Black & White Taxicab & Transfer Co. v. Brown & Yellow Taxicab & Transfer Co.
276 U.S. 518 (1928)
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Rule of Law:
Under the doctrine of Swift v. Tyson, federal courts exercising diversity jurisdiction are not bound by the common law decisions of state courts on matters of general law, but are free to exercise their own independent judgment.
Facts:
- Brown and Yellow Taxicab and Transfer Company, a Kentucky corporation, had an exclusive contract with the Louisville and Nashville Railroad Company to solicit passengers at its Bowling Green, Kentucky station.
- The highest court in Kentucky, the Court of Appeals, had previously held that such exclusive contracts were against public policy and therefore invalid.
- Knowing that federal courts upheld such contracts, the shareholders of the Kentucky Brown and Yellow Taxicab company dissolved their corporation.
- They then reincorporated the business in Tennessee under the same name, transferring all assets from the Kentucky entity to the new Tennessee entity.
- The newly formed Tennessee corporation entered into an identical exclusive contract with the railroad company.
- Black and White Taxicab and Transfer Company, a competing Kentucky corporation, disregarded the contract and continued to solicit business at the railroad's station, interfering with Brown and Yellow's exclusive privilege.
Procedural Posture:
- Brown and Yellow Taxicab and Transfer Co. sued Black and White Taxicab and Transfer Co. and the Louisville and Nashville Railroad Company in the U.S. District Court for the Western District of Kentucky.
- The district court, a trial court, entered a decree in favor of Brown and Yellow Taxicab.
- The railroad company did not appeal, but Black and White Taxicab, as appellant, appealed the decision to the U.S. Circuit Court of Appeals for the Sixth Circuit.
- The Circuit Court of Appeals, an intermediate appellate court, affirmed the district court's decree.
- The U.S. Supreme Court granted a writ of certiorari to review the decision of the Circuit Court of Appeals.
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Issue:
In a case based on diversity of citizenship, is a federal court required to follow the common law decisions of a state's highest court that invalidate a particular type of contract?
Opinions:
Majority - Justice Butler
No, a federal court is not required to follow the state's common law on this matter. The court held that the question of a contract's validity is a matter of general law, upon which federal courts may apply their own independent judgment. The court first addressed the jurisdictional challenge, finding that the reincorporation in Tennessee to create diversity of citizenship was not improper or collusive under the Judicial Code. Because the succession and transfer of assets were actual and not 'feigned or merely colorable,' the motive for the reincorporation was irrelevant. On the merits, the court applied the rule from Swift v. Tyson, which distinguishes between state statutes or local usages (which federal courts must follow) and questions of 'general law' (which they are not bound to follow). The court classified the validity of a contract with a common carrier for exclusive privileges as a question of general law. Following its own precedent, the Supreme Court found the contract to be valid, reasoning that such arrangements promote good order and passenger safety and do not violate public policy.
Dissenting - Justice Holmes
Yes, a federal court should be required to follow the state's common law. Justice Holmes argued that the doctrine of Swift v. Tyson is based on the fallacy that there exists a 'transcendental body of law' separate from the law of any particular state. He asserted that the common law, as enforced in a state, is the law of that state, whether established by its legislature or its courts. The decisions of a state's highest court are an authoritative declaration of state law, not merely an opinion about some overarching general law. To allow a federal court to disregard these decisions creates an 'unconstitutional assumption of powers' and permits parties to achieve different legal outcomes on the same facts simply by forum-shopping based on diversity of citizenship, thereby undermining the authority of state law.
Analysis:
This case represents the high-water mark of the Swift v. Tyson doctrine, which allowed federal courts to create a body of 'general federal common law' in diversity cases. Its stark facts—a company literally changing its state of incorporation to evade unfavorable state law—highlighted the doctrine's most significant flaws: promoting forum shopping and creating different systems of law within the same state. This outcome generated significant criticism and directly paved the way for the Supreme Court's landmark decision in Erie Railroad Co. v. Tompkins (1938), which overruled Swift v. Tyson and fundamentally altered the relationship between state and federal courts in diversity cases.
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