The clause authorizing diversity of citizenship jurisdiction was intended to protect out-of-state litigants from local bias in state courts. The records of the Constitutional Convention contain surprisingly little discussion of the clause. The reason for this silence, however, may have been that most delegates shared Alexander Hamilton’s belief that “the reasonableness of the agency of the national courts in cases in which the state tribunals cannot be supposed to be impartial speaks for itself.” The Federalist No.80. Some of the Framers appear to have been less worried about state court partiality. In the Virginia ratification debates, James Madison is said to have conceded that diversity jurisdiction might well have been left to the state courts; and Chief Justice John Marshall is reported to have given only half-hearted support to the Diversity Clause. But as Marshall later remarked in the classic statement of the purpose of the clause, however impartial the state courts may be in fact, “the Constitution itself either entertains apprehensions on this subject, or views with such indulgence the possible fears and apprehensions” of potential out-of-state litigants that it authorizes the extension of the federal judicial power to controversies between citizens of different states. Bank of the United States v. Deveaux (1809).

Although the Diversity Clause authorizes such extension, the actual grant of power to try diversity cases is conferred by statute. Congress has never conferred this power to the full extent authorized by the clause. For example, it has always limited the federal courts’ jurisdiction over diversity cases to those in which the amount in controversy between the parties exceeds a certain sum; and it has refused to allow a defendant to invoke diversity jurisdiction for the purpose of removing a case from a state court to the federal system when the defendant is a citizen of the state in which the suit was brought (and when, consequently, he would generally have nothing to fear from any local bias on the part of a state court).

Chief Justice Marshall interpreted the clause as not applying to residents of the District of Columbia, Hepburn v. Ellzey (1805), but Congress later extended federal diversity jurisdiction to the district’s residents by statute. 28 U.S.C. §1332. In National Mutual Insurance Co. of the District of Columbia v. Tidewater Transfer Co. (1949), the Supreme Court upheld Congress’s authority to accord the District of Columbia the status of a state for diversity purposes, but the Court did so with shifting majorities and conflicting rationales.

Chief Justice Marshall also excluded corporations from qualifying as parties under the clause, Bank of the United States v. Deveaux, but later Court decisions allowed corporations to be parties under the fiction that their shareholders were citizens of the state of incorporation. See Marshall v. Baltimore & Ohio Railroad Co. (1853).

More recently, Congress specified that a corporation is deemed to be a citizen not only of the state in which it is incorporated but also the state of its principal place of business; the effect was to make it more difficult for defendant corporations to remove cases to federal court. However, in 2010, the Supreme Court made diversity removal easier for corporate defendants by specifying that a corporation’s “principal place of business” means its “nerve center,” or the place where the officers direct, control, and coordinate the corporation’s activities. Hertz Corp. v. Friend (2010). Hertz enables a corporation to utilize diversity removal from state court even in states where it does a plurality of its business, so long as that state is not its “nerve center.”

The Supreme Court has recognized certain limitations on the federal courts’ diversity jurisdiction. Most importantly, the Court has required (with a few exceptions) that parties to a lawsuit based on diversity jurisdiction be “completely” diverse: that is, no party on one side of the dispute may be a citizen of the same state as any party on the other side. To qualify under the clause, the parties must actually be domiciled in different states. Differential residency alone is not sufficient.

For many years, the substantive law that federal courts applied in diversity cases was its own federal common law. Swift v. Tyson (1842). Through statute, however, the courts applied the procedural law of the state in which the court sat. That formula was reversed in Erie Railroad Co. v. Tompkins (1938). Subsequently, a complex body of law has developed governing which law the federal court will apply. In the main, a federal court will apply the substantive law of the state in which the court sits, including the state’s conflict-of-laws rules, but the federal court will follow federal procedural practice, unless the state’s procedure would be material in determining the outcome of the case. See Guaranty Trust Co. v. York (1945). In most cases, the federal court is bound to apply state law as determined by the state’s highest court. Although drastically reduced by the Erie decision, federal common law still governs in some areas of peculiar federal concern, such as relations with other nations. Banco Nacional de Cuba v. Sabbatino (1964).

Despite a longstanding prejudice against diversity jurisdiction by legal academics and jurists, Congress has significantly broadened it over the last two decades. In the early 1990s, Congress enlarged the class of claims and parties that a federal court must entertain as part of a single diversity “case” to include both related state law claims (“pendent” jurisdiction) as well as claims relating to third parties that would otherwise defeat diversity of citizenship (“ancillary” claims). The Supreme Court has expanded diversity jurisdiction even beyond what Congress apparently intended. See Exxon Mobil v. Allapattah Servs., Inc. (2005), which held that federal courts can entertain diversity jurisdiction even in cases where not all the claimants assert claims over the dollar minimum specified by statute.

In 2002, Congress eliminated the requirement that all plaintiffs and defendants be citizens of different states (“complete diversity”) for mass torts involving the deaths of at least seventy-five individuals in an accident in one location (the Multiparty, Multiforum Trial Jurisdiction Act). In 2005, Congress further provided that so long as there was diversity of citizenship between any two plaintiffs and defendants, a class action law-suit could be removed to federal court no matter how large was the class (the Class Action Fairness Act of 2005). In neither case was Congress concerned with bias against out-of-state defendants. Rather, it acted simply to further judicial efficiency (MMTJA) and to address the lack of uniformity that would occur when multiple state courts handled large consumer-oriented class action suits against national corporations (Class Action Fairness Act).

Not only did Congress’s expansion of the availability of diversity jurisdiction in the early 2000s arguably go beyond the original purpose for diversity jurisdiction, which was to remedy state court bias, but it amounted to a significant transfer of judicial authority from the state courts to the federal courts. For this reason, some commentators have suggested the new, expansive rules distort the federalist structure envisioned by the Framers.

Many academics and federal judges continue to believe that diversity jurisdiction should be curtailed or abolished. They argue that it is anachronistic because there is little danger today of bias against out-of-state litigants, that it encourages forum-shopping, that it has an innate bias against the states, and that it results in an inefficient use of judicial resources. On the other side, a widespread belief that federal judges are better qualified than their state court counterparts leads many practitioners to oppose further restrictions. Moreover, many practitioners continue to insist that local bias persists, especially in rural areas (where state courts are somewhat more likely to be located); and they counsel against departing from the precaution of the Framers.