Federal common law is a term of United States law used to describe common law that is developed by the federal courts, instead of by the courts of the various states. The United States is the only country to combine the creation of common law doctrines with a complete federalism, wherein the national supreme court has virtually no power to review state court decisions to determine whether the state courts have followed state laws. The High Court of Australia is sometimes said to have federal common law, but because all state and territorial courts are directly appealable to the High Court, this is indistinguishable from a general common law. In contrast, the United States Supreme Court has effectively barred the creation of federal common law in areas traditionally under the authority of state courts. Nevertheless, there are several areas where federal common law continues to govern.
The Swift doctrine
Until 1938, federal courts in the United States followed the doctrine set forth in the 1842 case of Swift v. Tyson. In that case, the U.S. Supreme Court held that federal courts hearing cases brought under their diversity jurisdiction (allowing them to hear cases between parties from different U.S. states) had to apply the statutory law of the states, but not the common law developed by state courts. Instead, the Supreme Court permitted the federal courts to make their own common law based on general principles of law.
The reasoning behind the decision in Swift v. Tyson was that the federal courts would craft a superior common law, and the state courts would voluntarily choose to adopt it. This hope was not fulfilled, however, as the principles of the common law of the several states continued to dramatically diverge in subsequent decades. Many litigants began to engage in forum shopping: abusing the availability of the federal courts for the specific purpose of having cases decided under federal common law, in lieu of state common law.
The Erie doctrine
In 1938, the Supreme Court decided Erie Railroad v. Tompkins. Erie overruled Swift v. Tyson, holding instead that federal courts exercising diversity jurisdiction had to use all of the same substantive laws as the courts of the states in which they were located. As the Erie Court put it, there is no "federal general common law", with the operative word being "general".
The Erie decision did not put an end to other types of federal common law. Several areas of federal common law remain, in two basic categories: areas where Congress has given the courts power to develop substantive law, and areas where a federal rule of decision is necessary to protect uniquely federal interests.
The U.S. Congress has given courts power to formulate common law rules in areas such as admiralty law, antitrust, bankruptcy law, interstate commerce, and civil rights. Congress often lays down broad mandates with vague standards, which are then left to the courts to interpret, and these interpretations eventually give rise to complex understandings of the original intent of Congress, informed by the courts' understanding of what is just and reasonable.
Furthermore, in the 1943 case of Clearfield Trust Co. v. United States, the Court recognized that federal courts could still create federal common law, albeit in limited circumstances where federal or Constitutional interests were at stake, Congress had inadequately addressed the situation sub judice, and the application of individual state laws in various jurisdictions would create unacceptable levels of diversity or uncertainty. When fashioning new federal common law, the Court may either adopt a reasonable state law, look to its own precedent, or create new law.
Congressional repeal of federal common law
Federal common law is valid only to the extent that Congress has not repealed the common law. The Supreme Court has explained that, "when Congress addresses a question previously governed by a decision resting on federal common law, the need for such an unusual exercise of law-making by federal courts disappears."