Klaxon Co. v. Stentor Elec. Mfg. Co.

Brief Fact Summary

Stentor Elec. Mfg. Co. (Plaintiff) received judgment for breach of contract based on Klaxon’s (Defendant) failure to manufacture and sell particular goods.  Defendant appeals that part of the order allowing interest on the damages from when the suit was filed.

Synopsis of Rule of Law

Federal district courts are required to apply the conflict of law rules of the state where the court sits when deciding a case based upon diversity jurisdiction.

Facts

Stentor Elec. Mfg. Co. (Plaintiff) transferred its entire business to Klaxon Co. (Defendant) in 1918 in return for a contractual promise by Defendant to use best efforts to promote the sale of particular items Stentor (Plaintiff) retained patent rights for.  Plaintiff was a New York corporation, Defendant a Delaware corporation, and the agreement was executed and partially performed in New York.  Plaintiff, suing in diversity jurisdiction, brought suit against Defendant in federal district court in Delaware in 1929 for breach of the agreement.  A judgment of $100,000 was rendered in favor of Plaintiff.  Plaintiff then moved to modify the judgment to add interest at the rate of six percent from the date the action was commenced.  The motion was based on a New York statute and was granted by the district court on the grounds the issue was substantive and that New York law governed the dispute.  Defendant appealed the motion, claiming that the district court was bound to follow the substantive law of Delaware in diversity actions.  The circuit court of appeals affirmed on the basis that the New York rule was the “better view.â€

Issue

Must federal district courts apply the conflict of law rules prevailing in the state where the court sits when deciding a case based upon diversity jurisdiction?

Held

(Reed, J.)  Yes.  Federal courts cannot make independent determinations of what the law in the state where the court sits should be, but are required to apply the conflicts rules of the state when deciding diversity jurisdiction cases.  An independent general law of conflicts does not exist.  Each state in the federal system is free to determine whether a specified matter is to be governed by the law of the forum or some other law.  There must, therefore, be uniformity within each state in order to avoid forum shopping between state and federal courts within each state.  The proper function of the federal courts is to determine what the state law is, rather than what the law should be.  Any other decision would lead to a disruption of the equal administration of justice in state and federal courts that sit in the same state and apply the same state law.  Reversed and remanded.

Discussion

The Klaxon case expands the Erie rule to include the state conflict of law rules where they apply to outcome determinative issues.  On remand, the circuit court found that the Delaware conflicts rules referred the issue to New York law, and so the decision remained the same through the use of differing rules.