Unanimous Supreme Court Resets “Principal Place Of Business” For Diversity Jurisdiction

It’s no secret: plaintiffs like state court and defendants like federal court.

The reasons include:

  • federal juries, by virtue of their larger geographic range, include fewer urban jurors and more rural jurors, and thus (according to lawyers’ lore) will award lower verdicts;
  • the Federal Rules of Civil Procedure place express limits on the amount of discovery available;
  • federal courts are (and were even before Ashcroft v. Iqbal) more prone to grant motions to dismiss (and motions for summary judgment) than state courts.

Even if a plaintiff files their lawsuit in state court, the defendant can “remove” the case to federal court if the case could have been filed in federal court.

There are two ways a case ‘could have been filed in federal court’: first, if the claim arises under federal law; second, if all plaintiffs and all defendants are citizens of different states. The latter is called “diversity” jurisdiction, and it has a long history of being “disfavored” by federal courts. As I wrote before, in discussing one of the games defendants play to remove cases, “much like how we prefer federal courts preside over cases bringing federal claims, we prefer state courts preside over cases bringing state claims.”

So how do we determine of which States a corporation is a “citizen?” 28 U.S.C. § 1332(c)(1) says, “a corporation shall be deemed to be a citizen of any State by which it has been incorporated and of the State where it has its principal place of business.”

Incorporation is simple enough; all corporations are incorporated in one, and only one, state, most commonly Delaware.

But where is the corporation’s “principal place of business?”

The Supreme Court’s answered that question yesterday in Hertz Co. v. Friend et al. Here’s the facts from the opinion, with substantial edits for clarity by yours truly:

In September 2007, Melinda Friend and John Nhieu, two California citizens, sued the Hertz Corporation in California state court for violations of California’s wage and hour laws as part of a potential class action on behalf of other California citizens similarly-situated to them.

Hertz removed the case to federal court claiming that the plaintiffs and the defendant were citizens of different States, and thus the federal court had diversity jurisdiction over the claims. Friend and Nhieu, however, claimed that the Hertz Corporation was a California citizen, like themselves, and that, hence, diversity jurisdiction was lacking.

To support its position, Hertz submitted a declaration by an employee relations manager that claimed Hertz’s “principal place of business” was in New Jersey, not in California, because — though its California operations accounted for 273 of Hertz’s 1,606 car rental locations, about 2,300 of its 11,230 full-time employees, about $811 million of its $4.371 billion in annual revenue and about 3.8 million of its approximately 21 million rentals — the leadership of Hertz and its domestic subsidiaries is located at Hertz’s corporate headquarters in Park Ridge, New Jersey, where its core executive and administrative functions are carried out, except for some lesser, but still substantial, administrative operations in Oklahoma City, Oklahoma.

Let’s start with the big picture: this case has no business being in federal court. It’s a class action brought solely by California residents alleging solely California-law claims against a company that has more business in California than anywhere else. None of the concerns underlying federal jurisdiction are present. There is no reason to believe that Hertz would be prejudiced by having the case heard by a California state court, and there are no federal issues in the case.

As the Supreme Court noted yesterday, two-hundred-and-one years ago, the Supreme Court, in a unanimous opinion by Chief Justice Marshall, scoffed at the very notion that a corporation was a “citizen” entitled to diversity jurisdiction: “the term citizen ought to be understood as it is used in the constitution, and as it is used in other laws. That is, to describe the real persons who come into court, in this case, under their corporate name.” Bank of United States v. Deveaux, 5 Cranch 91–92 (1809); see Slip op., p.5. If that was the law today, Hertz would not be entitled to remove any state-law case from any state court, since it would be a “citizen” everywhere.

But that was then, this is now. The statute we have today says Hertz is a citizen “of any State by which it has been incorporated and of the State where it has its principal place of business.” If Hertz is sued anywhere else, it can remove the case to federal court. So where is its “principle place of business?”

Prior to the Hertz opinion yesterday, the answer depended upon the Circuit in which the case was brought. Friend’s case was brought in the Ninth Circuit,

which instructs courts to identify a corporation’s “principal place of business” by first determining the amount of a corporation’s business activity State by State. If the amount of activity is “significantly larger” or “substantially predominates” in one State, then that State is the corporation’s “principal place of business.” If there is no such State, then the “principal place of business” is the corporation’s “‘nerve center,’” i.e., the place where “‘the majority of its executive and administrative functions are performed.’”

Slip op., p. 3. Other courts, like those in the Seventh Circuit, jumped straight to the “nerve center” approach.

Yesterday, the Supreme Court held that the “nerve center” test is the only test, that “the phrase ‘principal place of business’ refers to the place where the corporation’s high level officers direct, control, and coordinate the corporation’s activities.” Slip op., p. 1.

The opinion is a classic example of Justice Breyer’s methodology; long on “administrative simplicity” (p. 13), short on the plain meaning rule. I will leave, as an exercise for the reader, the question of whether the Court’s unanimous opinion is consistent with the originalism and formalism pressed by four, sometimes five, members of the Court.

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