Olympic Sports Products, Inc. v. Universal Athletic Sales Co.

• Decision Date: 22 April 1985
• Docket Number: 84-5736,Nos. 83-6332,s. 83-6332
• Citation: 760 F.2d 910
• Parties: OLYMPIC SPORTS PRODUCTS, INC., Plaintiff/Appellant, v. UNIVERSAL ATHLETIC SALES CO., Universal Gym Equipment Co., etc., et al., Defendants/Appellees. UNIVERSAL GYM EQUIPMENT, INC., Counterclaimant/Appellant, v. OLYMPIC SPORTS PRODUCTS, INC., Counterdefendant/Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 910

760 F.2d 910

1 Fed.R.Serv.3d 1562

OLYMPIC SPORTS PRODUCTS, INC., Plaintiff/Appellant, v. UNIVERSAL ATHLETIC SALES CO., Universal Gym Equipment Co.,

etc., et al., Defendants/Appellees.

UNIVERSAL GYM EQUIPMENT, INC., Counterclaimant/Appellant, v. OLYMPIC SPORTS PRODUCTS, INC., Counterdefendant/Appellee.

Nos. 83-6332, 84-5736.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Dec. 7, 1984.

Decided April 22, 1985.

Patricia M. Schnegg, Cynthia A.R. Woollacott, Knapp, Grossman & Marsh, Los Angeles, Cal., for plaintiff, appellant.

Ronald M. Greenberg, Beverly Hills, Cal., William F. Davis, Santa Monica, Cal., for defendants, appellees.

On appeal from the United States District Court for the Central District of California.

Before WALLACE and BOOCHEVER, Circuit Judges, and JAMESON, ^* District Judge.

BOOCHEVER, Circuit Judge:

Olympic Sports Products, Inc. (Olympic) appeals the dismissal of its claim by the district court for lack of prosecution under section 583(b) of the California Code of Civil Procedure (Deering 1972). Olympic claims that Fed.R.Civ.P. 41(b) governed dismissal and that section 583(b) was therefore inapplicable. Universal Gym Equipment, Inc. (Universal) appeals the district court's dismissal of its counterclaim on the same ground. Olympic and Universal further assert that if section 583(b) did govern dismissal the court's determination that their claims warranted dismissal constituted an abuse of discretion.

We hold that federal rule 41(b) governs the question of dismissal and that the district court erred in applying the state statute instead of the federal rule. Because section 583(b) was not applicable we need not address whether dismissal of Olympic's claim and Universal's counterclaim under that statute was erroneous.

FACTS

On March 1, 1978, Olympic, appellant/counter-appellee, a distributor of athletic equipment for appellee Whittaker and appellee/counter-appellant Universal, filed a diversity action in district court against Whittaker and Universal alleging breach of contract and fraud. Olympic alleged that appellees were secretly profiting by overstating freight charges on athletic equipment. Universal counterclaimed for contract damages on the ground that Olympic owed it money for goods purchased. The prolonged procedural history of this case is summarized in Appendix A.

On March 1, 1983, the complaint had been filed for five years. Olympic and Universal moved for a pretrial conference on May 5, 1983. Whittaker opposed the motion and on May 27, 1983, moved to dismiss the action pursuant to California Code of Civil Procedure section 583(b) and rule 41(b) of the Federal Rules of Civil Procedure.

Hearing on the motions was, at Whittaker's request, continued to June 20, 1983, at which time the court tentatively ruled that the case be dismissed pursuant to section 583(b), but took the matter under submission. On September 14, 1983, the court issued its order of dismissal. Two weeks later it dismissed the counterclaim on the same ground.

Olympic appealed, and Universal filed a separate counterappeal. The cases were consolidated for argument in this court.

Olympic and Universal contend that Fed.R.Civ.P. 41(b), rather than section 583(b) of the California Code of Civil Procedure, governs dismissal of diversity suits for lack of prosecution, and that the district court erred by applying section 583(b). Although Universal is an appellee with Whittaker in the appeal brought by Olympic, it is not opposing Olympic's arguments on appeal.

Whittaker asserts that rule 41(b) and section 583(b) differ in that rule 41(b) governs discretionary dismissal and section 583(b) governs mandatory dismissal. Whittaker concludes that because the federal rule does not address mandatory dismissal, Erie Railroad v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), requires us to apply California law. Whittaker further argues that section 583(b), because it is mandatory, is a statute of limitations, and that Supreme Court precedent mandates the application of state statutes of limitations in diversity suits.

DISCUSSION

A. Standard of Review

Whether state or federal law applies in a diversity action is a question of law, see Alonzo v. ACF Property Management, Inc., 643 F.2d 578, 579-80 (9th Cir.1981), which we review de novo, Miller v. United States, 587 F.2d 991, 994 (9th Cir.1978). Our de novo review extends to the district court's construction of state law. In re McLinn, 739 F.2d 1395, 1397 (9th Cir.1984) (en banc) (overruling prior practice of deferring to district court's interpretation of the law of the state in which it sits). Although we are not bound by the

                district court's construction of state law, we are bound to follow the decisions of a state's highest court in interpreting that state's law.   Aydin Corp. v. Loral Corp., 718 F.2d 897, 904 (9th Cir.1983)
                

B. The Erie and Hanna Analyses

We note at the outset that this court has already considered whether Erie requires federal courts to enforce section 583(b) in diversity suits. In Nealey v. Transportation Maritima Mexicana, S.A., 662 F.2d 1275, 1278 n. 5 (9th Cir.1980), we stated that rule 41(b), not section 583(b), governed dismissal for lack of prosecution in diversity suits. At oral argument of Nealey, however, the party opposing the enforcement of federal law conceded its applicability; the court's statement is dicta. We therefore proceed to analyze whether the federal rule or a state law governs dismissal here.

In 1938, the Supreme Court departed from precedent to rule that except in matters governed by the United States Constitution or acts of Congress, federal courts must apply state law in diversity suits. Erie, 304 U.S. at 78, 58 S.Ct. at 822 (construing The Federal Judiciary Act of 1789, ch. 20, Sec. 34, 1 Stat. 73, 92 (Rules of Decision Act) (current version at 28 U.S.C. Sec. 1652 (1982) ) ). The Rules of Decision Act then provided that the "laws of the several States, except where the Constitution, treaties, or statutes of the United States otherwise require or provide, shall be regarded as rules of decision in trials at common law, in the courts of the United States, in cases where they apply." Prior to Erie, the Court had interpreted the Act as requiring federal court application only of state statutes and local decisions concerning real property, not of state decisional law. Swift v. Tyson, 41 U.S. (16 Pet.) 1, 18, 10 L.Ed. 865 (1842). Under the Swift doctrine, federal courts assumed the power in diversity suits to decide issues of common law, such as tort principles or the interpretation of contracts. See Erie, 304 U.S. at 71, 74-76, 58 S.Ct. at 818, 820-822.

Erie repudiated this doctrine and held that state decisional law is entitled to respect equal to that accorded to state statutes. Id. at 78-79, 58 S.Ct. at 822-823. Neither Congress nor the federal judiciary has the constitutional power to declare substantive rules of common law for the states. Id. at 78, 58 S.Ct. at 822. Thus any application of the Rules of Decision Act which invades that substantive province must be unconstitutional. Id. at 79-80, 58 S.Ct. at 822-823. Underlying the Court's decision was its recognition that if the plaintiff, by choosing a federal rather than state forum, could also choose to have federal law rather than state law apply, injustice and confusion would result. Id. at 74-77, 58 S.Ct. at 820-822.

The Court subsequently indicated that the choice of law cannot be resolved simply by labeling a question substantive or procedural. Guaranty Trust Co. v. York, 326 U.S. 99, 108-10, 65 S.Ct. 1464, 1469-70, 89 L.Ed. 2079 (1945). According to York, the core policy of Erie is that plaintiff should not be able to choose a different outcome for a lawsuit by filing in federal court rather than state court. Under this outcome-determination test, York held that a state statute of limitations controlled in a diversity suit based on a state-created right. If the suit would be barred in state court when filed, it must be barred in federal court. Statutes of limitations, which dictate the life of state causes of action, are too intimately connected with the substance of the state-created right to be disregarded by the federal courts. Id. at 109-10, 65 S.Ct. at 1469-70.

The Court reiterated its respect for state statutes of limitations in Ragan v. Merchants Transfer & Warehouse Co., 337 U.S. 530, 69 S.Ct. 1233, 93 L.Ed. 1520 (1949). The federal rules of procedure tolled the statute of limitations upon filing of the complaint; the applicable state rule tolled the statute upon service. Because the state itself treated the service rule as an integral part of its statute of limitations, Ragan held that the state tolling rule must control. Id. at 532-34, 69 S.Ct. at 1234-35.

Erie and its progeny, however, are only one of two lines of cases governing choice of law in diversity suits. In Hanna v. Plumer, 380 U.S. 460, 85 S.Ct. 1136, 14 L.Ed.2d 8 (1965), the Court traced the development of a parallel series of precedents exemplified by Sibbach v. Wilson & Co., 312 U.S. 1, 61 S.Ct. 422, 85 L.Ed. 479 (1941), and explained when each line controls. The Erie analysis, based upon the Rules of Decision Act, applies when no federal rule directly addresses the situation. Hanna, 380 U.S. at 469-71, 85 S.Ct. at 1142-44. If both a state rule and a federal rule cover the situation, Hanna calls for a different analysis, based on the Rules Enabling Act, 28 U.S.C. Sec. 2072 (1982).

When a situation is covered by one of the Federal Rules, the question facing the court is a far cry from the typical, relatively unguided Erie choice: the court has been instructed to apply the Federal Rule, and can refuse to do so only if the Advisory Committee, this Court, and Congress erred in their prima facie judgment that the Rule in question transgresses neither the terms of the Enabling Act nor constitutional restrictions.

Hanna, 380 U.S. at 471, 85 S.Ct....