Brief Fact Summary.
Plaintiff sued Defendant to prevent Defendant from interfering with his contract with Railroad that allowed Plaintiff exclusive access to Railroad’s property. Plaintiff sued Defendant in federal court on the basis of diversity of citizenship after Plaintiff incorporated its company in another state.
Synopsis of Rule of Law.
In diversity of citizenship cases, federal courts are required to apply state statutes and constitutions but are not required to apply state courts’ determinations of common law precedent.
Brown & Yellow Taxicab & Transfer Co. (Plaintiff) sued Black & White Taxicab & Transfer Co. (Defendant) and Louisville & Nashville Railroad Co. (Railroad) in the United States District Court for the Western District of Kentucky to prevent Defendant from interfering with Plaintiff’s contract with Railroad. Under the contract between Plaintiff and Railroad, Plaintiff had an exclusive license to enter into Railroad’s property for soliciting transfers. However, according to Plaintiff, Railroad was letting Plaintiff’s competitors, including Defendant, enter onto Railroad’s property in violation of their exclusive contract. Although all the parties were incorporated in Kentucky, jurisdiction of the district court was invoked on the basis of diversity of citizenship because Plaintiff’s shareholders arranged to transfer the corporation to Tennessee in order to create diversity. Once Plaintiff was incorporated in Tennessee, Plaintiff brought suit in federal court. Defendant argued that Plaintiff incorporating in Tennessee to create diversity is fraudulent, and that the contract made between the parties was void because it went against the public policy of Kentucky. After the district court determined that fraud did not exist, and that the contract between Plaintiff and Railroad was interfered by Defendant, the court barred Defendant from further interfering with Plaintiff’s contract with Railroad. As a result, Defendant appealed to the United States Court of Appeals for the Six Circuit, which affirmed the district court’s ruling. The United States Supreme Court granted certiorari.
In diversity of citizenship cases, are federal courts bound by state court determinations of common law precedent?
No. Federal courts are not bound by state court determinations of common law precedent in diversity of citizenship cases. In this case, Kentucky state courts have held that exclusive railroad contracts, like the one made between Plaintiff and Railroad goes against public policy and thus, are void. Kentucky courts believe that these types of contracts harm the public due to the creation of monopolies, which ultimately deters competition. However, because Kentucky is in the minority of states that believe this principle, Kentucky’s precedent on this principle contradicts the general principles of common law followed by the majority of states. Therefore, the contract made between Plaintiff and Railroad was not void. The United States Supreme Court affirmed the district court’s ruling.
It is wrong to conclude that federal courts should not have to apply state court determinations of common law precedent and allow federal courts to apply an independent judgment on general law issues. It is a myth to think that common law transcends the law of a particular state. States adopt common law principles in state statutes. If states decide to adopt or change common law principles, then federal courts should take these common law determinations into consideration when ruling on diversity of citizenship cases. The contract made between Plaintiff and Railroad was void under Kentucky’s law. The common law precedent of Kentucky should bind the federal court in Kentucky. As such, the federal court should have ruled that the contract was void.
The Rules of Decision Act (RDA), codified as 28 U.S.C. § 1652, does not require federal courts to follow common law precedent of states in diversity cases; however, federal courts are required to follow the state statutes and constitutions in diversity cases as held in Swift v. Tyson, 41 U.S. 1 (1842). The Court determined that the common law is not considered local to any particular state; instead, the common law is considered a general body of law. Although federal courts can look to state court determinations of common law precedent within the states, federal courts will not be bound by such determinations; these determinations will only be considered persuasive authority.