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The Erie doctrine comes from a case called Erie Railroad Co. v. Tompkins, 304 U.S. 64 (1938), in which the U.S. Supreme Court held that if a federal court is hearing a state claim because it has diversity jurisdiction, the substantive common law of the state applies. The federal judges must be guided by state common law, the decisions of state law judges, and state practice, and may not create federal common law.
The purpose of the Erie doctine is to insure that, in all cases where a federal court is exercising jurisdiction solely because of the diversity of citizenship of the parties, the outcome of the litigation in the federal court should be substantially the same, so far as legal rules determine the outcome of a litigation, as it would be if tried in a state court. In this way, plaintiffs are deterred from "forum shopping", a practice where plaintiffs choose a forum based upon where they predict a more favorable outcome.