Lehman Brothers v. Schein

Supreme Court of the United States · 1974 · Federal Courts

Federal CourtsErieCertification of state-law questionsDiversity jurisdictiondiversity jurisdictionEriestate law uncertaintycertification

Facts

The suits were shareholder derivative actions involving Lum's, a Florida corporation, and were filed in the Southern District of New York under diversity jurisdiction. The complaints alleged that Lum's president disclosed confidential earnings projections to a representative of Lehman Brothers, who passed them to an IDS employee, after which IDS defendants sold 83,000 shares before the information became public. The plaintiffs sought to hold defendants liable to Lum's for profits allegedly derived from misuse of inside information. The lower courts agreed that Florida law controlled, but they disagreed about whether Florida law would recognize the claimed theory of liability.

Issue

When a federal court sitting in diversity confronts a novel and unsettled issue of controlling state law, and the relevant state provides a certification procedure, must the federal court decide the issue itself or may it certify the question to the state's highest court? More specifically, should the court of appeals have reconsidered using Florida's certification procedure here?

Rule

Where there is doubt as to local law and a state certification procedure is available, resort to certification is not obligatory, but its use rests in the sound discretion of the federal court. Certification can save time, energy, and resources in the long run and promotes cooperative judicial federalism, especially when the state-law issue is novel and unsettled.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Nora Feld sued Blue Mesa Storage LLC in federal court in Chicago under diversity jurisdiction after a warehouse fire damaged her inventory. Illinois choice-of-law rules point to Colorado law, and the dispute turns on a novel Colorado rule about whether a storage operator owes a particular nonwaivable duty; Colorado allows certification of state-law questions to its highest court.

What is the most accurate statement about the federal court's authority?

Explanation. Where state law is doubtful and the state provides a certification procedure, resort to certification is not obligatory; its use rests in the sound discretion of the federal court. The majority emphasized that certification can promote cooperative judicial federalism and conserve resources, but it is not mandatory. It also distinguished certification from forcing parties to start over in state court.