In Shepherd et al. v. Hampton, the Supreme Court of the United States held that a state court could not exercise jurisdiction over a case involving federal law or rights arising under it. The dispute arose when two individuals, Shepherd and his wife, sued their former employer in Virginia state court for unpaid wages due to them from services rendered while they were employed by him in Maryland. The defendant argued that since the cause of action was based on federal law (the Constitution), only a federal court had jurisdiction over it and thus he should be dismissed from suit in Virginia's courts. After examining both sides' arguments, Chief Justice John Marshall wrote an opinion affirming this position: "The question is whether [Virginia] can take cognizance of this cause; whether its tribunals are open to hear and determine controversies which arise out of acts done beyond its limits." He concluded that because such matters involve questions concerning national laws or those derived from treaties with foreign nations, only federal courts have authority to decide them as they are outside the scope of any particular state's power.

In Shepherd et al. v. Hampton, the Supreme Court was asked to decide whether a state court had jurisdiction over an action brought by citizens of one state against citizens of another in which the amount in controversy exceeded $500. The majority opinion held that such suits could not be maintained in any other than federal courts because they involved controversies between different states and were thus within the scope of Article III, Section 2, Clause 1 of the Constitution (the "diversity clause"). However, Justice Story dissented from this ruling on two grounds: firstly, he argued that Congress had never intended for diversity cases to be exclusively heard by federal courts; secondly he contended that even if it did intend such exclusivity then it would have been unconstitutional as Congress does not have authority under Article III to limit or expand judicial power beyond what is expressly granted therein. He concluded his dissent with a warning about how allowing exclusive jurisdiction over diversity cases would lead to unequal justice depending on where suitors lived and might ultimately undermine public confidence in both state and federal judiciaries.