Brown & Yellow Taxicab & Transfer Co. filed suit in the United States District Court for the Western District of Kentucky against Black & White Taxicab & Transfer Co. and the Louisville & Nashville Railroad Co., seeking to prevent interference with an exclusive contract it had with the Railroad. The federal district court ruled in favor of Brown & Yellow, finding the contract valid under general federal common law. The United States Court of Appeals for the Sixth Circuit affirmed. The United States Supreme Court granted certiorari.
Facts of Black & White Taxicab & Transfer Co. v. Brown & Yellow Taxicab & Transfer Co.
The dispute in Black & White Taxicab & Transfer Co. v. Brown & Yellow Taxicab & Transfer Co. arose from a contract between Brown & Yellow Taxicab & Transfer Co. and the Louisville & Nashville Railroad Co. Under this agreement, Brown & Yellow received an exclusive license to enter the Railroad’s property in Bowling Green, Kentucky, for the purpose of soliciting passengers for transportation services. This exclusivity effectively prevented other cab companies, including Black & White Taxicab & Transfer Co., from soliciting passengers on the Railroad’s premises.
Under Kentucky common law, as interpreted by Kentucky’s highest court, such exclusive agreements were considered contrary to public policy. Kentucky courts viewed them as creating monopolies, reducing competition, and harming the public interest. This interpretation meant that, if applied, the contract between Brown & Yellow and the Railroad would be void.
At the time the agreement was contemplated, Brown & Yellow Taxicab & Transfer Co., the Railroad, and Black & White Taxicab & Transfer Co. were all incorporated in Kentucky. In order to bring the case into federal court under diversity of citizenship jurisdiction, the shareholders of Brown & Yellow dissolved the corporation in Kentucky and reincorporated it in Tennessee. This change of incorporation allowed the company to claim diversity jurisdiction when suing in federal court against the Kentucky-based defendants.
After reincorporation, Brown & Yellow executed the agreement with the Railroad in Tennessee, where such contracts were legal under state law. The company then brought suit in Kentucky federal court to enjoin Black & White from soliciting passengers at the Bowling Green railroad station, alleging interference with its exclusive rights under the contract.
Black & White challenged the lawsuit on two primary grounds:
- That the reincorporation in Tennessee was fraudulent and undertaken solely to create diversity jurisdiction in federal court.
- That the contract was void under Kentucky common law because it violated the state’s public policy against monopolies in railroad passenger solicitation.
The district court rejected the fraud claim, found that the contract had been interfered with, and issued an injunction against Black & White. On appeal, the Sixth Circuit Court of Appeals affirmed this judgment. The case was then reviewed by the United States Supreme Court.
Issue
In diversity of citizenship cases, are federal courts required to apply the state court’s determinations of common law precedent, or may they instead apply general federal common law?
Rule of Law
At the time of the decision in Black & White Taxicab & Transfer Co. v. Brown & Yellow Taxicab & Transfer Co., federal courts sitting in diversity jurisdiction were required to apply state statutes and state constitutions but were not bound by state court interpretations of common law. This approach followed the doctrine established in Swift v. Tyson (1842).
Black & White Taxicab & Transfer Co. v. Brown & Yellow Taxicab & Transfer Co. Judgment
The United States Supreme Court held that federal courts are not bound by state court determinations of common law precedent in diversity jurisdiction cases.
The Supreme Court noted that under Kentucky state court precedent, the exclusive contract between Brown & Yellow and the Railroad would be considered void as against public policy because it created a monopoly that hindered competition. However, Kentucky’s stance represented the minority view among states. The majority of states, applying what was considered the “general principles of common law,” recognized the validity of such contracts.
Following the Swift v. Tyson doctrine, the Court emphasized that federal courts sitting in diversity could apply general common law rather than adopt the state court’s interpretation of common law principles. Therefore, even though Kentucky’s courts had previously invalidated similar contracts, the federal court was not obligated to follow that precedent when deciding the case.
Applying the majority view of general common law, the Court found the contract between Brown & Yellow and the Railroad valid and enforceable. The judgment of the district court, as affirmed by the Sixth Circuit, was thus upheld.