2016]RETHINKING FEDERAL EQUITY1

RETHINKING FEDERAL EQUITY

Michael T. Morley

Introduction

This Article proposes a new understanding of federal courts’ equity power. It contends that federal courts do not possess an inherent or independent equity power. Rather, the source of a federal court’s power to impose an equitable remedy comes, if at all, from the legal authority that establishes the underlying right, whether it is a state law, federal law, or the Constitution.

When a federal law provides for injunctions as remedies for statutory violations, the circumstances under which the court may issue an injunction depend on the statute’s explicit or implicit restrictions. Likewise—albeit more controversially—a federal court’s power to enjoin constitutional violations stems from the Constitution’s substantive restrictions themselves, rather than Article III.

Conversely, when a federal court is enforcing state law restrictions, it generally may not impose federal standards, but rather must abide by the pertinent provisions of that state’s law of equity and remedies. In short, in a post-Erie world, equity follows, and stems from, the law, and federal courts may be bound to apply state law on the availability of injunctive relief, even when it would differ from federal law.

I. Equity and the Federal Courts

During the Founding Era, Federal courts relied upon general equitable principles, rather than state law, to adjudicate a wide range of issues relating to equitable remedies.[1] Remedies in federal courts, both at common law and in equity, were determined “not according to the practice of state courts, but according to the principles of common law and equity, as distinguished and defined in that country from which we derive our knowledge of those principles.”[2] Specifically, equitable principles determined the availability of injunctive relief,[3]even where state law purported to prohibit the issuance of injunctions;[4]the court’s ability to impose conditions on injunctions;[5] the effects of injunctions;[6] awards of damages under injunction bonds;[7] and attorneys’ fee awards in equity cases.[8] . . . Prior to Erie, the Supreme Court repeatedly recognized the prerogative of federal courts to apply a unique body of principles derived from the English Courts of Chancery, akin to general law, to resolve remedial issues and determine litigants’ remedial rights in state-law cases.

In many respects, Erie reasonably might have been expected to have been the death knell for this notion of the federal equity power.[9] Erie held that there are no such things as either “federal common law,” because courts lack power to create federal law for themselves, or “general law,” in the sense of a “‘transcendental body of law outside of any particular State but obligatory within it unless and until changed by statute.’”[10] Applying either federal common law or general law, in the absence of a federal statute, to areas that federal courts deem to be outside of a State’s “local” concern “invade[s] right which . . . are reserved by the Constitution to the several States.”[11] Under Erie, both the Constitution and the Rules of Decision Act require federal courts to resolve cases based on the U.S. Constitution or federal statutes. In the absence of a federal authority on point, the federal court must apply state law, including both judicial decisions and statutes.[12]

Erie went on to lament the “mischievous results” that arose from federal courts’ reliance on general law rather than state law in cases that were not governed by the U.S. Constitution or federal statutes.[13] Out-of-state litigants involved in litigation against a State’s citizenscould invoke a federal court’s diversity jurisdiction to have their case decided based on general law. They often would obtain different results than a similarly situated litigant who happened to be a citizen of the forum state, and therefore was relegated to state courts applying state law.[14] Such differences were unjust and encouraged forum shopping. The Court also opined that general law tended to be highly subjective, with cases turning on “‘what the judge advancing the doctrine thinks at the time should be the general law on a particular subject.’”[15]

All of these concerns seem to apply equally to the principles of equity upon which pre-Erie courts decided cases. Applying an independent body of “general” equitable principles to diversity cases in federal court could lead to a different outcome than if the case had remained in state court and been adjudicated solely according to state law or the equitable principles adopted by that state’s courts. The possibility of such disparate results could lead to forum shopping in equity cases. And subjectivity—administering justice according to the length of the chancellor’s foot—is one of the longstanding critiques of equity.[16] Moreover, Article III treats law and equity the same, using identical language to grant federal courts jurisdiction over both types of cases.[17]

Guaranty TrustCo. v. York, however, confirmed the vitality of independent federal equity law.[18] In Guaranty Trust, the Court considered whether a federal court sitting in diversity was required to apply a state statute of limitations to an equitable claim for breach of trust.[19] Many passages in the opinion suggest that the Court would decline to enforce an independent body of equitable principles—particularly those that a state court would not itself apply—in state-law cases. For example, it stated, “[A] federal court adjudicating a State-created right solely because of the diversity of citizenship of the parties is for that purpose, in effect, only another court of the State.”[20] A federal court sitting in equity therefore generally cannot “deny substantive rights created by State law or to create substantive rights denied by State law.”[21]

The Court then identified some exceptions to this principle, in which federal courts are to apply different doctrines than state courts in equity cases, and an equitable remedy available in a state or federal court may be unavailable in the other.[22] Some of these exceptions were fairly uncontroversial, such as when the Seventh Amendment (which is applicable only in federal court[23]) requires a federal court to convene a jury to resolve an issue in an equity case that would have been adjudicated by the judge in state court;[24] or a federal statute expressly bars federal courts from granting certain kinds of relief,[25] or from granting relief under certain circumstances.[26]

The Court went on to hold, however, that traditional principles of equity from the English Chancery Court, also continued to govern federal courts’ exercise of equitable powers, even in diversity cases. It explained, “Equitable relief in a federal court is of course subject to restrictions: the suit must be within the traditional scope of equity as historically evolved in the English Court of Chancery.”[27] The Court elaborated:

That a State may authorize its courts to give equitable relief unhampered by any or all such restrictions cannot remove these fetters from the federal courts. . . . State law cannot define the remedies which a federal court must give simply because a federal court in diversity jurisdiction is available as an alternative tribunal to the State’s courts. Contrariwise, a federal court may afford an equitable remedy for a substantive right recognized by a State even though a State court cannot give it.[28]

Thus, Guaranty Trust drew a sharp distinction between “substantive rights” and remedies in equity cases. Under Erie,state law is to govern “substantive rights” in federal diversity (and supplemental jurisdiction[29]) cases regardless of whether they arise in common law or equity,[30] but a federal court is free to disregard state laws (both statutes and judicial rulings) of a “‘mere remedial character.’”[31] The Court later reiterated, “The source of substantive rights enforced by a federal court under diversity jurisdiction, it cannot be said too often, is the law of the States.”[32] The source of remedial rights and the doctrines surrounding them, in contrast, implicitly remain matters of general equity law.[33]

This theory has been referred to as the “equitable remedial rights doctrine,”[34] and the choice-of-law problems it raised were identified shortly after Guaranty Trust was issued.[35] Other post-Erie cases confirm that, under Erie, state law governs determinations concerning substantive rights in state-law cases in equity,[36] while federal equitable principles govern equitable remedies.[37] And even today, lower courts continue to cite and discuss this aspect of Guaranty Trust, even if they are not altogether sure what to make of it.[38]Thus, despite Erie’s purported abolition of general law, and relegation of federal common law to a few distinct areas in which federal interests predominate,[39] equity—at least insofar as it governs remedial issues—lingers as a vestigial “brooding omnipresence”[40] that may dictate the results of both federal and state cases.

II. Erieand Equity in the Modern World

The Supreme Court has never repudiated GuarantyTrust’s exception to the Erie doctrine for equitable remedies. One of the major contexts in which the issue recurs today is determining the standard federal courts must apply in awarding injunctions—the quintessential form of equitable relief—in state-law cases. The equitable principles that federal courts apply in deciding whether to grant injunctive relief are similar to those employed by most states, but important distinctions exist that, at least in some cases, may be outcome determinative. Federal Rule of Civil Procedure 65 sets forth the process governing temporary restraining orders (“TRO”) and preliminary injunctions, as well as a few additional rules governing all TROs and injunctions (including permanent injunctions), but does not provide any substantive standards for courts to apply in awarding such relief.[41]

The standards for actually issuing a TRO, preliminary injunction, or permanent injunction (which Rule 65 does not address)—apart from the requirement of “immediate and irreparable injury” for TROs[42]—are set forth in precedent rather than the Federal Rules. The Supreme Court established the modern standard for permanent injunctions in eBay Inc. v. MercExchange Inc.[43] Under eBay, to obtain a permanent injunction, a plaintiff must not only prevail in its underlying cause of action, but further demonstrate that:

1. it has suffered an irreparable injury;

2. remedies available at law, such as monetary damages, are inadequate to compensate for that injury;

3. considering the balance of hardships . . ., a remedy in equity is warranted; and

4. the public interest would not be disserved by a permanent injunction.[44]

Winter v. Natural Resources Defense Council went on to explain that the requirements for obtaining a preliminary injunction are similar, except that the plaintiff must demonstrate “that he is likely to succeed on the merits.”[45]

Most states’ standards for injunctive relief are at least somewhat similar to these federal standards, but important differences exist.[46] A few state courts have expressly refused to follow eBay’s standards for permanent injunctions[47] or Winter’s standards for preliminary injunctions.[48] Some state laws expressly mandate[49]the award of injunctive relief in situations where federal equitable principles would likely dictate that courts exercise discretion under eBay. State courts have interpreted other statutes as implicitly permitting or requiring the award of injunctive reliefwithout satisfying one or more of thetraditional equitable requirements identified in eBay.[50]

More generally, some states have laws specifying the circumstances under which courts may, or may not, award injunctions. While these standards often overlap with the eBay factors, these state provisions also frequently deviate from the eBay test in important ways. For example, California law identifies seven types of cases in which injunctions may be issued, and seven types of injunctions that may not be issued.[51] Injunctive relief is permissible under California law, for examplewhen necessary to prevent irreparable injury or a remedy at law would be inadequate.[52] New York[53] and Texas[54] also have statutes codifying their standards for injunctive relief.

Other states have adopted their own sets of standards, either in general[55] or for particular types of cases,[56] in judicial opinions. In Alaska, for example, a plaintiff may obtain a preliminary injunction by making “a clear showing of probable success,” without more.[57] Arkansas relies only on two elements: “whether irreparable harm will result in the absence of an injunction . . . [and] whether the moving party has demonstrated a likelihood of success on the merits.”[58] The Massachusetts Supreme Judicial Court has held that, when a person is suing as a “private attorney general,” she must demonstrate only a likelihood of success on the merits, and that the requested relief would be in the public interest, to obtain a preliminary injunction.[59]

Even where states have adopted standards comparable to eBay or Winter, the exact formulation of their elements often differ. For example, some states require a plaintiff to show a “reasonable likelihood of success on the merits.”[60] Others require a “strong likelihood of success on the merits,”[61] And still others allow relief even if the plaintiff shows only “some possibility that the plaintiff would ultimately prevail on the merits of the claim.”[62] Likewise, some states require a plaintiff to show that the hardship to the defendant does not “unreasonably outweigh” the benefit the plaintiff would obtain from an injunction,[63] while others require the plaintiff to show the balance of hardships favors it.”[64] Thus, significant disparities sometimes exist between federal and state standards for granting injunctive relief that can be outcome-determinative. Consequently, various courts have come to flatly contradictory conclusions about whether to employ general federal equitable principles in making such decisions, or potentially contradictory state-level standards instead.[65]

Some courts apply federal standards to adjudicate motions for preliminary injunctions against violations of state laws. Other courts have reached the opposite conclusion, holding that state-law standards determine the permissibility of preliminary injunctions in federal court.

III. Equity Follows the Law

Modern Supreme Court precedent in the field of statutory injunctions provides a foundation for a modern reinterpretation of the federal equity power that can provide a framework for resolving a range of issues that arise in attempting to apply the Erie Doctrine to federal equitable remedies. The Supreme Court repeatedly has held that, when a federal statute provides for injunctive relief, a federal court is generally required to exercise its equitable discretion pursuant to the Winteror eBay factors about whether to grant such relief, rather than automatically issuing an injunction to prevent impending or ongoing statutory violations or remedy past ones. As the Court declared, “[A] federal judge sitting as chancellor is not mechanically obligated to grant an injunction for every violation of law.”[66] “Indeed, the Court repeatedly has rejected the notion that injunctive relief against statutory violations is even presumptively appropriate or should be denied only in extraordinary circumstances, explaining that ‘[n]o such thumb on the scales is warranted.’”[67]

The Court explained, however, that it is not applying the eBay factors because they are a body of federal equitable principles that federal courts have a constitutional or other obligation to apply. Rather, the Court simply assumes that, when Congress authorizes injunctive relief, Congress implicitly expects or requires a federal court to exercise that power in accordance with traditional equitable principles,[68] unless the statute’s text or legislative history suggests otherwise.[69] eBay itself emphasizes that its equitable factors apply to statutory inunctions only if “Congress intended” that they do so.[70]

Thus, the modern Court has recognized, at least in the statutory context, that the standards a court must apply in determining the circumstances under which it may award injunctive relief for a violation of a particular legal restriction arise from that legal restriction itself. Under the canon of statutory interpretation, the “clear-statement” rule set forth above, if a statute clearly requires a court to automatically issue an injunction, then the court must do so. If the statute lacks such clear language, then the statute itself—not some independent body of principles with the force of law—requires the court to apply traditional equitable principles in deciding whether to grant relief.

This analysis is easily transferrable to state statutes and federal Constitutional provisions. The circumstances under which a court may or must award equitable relief under a state law derive, whether implicitly or explicitly, from that law itself. When a federal court adjudicates a state-law cause of action in the post-Erie era, there is no freestanding body of general or federal equitable principles with the force of law that a court is required to apply. Rather, the circumstances under which the court should, may, or must grant injunctive relief stem from interpretation of that state statute itself, and therefore are a matter of state law. Particularly in light of Erie’s repudiation of the distinction between state statutory law and law embodied in judicial opinions, such an analysis may be applied to common-law causes of action, as well.