Smith v. Kansas City Title & Trust Co.
Citation and Court
255 U.S. 180 (1921) — Supreme Court of the United States
Facts
A shareholder of Kansas City Title & Trust Company sued to prevent the company from investing in federal farm loan bonds authorized by the Federal Farm Loan Act, arguing that the Act was unconstitutional. The cause of action was created by Missouri state law (shareholder derivative suit), but the plaintiff’s right to relief depended entirely on whether the federal statute was constitutional.
Issue
Whether a federal court has federal question jurisdiction over a state-law cause of action when the plaintiff’s right to relief depends on the validity of a federal statute.
Holding
Yes. A case arises under federal law within the meaning of § 1331 when the plaintiff’s right to relief necessarily depends on the construction or validity of federal law, even though the cause of action itself is created by state law.
Rule / Doctrine
Federal question jurisdiction exists not only when federal law creates the cause of action, but also when the plaintiff’s right to relief necessarily depends on a substantial question of federal law — including the validity or construction of a federal statute. The federal issue must be an essential element of the plaintiff’s claim.
Significance
Smith is the foundational case for embedded federal question jurisdiction, establishing that the federal question need not create the cause of action to support § 1331 jurisdiction. It stands in tension with American Well Works v. Layne & Bowler (where Holmes wrote that federal law must create the cause of action), and the two cases together define the scope of the Grable embedded-question doctrine.