Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. No. MDL 391 -- Edwin A. Robson and Hubert L. Will, Judges.
Coffey, Circuit Judge, Swygert, Senior Circuit Judge, and Templar, Senior District Judge.*fn*
SWYGERT, Senior Circuit Judge.
This diversity case involves the wrongful death actions filed by the survivors of certain victims of the crash near Chicago on May 25, 1979, of a DC-10 aircraft manufactured by defendant McDonnell Douglas Corporation and owned by defendant American Airlines. Many of these actions, either filed in or removed to federal court, were consolidated for pretrial proceedings in the United States District Court for the Northern District of Illinois by an order of the Judicial Panel on Multidistrict Litigation. In re Air Crash Disaster, 476 F. Supp. 445, 449 (J.P.M.D.L. 1979). This interlocutory appeal from the district court's ruling on the parties' motions in limine raises two issues: first, whether a federal court sitting in diversity and applying the Illinois Wrongful Death Act,*fn1 see In re Air Crash Disaster, 644 F.2d 633, 637 (7th Cir. 1981), may admit evidence of the income tax liability the decedent would have incurred on the earnings lost because of premature death, as an aid to accurate computation of the survivor's loss; and second, whether the court may instruct the jury that whatever award it makes will not be subject to federal income tax in the hands of the survivor.*fn2 The district court held that under the principles of Erie Railroad v. Tompkins, 304 U.S. 64, 82 L. Ed. 1188, 58 S. Ct. 817 (1938), it was bound to apply state law, and that Illinois courts would reject both the evidence and the jury instruction. In re Air Crash Disaster, 526 F. Supp. 226 (N.D. Ill. 1981). Because we hold that state and federal law do not differ on the evidence issue, we reverse that portion of the judgment. On the jury instruction issue, we reverse because Erie is inapplicable.
It is clear that in cases involving federal substantive law the evidence of "lost taxes" would be admissible and the jury instruction on the nontaxability of the award would be proper, in appropriate circumstances. In Norfolk & Western Railway v. Liepelt, 444 U.S. 490, 62 L. Ed. 2d 689, 100 S. Ct. 755 (1980), the Supreme Court held that in cases brought under the Federal Employers' Liability Act ("FELA") even state courts may not prohibit the admission of such evidence or the use of that instruction, reversing a decision of the Illinois Appellate Court, 62 Ill. App. 3d 653, 378 N.E.2d 1232, 19 Ill. Dec. 357 (1978), and overruling the Illinois Supreme Court's practice under FELA, see Raines v. New York Central Railroad, 51 Ill. 2d 428, 430, 283 N.E.2d 230, 232 (1972); Hall v. Chicago & North Western Railway, 5 Ill. 2d 135, 149-52, 125 N.E.2d 77, 85-86 (1955). Subsequent cases have adopted Liepelt's reasoning in non-FELA federal contexts. See, e.g., Fanetti v. Hellenic Lines Ltd., 678 F.2d 424, 431 (2d Cir. 1982) (Longshoremen's and Harbor Workers' Compensation Act); Austin v. Loftsgaarden, 675 F.2d 168, 183-84 (8th Cir. 1982) (Securities Act of 1933 and Securities Exchange Act of 1934). See also Gulf Offshore Co. v. Mobil Oil Corp., 453 U.S. 473, 498 & n.17, 69 L. Ed. 2d 784, 101 S. Ct. 2870 (1981). The Supreme Court has left open the question whether it should extend Liepelt to diversity cases based on state law. See id. at 487-88 (reserving the question whether Liepelt would control when federal right of action incorporates state law).
The defendants urge that we reverse the district court on both the evidence and the jury instruction issues. On the former, they argue that the existence of the Federal Rules of Evidence, which apply even in diversity cases, see Fed. R. Evid. 101, 1101(b), and which declare relevant evidence admissible, see Fed. R. Evid. 402,*fn3 make Erie inapplicable; and that Fed. R. Evid. 401, as construed by Liepelt, provides the federal definition of relevancy in this kind of case.*fn4 In addition, they argue that state law is identical to federal law on this issue in any case. On the jury instruction issue, they argue that Hall and Raines, the only Illinois Supreme Court precedents on point, are overruled by Liepelt, because they arose under FELA; and that we should predict that the Illinois Supreme Court would now find the reasoning of Liepelt persuasive. Alternatively, they argue that because the substance of the proposed instruction relates to the Internal Revenue Code, federal law should govern whether the instruction should be given, even in a diversity case. We address these issues in turn.
I. Admissibility of Evidence
We agree that the Federal Rules of Evidence apply and that as a consequence the district court may not categorically exclude certain kinds of evidence relevant to the determination of damages. If the rules had been promulgated under the Supreme Court's rulemaking power, 28 U.S.C. § 2072 (1976), and did not transgress the limits of that power, this would be true under the reasoning of Hanna v. Plumer, 380 U.S. 460, 470-71, 14 L. Ed. 2d 8, 85 S. Ct. 1136 (1965). But the Rules of Evidence stand on even firmer footing, for they are statutory. Pub. L. No. 93-595, 88 Stat. 1959 (1975). In such a case the Rules of Decision Act, 28 U.S.C. § 1652 (1976), coupled with the supremacy clause of the United States Constitution, demands that the rules apply in federal court, unless Congress exceeded its powers to regulate federal courts in enacting them. The parties have not urged us to find, and we are not prepared to hold, that the rules are unconstitutional. See 10 J. Moore & H. Bendix, Federal Practice § 57 (2d ed. 1982).
Our conclusion is supported by many cases holding that the Federal Rules of Evidence govern the admissibility of evidence in diversity cases. See, e.g., Rabon v. Automatic Fasteners, Inc., 672 F.2d 1231, 1238 n.14 (5th Cir. 1982); Garwood v. International Paper Co., 666 F.2d 217, 223 (5th Cir. 1982); Southern Stone Co. v. Single, 665 F.2d 698, 701 (5th Cir. 1982); Ballou v. Henri Studios, Inc., 656 F.2d 1147, 1153 (5th Cir. 1981); Croce v. Bromley Corp., 623 F.2d 1084, 1094 (5th Cir. 1980), cert. denied, 450 U.S. 981, 101 S. Ct. 1516, 67 L. Ed. 2d 816 (1981); Johnson v. William C. Ellis & Sons Iron Works, Inc., 609 F.2d 820, 821-22 (5th Cir. 1980); Pollard v. Metropolitan Life Insurance Co., 598 F.2d 1284, 1286 (3d Cir.), cert. denied, 444 U.S. 917, 62 L. Ed. 2d 171, 100 S. Ct. 232 (1979); Gibbs v. State Farm Mutual Insurance Co., 544 F.2d 423, 428 n.2 (9th Cir. 1976). See also Oberst v. International Harvester Co., 640 F.2d 863, 867 n.2 (7th Cir. 1980) (Swygert, J., concurring in part and dissenting in part). This result conforms with the practice in federal courts preceding the adoption of the Federal Rules of Evidence. See 10 J. Moore & H. Bendix, Federal Practice § 400.12-(3) (2d ed. 1982) (in fashioning broad rules of admissibility, federal courts adopted state rules that favored admission but rejected state rules that favored exclusion); 9 C. Wright & A. Miller, Federal Practice and Procedure § 2405 (1971 & Supp. 1982) (same).
It does not follow, however that state evidence rules have no bearing on what evidence is admissible in federal court, for the relevance of the evidence is ascertainable only by reference to the substantive law of the state. To the extent that the state evidentiary rule defines what is sought to be proved -- here, the measure of damages -- it may bind the federal court under Erie principles.
If Illinois followed the rule of the majority of state courts that evidence of would-be tax liability is inadmissible for the purpose of proving the amount of damages, see cases collected in Annot., 63 A.L.R.3d 1393 (1975 & Supps.); Louissaint v. Hudson Waterways Corp., 111 Misc. 2d 122, 125-26, 443 N.Y.S.2d 678, 680-81 (N.Y.Sup.Ct. 1981), this subsidiary Erie problem would be quite difficult. Courts have supplied several rationales for the exclusionary rule: they have argued that the calculation of net income is too speculative or confusing because of tax rate fluctuations and the difficulty of predicting exclusions and exemptions to which the decedent would have been entitled, see, e.g., McWeeney v. New York, New Haven & Hartford Railroad, 282 F.2d 34, 35-36 (2d Cir.) (en banc), cert. denied, 364 U.S. 870, 5 L. Ed. 2d 93, 81 S. Ct. 115 (1960); that inaccuracies resulting from the projection of gross rather than net income are offset by the undercompensating effects of ignoring inflation and attorney's fees, see, e.g., id. at 38; and that by making the award tax exempt, see supra note 2, Congress intended to confer a tax benefit that should be reflected in the calculation of the award, see, e.g., Louissaint v. Hudson Waterways Corp., 111 Misc. 2d at 128-29, 443 N.Y.S.2d at 682.
The last of these rationales should carry no weight any longer in any court, to the extent that it relies on an interpretation of federal tax law rejected by Liepelt. 444 U.S. at 495 n.10. Nevertheless, the remaining considerations may be so closely linked with the state's view of the measure of damages (which is inseparable from the substantive right of action, see Chesapeake & Ohio Railway v. Kelly, 241 U.S. 485, 491, 60 L. Ed. 1117, 36 S. Ct. 630 (1916)) that it binds a federal court sitting in diversity. Several courts have either held or assumed that state law governs admissibility in this situation. See Vasina v. Grumman Corp., 644 F.2d 112, 118 (2d Cir. 1981); Fenasci v. Travelers Insurance Co., 642 F.2d 986, 989 (5th Cir.), cert. denied, 454 U.S. 1123, 71 L. Ed. 2d 110, 102 S. Ct. 971 (1981); Estate of Spinosa v. International Harvester Co., 621 F.2d 1154, 1158-59 (1st Cir. 1980); Huddell v. Levin, 537 F.2d 726, 742 (3d Cir. 1976); Turcotte v. Ford Motor Co., 494 F.2d 173, 185 (1st Cir. 1974). But see Croce v. Bromley Corp., 623 F.2d 1084, 1094 (5th Cir. 1980), cert. denied, 450 U.S. 981, 101 S. Ct. 1516, 67 L. Ed. 2d 816 (1981) (holding that Fed. R. Evid. 403 controls). In addition, many courts have found similar state admissibility rules applicable in diversity cases. See Budge v. Post, 643 F.2d 372, 375 (5th Cir. 1981) (reduction of award to present value); Murphy v. Georgia-Pacific Corp., 628 F.2d 862, 869 (5th Cir. 1980) (evidence and jury instruction on inflation); Bailey v. Southern Pacific Transportation Co., 613 F.2d 1385, 1388 (5th Cir.), cert. denied, 449 U.S. 836, 66 L. Ed. 2d 42, 101 S. Ct. 109 (1980) (evidence of remarriage in mitigation of damages); Conway v. Chemical Leaman Tank Lines, Inc., 540 F.2d 837, 838-39 (5th Cir. 1976) (same); Johnson v. Serra, 521 F.2d 1289, 1294 (8th Cir. 1975) (inflation); Weakley v. Fischbach & Moore, Inc., 515 F.2d 1260, 1267 (5th Cir. 1975) (inflation); Mahoney v. Roper-Wright Manufacturing Co., 490 F.2d 229, 232 (7th Cir. 1973) (evidence of alternative design feasibility in products liability case); Chicago, Rock Island & Peoria Railway v. Howell, 401 F.2d 752, 754 (10th Cir. 1968) (competency of circumstantial evidence); E.L. Cheeney Co. v. Gates, 346 F.2d 197, 206 (5th Cir. 1965) (admissibility of driving convictions to show incompetence).
Perhaps the most appealing argument that admissibility rules are tied to the substantive law is the analogy to Liepelt itself, which required state courts to apply a federal admissibility rule when adjudicating a federal claim. 444 U.S. at 493. This argument assumes, however, that Erie considerations work in reverse, and that assumption may be unwarranted. Liepelt expressly relied on the overwhelming federal interest in uniformity of practice under FELA, and the supremacy clause gives the federal government power to impose even a procedural rule on state courts in these circumstances. See id. at 493 n.5, citing Brady v. Southern Railway, 320 U.S. 476, 479, 88 L. Ed. 239, 64 S. Ct. 232 (1943) ("Through the supremacy clause of the Constitution, Art. VI, we are charged with assuring [FELA's] authority in state courts. Only by a uniform federal rule . . . may litigants under the federal act receive similar treatment in all states."). See also Hill, Substance and Procedure in State FELA Actions -- The Converse of the Erie Problem ?, 17 Ohio St. L.J. 384, 390, 414-15 (1956) (cited with approval in Liepelt, 444 U.S. at 493 n.5); Liepelt, 444 U.S. at 503-04, 100 S. Ct. at 762 (Blackmun, J., dissenting) (noting that federal regulation of state procedure is warranted when a federal interest is implicated). If Liepelt required the admissibility of tax evidence because of the need for uniform procedure rather than as a substantive FELA requirement, it sheds little light on whether state admissibility rules should be characterized as "procedural" or "substantive" for Erie purposes.
Moreover, despite the weight of authority and analogy there are good reasons to characterize the majority admissibility rule as procedural and therefore not binding on the federal courts under Erie. In adopting the rule that rejects evidence as being too confusing, a state court may merely be making a statement about its own competence and that of its juries to deal with this kind of evidence. But a federal court may assess its own capabilities differently, and logically should not be bound by the state court's self-evaluation. Cf. Monarch Insurance Co. v. Spach, 281 F.2d 401, 407 (5th Cir. 1960). Indeed, to the extent that the exclusionary rule is based on fear of confusion, it should not apply in federal court because Fed. R. Evid. 403 provides a federal standard for rejecting relevant evidence on the grounds of risk of prejudice, confusion, or waste of time,*fn5 and, as shown above, the Federal Rules generally displace differing state rules ...