Federal common law governs the claim-preclusive effect of a dismissal by a federal court sitting in diversity.
Petitioner's contract and business tort claims against respondent were dismissed on the merits by the federal court, sitting in diversity, on the ground that the statute of limitations of the court's forum state precluded the claims. Petitioner also asserted the same claims in the state court in a different forum, and the state court determined that the federal court dismissal was on the merits and thus was claim preclusive.
Was the judgment claim preclusive?
The United States Supreme Court held that the federal court's dismissal did not necessarily preclude the action in the alternate forum state. The dismissal on the merits, based on the statute of limitations, merely barred petitioner's remedy without extinguishing its substantive rights, and thus only precluded petitioner from pursuing the same claim in the dismissing court. Federal common law governed the effect of the dismissal by the federal court sitting in diversity, and such law required that the claim-preclusive effect of the federal judgment was governed by the law of claim preclusion of the federal court's forum state.