In the case of Klaxon Company v. Stentor Electric Manufacturing Co., Inc., 1940, the U.S. Supreme Court ruled that a federal court sitting in diversity must apply the conflict-of-laws rules of the state in which it sits. The dispute arose when Delaware-based Klaxon Company sued New York-based Stentor Electric Manufacturing for patent infringement and unfair competition. Initially, a district court applied Pennsylvania's conflict-of-law rules (as it was based in Pennsylvania) and found in favor of Klaxon on both counts. However, upon appeal to Third Circuit Court, they reversed this decision stating that Delaware law should have been applied instead as per 'place of wrong' rule followed by most states at that time including Delaware but not Pennsylvania. The case reached Supreme Court where Justice Benjamin N Cardozo delivered unanimous opinion upholding Third Circuit’s ruling thereby establishing ‘Klaxon Rule’. This rule mandates federal courts to use conflict-of-laws principles from their own state rather than creating a separate federal common law or borrowing laws from another jurisdiction.

In the dissenting opinion for KLAXON COMPANY v. STENTOR ELECTRIC MANUFACTURING CO., INC., Justice Frankfurter disagreed with the majority's decision to apply federal common law in determining which state's statute of limitations should govern a diversity case. He argued that this approach would lead to uncertainty and inconsistency, as different federal courts could potentially choose different states' laws depending on their interpretation of the "center of gravity" or "most significant relationship" tests proposed by the Restatement (Second) of Conflict of Laws. Instead, he advocated for applying the statute of limitations from either: 1) The state where the cause action arose; or 2) The forum state if it has a substantial interest in applying its own law. This way, according to him, would provide more predictability and uniformity across cases.