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Diversity jurisdiction refers to a situation in which the federal court of the United States is vested with the right to decide a case that normally would be heard in a state court. Courts cannot simply determine the fate of every potential person, and courts cannot rule or decide every single case. In order for a court to have the authority to decide a case, that court must have the right to do so based on jurisdiction.
According to the United States Constitution, the federal government — including the federal court system — has authority over only those issues enumerated in the Constitution. All other powers are left to the states. Therefore, federal courts are courts of limited jurisdiction.
There are two ways in which a federal court can have authority to hear a case. The first type is through original jurisdiction. The second type is through diversity jurisdiction.
The federal court has primary or original jurisdiction if the case arises from federal law. In other words, if a person is suing on the basis of the US Constitution or on the basis of federal legislation such as Title VII of the 1964 Civil Rights Act, then the federal court has jurisdiction because a federal question is being raised. Sometimes, the federal court has concurrent jurisdiction with the state in this type of case, which means either a state court or the federal court could decide the issue. Other times, such as constitutional matters or tax or bankruptcy cases, the federal court has exclusive jurisdiction.
Diversity jurisdiction, on the other hand, allows a federal court to hear a case that would normally be heard in state court. Diversity jurisdiction exists when parties from two different states are having a dispute in court. In addition, the dispute must be more than $10,000 US Dollars (USD) or more. This monetary threshold is referred to as the amount in controversy.
The Federal Rules of Civil Procedure allow for diversity jurisdiction based on the belief that a state court would be biased toward its own citizens. Diversity jurisdiction applies not only between citizens of different states, but also between citizens of the same state in which one individual is a resident and the other an alien. The same amount in controversy applies.
When diversity jurisdiction exists, the plaintiff can, but is not required to, bring the case in federal court. The defendant also can request the case be moved to federal court if the plaintiff brings it in state court, but does not have to do so. The term "forum shopping" can sometimes come into play when one or the other party specifically decides to bring a case in the court he believes will be most favorable to his position.