. S.
(a) The Federal Constitution does not oblige a state to place
its litigating and adjudicating processes at the disposal of a
plaintiff in a stockholder's derivative suit, at least without
imposing standards of responsibility, liability and accountability
which it considers will protect the interests he elects himself to
represent. Pp. 337 U. S.
(b) The statute here involved does not violate the Contract
Clause of the Constitution. P. 337 U. S.
(c) For a state to close its courts to this type of litigation
if the condition of reasonable security is not met does not violate
the Due Process Clause. Pp. 337 U. S.
Page 337 U. S. 542
(d) The limitation of the requirement of the statute to
stockholders whose interest is less than 5% and has a market value
of less than $50,000 does not violate the Equal Protection Clause
of the Constitution. Pp. 337 U. S.
(e) Assuming that the statute will not be construed as imposing
liability for expenses incurred before its enactment, or perhaps
before the granting of security in a particular case, the provision
making it applicable to actions pending at the time of its
enactment does not give it such a retroactive effect as to render
it unconstitutional under the Due Process Clause. Pp. 337 U. S.
3. That a corporation which was the subject of a stockholder's
derivative action in New Jersey was organized under the laws of
Delaware does not make inapplicable a New Jersey statute providing
that the plaintiff may be required to give security for reasonable
expenses of the corporation. Pp. 337 U. S.
4. A federal court, having jurisdiction of a stockholder's
derivative action only because of diversity of citizenship, must
apply a statute of the forum State which makes the plaintiff, if
unsuccessful, liable for reasonable expenses, including attorney's
fees, of the defense and provides that the corporation may require
the plaintiff to give security for their payment as a condition of
prosecuting the action. Pp. 337 U. S.
-545, 337 U. S.
(a) A statute which so conditions the stockholder's action
cannot be disregarded by the federal court as a mere procedural
device. Pp. 337 U. S.
(b) A different result is not required by Rule 23 of the Federal
Rules of Civil Procedure, since there is no conflict between that
rule and the state statute. P. 337 U. S.
170 F.2d 44, affirmed.
A Federal District Court, having jurisdiction of a stockholder's
derivative action solely because of diversity of citizenship,
denied a motion to require the plaintiff to post security for
reasonable expenses incurred by the defense, as required by a
statute of the forum State. 7 F.R.D. 352. The Court of Appeals
reversed. 170 F.2d 44. This Court granted certiorari. 336 U.S. 917.
p. 337 U. S.
Page 337 U. S. 543
MR. JUSTICE JACKSON delivered the opinion of the Court.
The ultimate question here is whether a federal court, having
jurisdiction of a stockholder's derivative action only because the
parties are of diverse citizenship, must apply a statute of the
forum state which makes the plaintiff, if unsuccessful, liable for
all expenses, including attorney's fees, of the defense and
requires security for their payment as a condition of prosecuting
Petitioners' decedent as plaintiff, brought in the United States
District Court for New Jersey an action in the right of the
Beneficial Industrial Loan Corporation, a Delaware corporation
doing business in New Jersey. The defendants were the corporation
and certain of its managers and directors. The complaint alleged
generally that, since 1929, the individual defendants engaged in a
continuing and successful conspiracy to enrich themselves at the
expense of the corporation. Specific charges of mismanagement and
fraud extended over a period of eighteen years, and the assets
allegedly wasted or diverted thereby were said to exceed
$100,000,000. The stockholder had demanded that the corporation
institute proceedings for its recovery but, by their control of the
corporation, the individual defendants prevented it from doing so.
This stockholder, therefore, sought to assert
Page 337 U. S. 544
the right of the corporation. One of 16,000 stockholders, he
owned 100 of its more than two million shares, so that his
holdings, together with 150 shares held by the intervenor,
approximated 0.0125% of the outstanding stock, and had a market
value that had never exceeded $9,000.
The action was brought in 1943, and various proceedings had been
taken therein when, in 1945, New Jersey enacted the statute which
is here involved. [Footnote 1
Its general effect is to make a plaintiff having so small an
interest liable for all expenses and attorney's fees of
Page 337 U. S. 545
the defense if he fails to make good his complaint and to
entitle the corporation to indemnity before the case can be
prosecuted. These conditions are made applicable to pending
actions. The corporate defendant therefore moved to require
security, pointed to its by-laws by which it might be required to
indemnify the individual defendants, and averred that a bond of
$125,000 would be appropriate.
The District Court was of the opinion that the state enactment
is not applicable to such an action when pending in a federal
court, 7 F.R.D. 352. The Court of Appeals were of a contrary
opinion, and reversed, 170 F.2d 44, and we granted certiorari. 336
At the threshold, we are met with the question whether the
District Court's order refusing to apply the statute was an
appealable one. Title 28 U.S.C. § 1291, provides, as did its
predecessors, for appeal only "from all final decisions of the
district courts," except when direct appeal to this Court is
provided. Section 1292 allows appeals also from certain
interlocutory orders, decrees and judgments, not material to this
case except as they indicate the purpose to allow appeals from
orders other than final judgments when they have a final and
irreparable effect on the rights of the parties. It is obvious
that, if Congress had allowed appeals only from those final
judgments which terminate an action, this order would not be
Page 337 U. S. 546
The effect of the statute is to disallow appeal from any
decision which is tentative, informal or incomplete. Appeal gives
the upper court a power of review, not one of intervention. So long
as the matter remains open, unfinished or inconclusive, there may
be no intrusion by appeal. But the District Court's action upon
this application was concluded and closed, and its decision final
in that sense, before the appeal was taken.
Nor does the statute permit appeals, even from fully consummated
decisions, where they are but steps towards final judgment in which
they will merge. The purpose is to combine in one review all stages
of the proceeding that effectively may be reviewed and corrected if
and when final judgment results. But this order of the District
Court did not make any step toward final disposition of the merits
of the case, and will not be merged in final judgment. When that
time comes, it will be too late effectively to review the present
order, and the rights conferred by the statute, if it is
applicable, will have been lost, probably irreparably. We conclude
that the matters embraced in the decision appealed from are not of
such an interlocutory nature as to affect, or to be affected by,
decision of the merits of this case.
This decision appears to fall in that small class which finally
determine claims of right separable from, and collateral to, rights
asserted in the action, too important to be denied review and too
independent of the cause itself to require that appellate
consideration be deferred until the whole case is adjudicated. The
Court has long given this provision of the statute this practical,
rather than a technical, construction. Bank of
Columbia v. Sweeney,
1 Pet. 567, 26 U. S. 569
United States v. River Rouge Improvement Co., 269 U.
, 269 U. S. 414
Cobbledick v. United States, 309 U.
, 309 U. S.
We hold this order appealable because it is a final disposition
of a claimed right which is not an ingredient
Page 337 U. S. 547
of the cause of action and does not require consideration with
it. But we do not mean that every order fixing security is subject
to appeal. Here, it is the right to security that presents a
serious and unsettled question. If the right were admitted or clear
and the order involved only an exercise of discretion as to the
amount of security, a matter the statute makes subject to
reconsideration from time to time, appealability would present a
Since this order may be reviewed on appeal, the petition in No.
512, whereby the corporation asserts the right to compel security
by mandamus, is dismissed.
Petitioners deny the validity of the statute under both Federal
and New Jersey Constitutions. The latter question is ultimately for
the state courts, and since they have made no contrary
determination, we shall presume in the circumstances of this case
that the statute conforms with the State constitution.
Federal Constitutional questions we must consider, because a
federal court would not give effect, in either a diversity or
nondiversity case, to a state statute that violates the
Constitution of the United States.
The background of stockholder litigation with which this statute
deals requires no more than general notice. As business enterprise
increasingly sought the advantages of incorporation, management
became vested with almost uncontrolled discretion in handling other
people's money. The vast aggregate of funds committed to corporate
control came to be drawn to a considerable extent from numerous and
scattered holders of small interests. The director was not subject
to an effective accountability. That created strong temptation for
managers to profit personally at expense of their trust. The
business code became all too tolerant of such practices. Corporate
Page 337 U. S. 548
were lax, and were not self-enforcing, and stockholders, in face
of gravest abuses, were singularly impotent in obtaining redress of
abuses of trust.
Equity came to the relief of the stockholder, who had no
standing to bring civil action at law against faithless directors
and managers. Equity, however, allowed him to step into the
corporation's shoes and to seek in its right the restitution he
could not demand in his own. It required him first to demand that
the corporation vindicate its own rights, but when, as was usual,
those who perpetrated the wrongs also were able to obstruct any
remedy, equity would hear and adjudge the corporation's cause
through its stockholder with the corporation as a defendant, albeit
a rather nominal one. This remedy, born of stockholder
helplessness, was long the chief regulator of corporate management,
and has afforded no small incentive to avoid at least grosser forms
of betrayal of stockholders' interests. It is argued, and not
without reason, that, without it, there would be little practical
check on such abuses.
Unfortunately, the remedy itself provided opportunity for abuse
which was not neglected. Suits sometimes were brought not to
redress real wrongs, but to realize upon their nuisance value. They
were bought off by secret settlements in which any wrongs to the
general body of share owners were compounded by the suing
stockholder, who was mollified by payments from corporate assets.
These litigations were aptly characterized in professional slang as
"strike suits." And it was said that these suits were more commonly
brought by small and irresponsible than by large stockholders,
because the former put less to risk, and a small interest was more
often within the capacity and readiness of management to compromise
than a large one.
We need not determine the measure of these abuses or the evils
they produced, on the one hand, or prevented
Page 337 U. S. 549
and redressed, on the other. The Legislature of New Jersey, like
that of other states, [Footnote
] considered them sufficient to warrant some remedial
The very nature of the stockholder's derivative action makes it
one in the regulation of which the legislature of a state has wide
powers. Whatever theory one may hold as to the nature of the
corporate entity, it remains a wholly artificial creation whose
internal relations between management and stockholders are
dependent upon state law and may be subject to most complete and
penetrating regulation, either by public authority or by some form
of stockholder action. Directors and managers, if not technically
trustees, occupy positions of a fiduciary nature, and nothing in
the Federal Constitution prohibits a state from imposing on them
the strictest measure of responsibility, liability and
accountability, either as a condition of assuming office or as a
consequence of holding it.
Likewise, a stockholder who brings suit on a cause of action
derived from the corporation assumes a position not technically as
a trustee, perhaps, but one of a fiduciary character. He sues not
for himself alone, but as representative of a class comprising all
who are similarly situated. The interests of all in the redress of
the wrongs are taken into his hands, dependent upon his diligence,
wisdom and integrity. And while the stockholders have chosen the
corporate director or manager, they have no such election as to a
plaintiff who steps forward to represent them. He is a self-chosen
representative and a volunteer champion. The Federal Constitution
does not oblige the State to place its litigating and adjudicating
processes at the disposal of such a
Page 337 U. S. 550
representative, at least without imposing standards of
responsibility, liability and accountability which it considers
will protect the interests he elects himself to represent. It is
not without significance that this Court has found it necessary
long ago, in the Equity Rules [Footnote 3
] and now in the Federal Rules of Civil
Procedure, [Footnote 4
impose procedural regulations of the class action not applicable to
any other. We conclude that the state has plenary power over this
type of litigation.
In considering specific objections to the way in which the State
has exercised its power in this particular statute, it should be
unnecessary to say that we are concerned only with objections which
go to constitutionality. The wisdom and the policy of this and
similar statutes are involved in controversies amply debated in
legal literature, [Footnote 5
but not for us to judge, and, hence not for us to remark upon. The
Federal Constitution does not invalidate state legislation because
it fails to embody the
Page 337 U. S. 551
highest wisdom or provide the best conceivable remedies. Nor can
legislation be set aside by courts because of the fact, if it be
such, that it has been sponsored and promoted by those who
advantage from it. [Footnote 6
In dealing with such difficult and controversial subjects, only
experience will verify or disclose weaknesses and defects of any
policy and teach lessons which may be applied by amendment. Within
the area of constitutionality, the states should not be restrained
from devising experiments, even those we might think dubious, in
the effort to preserve the maximum good which equity sought in
creating the derivative stockholder's action and at the same time
to eliminate as much as possible its defects and evils.
It is said that this statute transgresses the Due Process
Clause, Amend. 14, by being "arbitrary, capricious and
unreasonable;" the Equal Protection Clause by singling out small
stockholders to burden most heavily; that it violates the Contract
Clause, art. 1, § 10, cl. 1, and that its application to pending
litigation renders it unconstitutionally retroactive.
The contention that this statute violates the Contract Clause of
the Constitution is one in which we see not the slightest merit.
Plaintiff's suit is entertained by equity largely because he had no
contract rights on which to base an action at law, and hence none
which is impaired by this legislation.
In considering whether the statute offends the Due Process
Clause, we can judge it only by its own terms, for it has had no
interpretation or application as yet. It imposes liability and
requires security for "the reasonable
counsel fees which may be incurred" (emphasis supplied) by the
corporation and by other parties defendant. The amount of security
is subject to increase if the progress of the litigation
Page 337 U. S. 552
that it is inadequate or to decrease if it is proved to be
excessive. A state may set the terms on which it will permit
litigations in its courts. No type of litigation is more
susceptible of regulation than that of a fiduciary nature. And it
cannot seriously be said that a state makes such unreasonable use
of its power as to violate the Constitution when it provides
liability and security for payment of reasonable expenses if a
litigation of this character is adjudged to be unsustainable. It is
urged that such a requirement will foreclose resort by most
stockholders to the only available judicial remedy for the
protection of their rights. Of course, to require security for the
payment of any kind of costs or the necessity for bearing any kind
of expense of litigation has a deterring effect. But we deal with
power, not wisdom, and we think, notwithstanding this tendency, it
is within the power of a state to close its courts to this type of
litigation if the condition of reasonable security is not met.
The contention that the statute denies equal protection of the
laws is based upon the fact that it enables a stockholder who owns
5% of a corporation's outstanding shares, or $50,000 in market
value, to proceed without either security or liability and imposes
both upon those who elect to proceed with a smaller interest. We do
not think the state is forbidden to use the amount of one's
financial interest, which measures his individual injury from the
misconduct to be redressed, as some measure of the good faith and
responsibility of one who seeks at his own election to act as
custodian of the interests of all stockholders, and as an
indication that he volunteers for the large burdens of the
litigation from a real sense of grievance and is not putting
forward a claim to capitalize personally on its harassment value.
These may not be the best ways of precluding "strike lawsuits," but
we are unable to say that a classification for these purposes,
Page 337 U. S. 553
based upon the percentage or market value of the stock alleged
to be injured by the wrongs, is an unconstitutional one. Where any
classification is based on a percentage or an amount, it is
necessarily somewhat arbitrary. It is difficult to say of many
lines drawn by legislation that they give those just above and
those just below the line a perfectly equal protection. A taxpayer
with $10,000.01 of income does not think it is equality to tax him
at a different rate than one who has $9,999.99, or to require
returns from one just above and not from one just below a certain
figure. It is difficult to say that a stockholder who has 49.99% of
a company's stock should be unable to elect any representative to
its Board of Directors. while one who owns 50.01% may name the
entire Board. If there is power, as we think there is, to draw a
line based on considerations of proportion or amount, it is a rare
case, of which this is not one, that a constitutional objection may
be made to the particular point which the legislature has
The contention also is made that the provision which applies
this statute to actions pending upon its enactment in which no
final judgment has been entered renders it void under the Due
Process Clause for retroactivity. While, by its terms, the statute
applies to pending cases, it does not provide the manner of
application, nor do the New Jersey courts appear to have settled
what its effect is to be. Its terms do not appear to require an
interpretation that it creates new liability against the plaintiff
for expenses incurred by the defense previous to its enactment. The
statute would admit of a construction that plaintiff's liability
begins only from the time when the Act was passed, or perhaps when
the corporation's application for security is granted, and that
security for expenses and counsel fees which "may be incurred" does
not include those which have been incurred
Page 337 U. S. 554
before one or the other of these periods. We would not, for the
purpose of considering constitutionality, construe the statute in
absence of a state decision to impose liability for events before
its enactment. On this basis, its alleged retroactivity amounts
only to a stay of further proceedings unless and until security is
furnished for expense incurred in the future, and does not extend
either to destruction of an existing cause of action or to creation
of a new liability for past events.
The mere fact that a statute applies to a civil action
retrospectively does not render it unconstitutional. Blount v.
Windley, 95 U. S. 173
95 U. S. 180
Western Union Telegraph Co. v. Louisville & N.R.Co.,
258 U. S. 13
Chase Securities Corp. v. Donaldson, 325 U.
. Looking upon the statute as we have indicated,
its retroactive effect, if any, is certainly less drastic and
prejudicial than that held not to be unconstitutional in these
decisions. We do not find in the bare statute any such retroactive
effect as renders it unconstitutional under the Due Process Clause,
and of course we express no opinion as to the effect of an
application other than we have indicated.
It is also contended that this statute may not be applied in
this case because the cause of action derives from a Delaware
corporation, and hence Delaware law governs it. But it is the
plaintiff who has brought the case in New Jersey. The trial will
very likely involve questions of conflict of laws as to which the
law of New Jersey will apply, Klaxon Co. v. Stentor Electric
Mfg. Co., 313 U. S. 487
Griffin v. McCoach, 313 U. S. 498
perhaps questions of full faith and credit. These are not before us
now. A plaintiff cannot avail himself of the New Jersey forum and
at the same time escape the terms on which it is made available, if
the law is applicable to a federal court sitting in that State,
which we later consider.
We conclude, therefore, that, so far as the Federal Constitution
is concerned, New Jersey's security statute is
Page 337 U. S. 555
a valid law of that State, and the question remains as to
whether it must be applied by federal courts in that State to suits
brought therein on diversity grounds.
APPLICABILITY IN FEDERAL COURT
The Rules of Decision Act, in effect since the First Congress of
the United States and now found at 28 U.S.C. § 1652, provides:
"The laws of the several states, except where the Constitution
or treaties of the United States or Acts of Congress otherwise
require or provide, shall be regarded as rules of decision in civil
actions in the courts of the United States, in cases where they
This Court, in Erie R. Co. v. Tompkins, 304 U. S.
, held that judicial decisions are laws of the states
within its meaning. But Erie R. Co. v. Tompkins
progeny have wrought a more far-reaching change in the relation of
state and federal courts and the application of state law in the
latter whereby in diversity cases the federal court administers the
state system of law in all except details related to its own
conduct of business. Guaranty Trust Co. v. York,
326 U. S. 99
only substantial argument that this New Jersey statute is not
applicable here is that its provisions are mere rules of procedure,
rather than rules of substantive law.
Even if we were to agree that the New Jersey statute is
procedural, it would not determine that it is not applicable. Rules
which lawyers call procedural do not always exhaust their effect by
regulating procedure. But this statute is not merely a regulation
of procedure. With it or without it, the main action takes the same
course. However, it creates a new liability where none existed
before, for it makes a stockholder who institutes a derivative
action liable for the expense to which he puts the corporation and
other defendants if he does not make good his claims. Such
liability is not usual, and it goes beyond payment of what we know
as "costs." If all
Page 337 U. S. 556
the Act did was to create this liability, it would clearly be
substantive. But this new liability would be without meaning and
value in many cases if it resulted in nothing but a judgment for
expenses at or after the end of the case. Therefore, a procedure is
prescribed by which the liability is insured by entitling the
corporate defendant to a bond of indemnity before the outlay is
incurred. We do not think a statute which so conditions the
stockholder's action can be disregarded by the federal court as a
mere procedural device.
It is urged, however, that Federal Rule of Civil Procedure No.
23 deals with plaintiff's right to maintain such an action in
federal court, and that therefore the subject is recognized as
procedural, and the federal rule alone prevails. Rule 23 requires
the stockholder's complaint to be verified by oath and to show that
the plaintiff was a stockholder at the time of the transaction of
which he complains or that his share thereafter devolved upon him
by operation of law. In other words, the federal court will not
permit itself to be used to litigate a purchased grievance or
become a party to speculation in wrongs done to corporations. It
also requires a showing that an action is not a collusive one to
confer jurisdiction, and to set forth the facts showing that the
plaintiff has endeavored to obtain his remedy through the
corporation itself. It further provides that the class action shall
not be dismissed or compromised without approval of the court, with
notice to the members of the class. These provisions neither create
nor exempt from liabilities, but require complete disclosure to the
court and notice to the parties in interest. None conflict with the
statute in question, and all may be observed by a federal court,
even if not applicable in state court.
We see no reason why the policy stated in Guaranty Trust Co.
v. York, 326 U. S. 99
should not apply.
Page 337 U. S. 557
We hold that the New Jersey statute applies in federal courts,
and that the District Court erred in declining to fix the amount of
indemnity reasonably to be exacted as a condition of further
prosecution of the suit.
The judgment of the Court of Appeals is affirmed.
* Together with No. 512, Beneficial Industrial Loan Corp. v.
Smith, United States District Judge, et al.,
certiorari to the same Court.
Chapter 131, New Jersey Laws of 1945, N.J.S.A. 14:3-15 to 17,
provides in pertinent part as follows:
"1. In any action instituted or maintained in the right of any
domestic or foreign corporation by the holder or holders of shares,
or of voting trust certificates representing shares, of such
corporation having a total par value or stated capital value of
less than five percentum (5%) of the aggregate par value or stated
capital value of all the outstanding shares of such corporation's
stock of every class . . . unless the shares or voting trust
certificates held by such holder or holders have a market value in
excess of fifty thousand dollars ($50,000.00), the corporation in
whose right such action is brought shall be entitled, at any stage
of the proceeding before final judgment, to require the complainant
or complainants to give security for the reasonable expenses,
including counsel fees, which may be incurred by it in connection
with such action and by the other parties defendant in connection
therewith for which it may become subject pursuant to law, its
certificate of incorporation, its by-laws or under equitable
principles, to which the corporation shall have recourse in such
amount as the court having jurisdiction shall determine upon the
termination of such action. The amount of such security may
thereafter, from time to time, be increased or decreased in the
discretion of the court having jurisdiction of such action upon
showing that the security provided has or may become inadequate or
"2. In any action, suit or proceeding brought or maintained in
the right of a domestic or foreign corporation by the holder or
holders of shares, or of voting trust certificates representing
shares, of such corporation, it must be made to appear that the
complainant was a shareholder or the holder of a voting trust
certificate at the time of the transaction of which he complains or
that his share or voting trust certificate thereafter devolved upon
him by operation of law."
"3. This act shall take effect immediately, and shall apply to
all such actions, suits or proceedings now pending in which no
final judgment has been entered, and to all future actions, suits
§ 61-b, New York General Corporation Law,
Consol.Laws, c. 23; 12 Pa. Stat.Ann. § 1322; c. 989, Laws of
Maryland, 1945; Wisconsin Stat. § 180.13 (1945).
Old Equity Rule 94, 104 U.S. ix; Equity Rule 27, 226 U.S. 649,
Hornstein, Problems of Procedure is Stockholders'
Derivative Suits, 42 Col.L.R. 574; Hornstein, Directors' Expenses
in Stockholders' Suits, 43 id. 301; Koessler, The Stockholder's
Suit: A Comparative View, 46 id.
238; Hornstein, New
Aspects of Stockholders' Derivative Suits, 47 id.
Carson, Current Phases of Derivative Actions Against Directors, 40
Mich.L.R. 1125; P. E. Jackson, Reorganization of the Corporate
Concept and the Effect of Section 61-b of the New York General
Corporation Law, A5 Am.Bankr.Rev. 323; Carson, Further Phases of
Derivative Actions Against Directors, 29 Cornell L.Q. 431; House,
Stockholders' Suits And the Coudert-Mitchell Laws, 20
N.Y.U.L.Q.Rev. 377; Hornstein, The Death Knell of Stockholders'
Derivative Suits in New York, 32 California L.R. 123; Zlinkoff, The
American Investor And the Constitutionality of Section 61-b of the
New York General Corporation Law, 54 Yale L.J. 352. See
Douglas, Directors Who Do Not Direct, 47 Harv.L.R. 1305.
Daniel v. Family Security Life Insurance Co.,
336 U. S. 220
MR. JUSTICE DOUGLAS, with whom MR. JUSTICE FRANKFURTER concurs,
dissenting in part.
The cause of action on which this suit is brought is a
derivative one. Though it belongs to the corporation, the
stockholders are entitled under state law to enforce it. The
measure of the cause of action is the claim which the corporation
has against the alleged wrongdoers. This New Jersey statute does
not add one iota to, nor subtract one iota from, that cause of
action. It merely prescribes the method by which stockholders may
enforce it. Each state has numerous regulations governing the
institution of suits in its courts. They may favor the litigation
or they may affect it adversely. But they do not fall under the
principle of Erie R. Co. v. Tompkins, 304 U. S.
, unless they define, qualify or delimit the cause of
action or otherwise relate to it.
This New Jersey statute, like statutes governing security for
costs, regulates only the procedure for instituting a particular
cause of action, and hence need not be applied in this diversity
suit in the federal court. Rule 23 of the Federal Rules of Civil
Procedure defines that procedure for the federal courts.
MR. JUSTICE RUTLEDGE, dissenting.
I am in accord with the dissenting opinion of MR. JUSTICE
DOUGLAS in this case. I also agree with the dissenting views of MR.
JUSTICE JACKSON in No. 465, Woods v.
Page 337 U. S. 558
Interstate Realty Co., ante,
p. 337 U. S. 538
decided today. And I have noted my dissent in Ragan v.
Merchants Transfer & Warehouse Co., ante,
p. 337 U. S. 530
also decided today.
Without undertaking to discuss each case in detail, I think the
three decisions, taken together, demonstrate the extreme extent to
which the Court is going in submitting the control of diversity
litigation in the federal courts to the states, rather than to
Congress, where it properly belongs. This is done in the guise of
applying the rule of Erie R. Co. v. Tompkins, 304 U. S.
. But, in my opinion, it was never the purpose of that
decision to put such matters as those involved here outside the
power of Congress to regulate, and to confer that authority
exclusively upon the states.
What is being applied is a gloss on the Erie
the rule itself. That case held that federal courts in diversity
cases must apply state law, decisional as well as statutory, in
determining matters of substantive law, in particular and apart
from procedural limitations upon its assertion -- whether a cause
of action exists. I accept that view generally and insofar as it
involves a wise rule of administration for the federal courts,
though I have grave doubt that it has any solid constitutional
But the Erie
case made no ruling that, in so deciding
diversity cases, a federal court is "merely another court of the
state in which it sits," and hence that, in every situation in
which the doors of state courts are closed to a suitor, so must be
also those of the federal courts. Not only is this not true when
the state bar is raised by a purely procedural obstacle. There is
sound historical reason for believing that one of the purposes of
the diversity clause was to afford a federal court remedy when, for
at least some reasons of state policy, none would be available in
the state courts. It is the gloss which has
Page 337 U. S. 559
been put upon the Erie
ruling by later decisions,
e.g., Guaranty Trust Co. v. York, 326 U. S.
, which, in my opinion, is being applied to extend the
ruling far beyond its original purpose or intent and,
in my judgment, with consequences and implications seriously
impairing Congress' power, within its proper sphere of action, to
control this type of litigation in the federal courts.
The accepted dichotomy is the familiar "procedural-substantive"
one. This, of course, is a subject of endless discussion, which
hardly needs to be repeated here. Suffice it to say that actually,
in many situations, procedure and substance are so interwoven that
rational separation becomes well nigh impossible. But, even so,
this fact cannot dispense with the necessity of making a
distinction. For, as the matter stands, it is Congress which has
the power to govern the procedure of the federal courts in
diversity cases and the states which have that power over matters
clearly substantive in nature. Judges therefore cannot escape
making the division. And they must make it where the two
constituent elements are Siamese twins, as well as where they are
not twins or even blood brothers. The real question is not whether
the separation shall be made, but how it shall be made, whether
mechanically by reference to whether the state courts' doors are
open or closed, or by a consideration of the policies which close
them and their relation to accommodating the policy of the Erie
rule with Congress' power to govern the incidents of litigation in
It is in these close cases, this borderland area, that I think
we are going too far. It is one thing to decide that Pennsylvania
does or does not create a cause of action in tort for injuries
inflicted by specified conduct and to have that determination
govern the outcome of
Page 337 U. S. 560
a diversity suit in Pennsylvania or New York.* It is another, in
my view, to require a bond for costs or for payment of the opposing
party's expenses and attorney's fees in the event the claimant is
unsuccessful. Whether or not the latter is conceived as creating a
new substantive right, it is too close to controlling the incidents
of the litigation, rather than its outcome, to be identified with
the former. It is a matter which, in my opinion, lies within
Congress' control for diversity cases, not one for state control or
to be governed by the fact that the state shuts the doors of its
courts unless the state requirements concerning such incidents of
litigation are complied with.
In my view, Rule 23 of the Federal Rules of Civil Procedure,
derived from the former Equity Rules and now having the sanction of
Congress, is valid, and governs in the Cohen
however, the State of New Jersey has the power to govern federal
diversity suits within its
Page 337 U. S. 561
borders as to all matters having a substantive tinge or aspect,
then it may be questioned whether, in the event of conflict with
some local policy, a federal court sitting in that state could give
effect to the Rule's requirement that the complaint aver
"that the plaintiff was a shareholder at the time of the
transaction of which he complains or that his share thereafter
devolved on him by operation of law. . . ."
For, in any strict and abstract sense, that provision would seem
to be as much a "substantive" one as the New Jersey requirements
for bond, etc. And, if so, then it would seem highly doubtful, on
any automatic or mechanical application of the
substantive-procedural dichotomy, that either Congress or this
Court could create such a limitation on diversity litigation,
since, as a substantive matter, this would be for the states to
3 Moore, Federal Practice (2d Ed.)
For myself, I have no doubt of the validity of Rule 23 or of the
power of Congress to enact such a rule, even though it has a
substantive aspect. Notwithstanding that aspect, the rule is too
closely related to procedural and other matters affecting
litigation in the federal courts for me to conceive of its
invalidity. So also, in the present cases, I think the state
regulations, though each may be regarded as having a substantive
aspect, are too closely related to the modes and methods of
conducting litigation in the federal courts to be capable of
displacing Congress' power or regulation in those respects or the
federal courts' power to hear and determine the respective
Accordingly I would reverse the judgments in the Cohen
cases and affirm that in the Woods
* It may be noted that the disposition of the local law problem
apparently presented in Erie
was not consistent, either
here or on remand, with the current view that a federal district
court is required to treat a diversity case exactly as would a
state court of the state in which the district court is sitting:
case arose out of an alleged Pennsylvania tort,
and this Court stated that the court of appeals had erred when it
"declined to decide the issue of state law," 304 U.S. at
304 U. S. 80
"the Pennsylvania law." Ibid.
case was initiated by Tompkins,
"a citizen of Pennsylvania . . . in the federal court for
Southern New York,
which had jurisdiction because the company
is a corporation of that State."
304 U.S. at 304 U. S. 69
(emphasis added). Accordingly, as Erie
is now construed,
the issue on remand should have been what law a New York state
court would have applied to the Pennsylvania tort.
sole issue determined on remand was the applicable
law, without mention of the probable attitude
of the New York courts. Tompkins v. Erie R. Co.,
98 F.2d 49. It was not until after Justice Brandeis had retired
that this Court held that federal district courts were required to
follow local conflict of laws doctrine in the resolution of
diversity cases. Klaxon Co. v. Stentor Electric Mfg. Co.,
313 U. S. 487