What factors should courts look to when determining the “citizenship” of a multistate corporation to determine whether or not to exercise diversity jurisdiction?
Though federal courts are generally only able to hear claims arising under federal law, Congress gives them the power to exercise so-called “diversity jurisdiction” over any state law civil claim between citizens of different states. When a multistate corporation seeks relief in federal court on the basis of a diversity action, courts wrestle with exactly what factors they should look to in determining the corporation’s citizenship. Here, a group of California citizens sued Hertz Corporation in California state court alleging violations of California’s state labor laws. Hertz sought to remove the case to federal court. The Ninth Circuit concluded Hertz was a California citizen and denied removal jurisdiction. This case presents the Supreme Court with the opportunity to lay out a specific test for determining corporate citizenship for the purposes of diversity jurisdiction.
Questions as Framed for the Court by the Parties
Whether, for purposes of determining principal place of business for diversity jurisdiction citizenship under 28 U.S.C. § 1332, a court can disregard the location of a nationwide corporation's headquarters - i.e., its nerve center.
Congress gives federal district courts the power to exercise “diversity jurisdiction” over any civil claim for at least $75,000 arising between citizens of different states. For purposes of diversity jurisdiction, a corporation is a citizen of “any State by which it has been incorporated and of the State where it has its principal place of business.” Whenever a party is sued in state court, Congress further provides that that party may remove the suit to federal court, providing the federal court would otherwise have jurisdiction. Thus, when a resident plaintiff sues a foreign defendant in the plaintiff’s home state, that defendant can remove the suit to a federal court exercising diversity jurisdiction. When the suit involves a class action, as long as any member of the plaintiff class is a citizen of a different state than the defendant, the action is generally removable. However, when a large corporation does business in a number of states, determining its “principal place of business” often presents courts with a challenge.
Plaintiff Melinda Friend and a group of other Hertz Corporation employees filed a class action against Hertz in California state court seeking damages, alleging that Hertz violated California’s wage and hour laws. .Hertz sought to remove the suit to the United States District Court for the Northern District of California pursuant to 28 U.S.C. § 1453(b). In its notice of removal, Hertz argued the district court had diversity jurisdiction because Hertz was a Delaware corporation with its corporate headquarters in New Jersey. However, in the same notice, Hertz conceded that it employs more people in and derives more revenue from California than any other state. The district court, applying the Ninth Circuit’s “place of operations” test from Tosco Corp. v. Communities for a Better Environment, concluded that the plurality of Hertz’s business activities occur in California. It denied the removal petition and remanded the case to California state court.
The United States Court of Appeals for the Ninth Circuit upheld the lower court’s ruling, holding that the district court correctly applied Tosco when it reasoned that Hertz’s principle place of business was in California. Because it was possible to conclude that a “substantial predominance” of Hertz’s business takes place in California under Tosco’s “place of operations” test, the Ninth Circuit refused to apply Tosco’s last-resort “nerve center” test under which a court would look to the state where the majority of a corporation’s executive and administrative functions take place. Furthermore, the Ninth Circuit rejected Hertz’s argument that the court should apply a “per capita” approach and consider the comparative populations of states in which Hertz operates to determine the extent of its activities in any particular state Finally, the Ninth Circuit concluded that Hertz was “not in jeopardy of being mistreated in California courts.” The Supreme Court of the United States granted certiorari on June 8, 2009.
Under 28 U.S.C. § 1332(c)(1), a corporation is a citizen of its state of incorporation and the state “where it has its principal place of business.” The case hinges on the interpretation of the language “principal place of business.” Petitioner Hertz Corporation advocates that the Supreme Court adopt the Seventh Circuit’s “headquarters test,” which looks to where a corporation has its headquarters in determining where that corporation has its principal place of business. Using the “headquarters’ test,” Hertz argues that in addition to Delaware, its state of incorporation, it is a citizen of New Jersey, where its headquarters are located.
In contrast, Respondents Melinda Friend, et al. ("Friend”) advocate that, in determining where a corporation has its principal place of business, the Supreme Court should adopt the Ninth Circuit’s “business realities test,” which looks to the state that contains a substantial predominance of the corporation’s business activities. Using the “business operations test,” Friend argues that Hertz is a citizen of California, not New Jersey. Hertz’s citizenship is important in this case because it is dispositive on the issue of whether the litigants’ case belongs in California state court or in federal court.
Does Grammatical Statutory Interpretation Support the “Headquarters Test” or the “Business Realities Test?”
Hertz and Friend both use grammatical statutory interpretation to support their respective positions. Hertz argues that the Ninth Circuit’s interpretation of 28 U.S.C. § 1332(c)(1) is incorrect because the word “place” within the statutory phrase “the State where it has its principal place of business” refers to a single physical location within a state. It argues that if Congress intended to make corporations citizens of the states where the sum total of their operations is the greatest, the statute would read “the state that is the corporation’s principal place of business,” clearly equating a single “state” with “principal place of business.” Hertz reasons that in using the phrase “the state where it has its principal place of business,” Congress clearly intended that “place” refers not to a state as a whole, but rather to a physical business location within a state.
In explaining which physical location within a state a court should look to in determining a corporation’s “principal place of business,” Hertz again uses grammatical statutory interpretation. Hertz argues that based on the dictionary definition of the word “principal,” a court should consider a corporation’s headquarters to be its “principal place of business.” The basis of Hertz’ argument is that a headquarters is ‘principal’ in that it is the single most important, influential, and authoritative location of a company within a state.
Friend uses grammatical statutory interpretation to support an opposite conclusion. Friend argues that if by “principal place of business” Congress meant to refer to the corporation’s headquarters, the statute would clearly state “headquarters.” Since the statute does not so read, Friend asserts, it is reasonable to infer that Congress did not intend that “principal place of business” definitively refer to a company’s “headquarters.” In support of its argument, Friend cites the statutory construction axiom that “when it can be demonstrated that Congress knew how to say something simply and directly, a strong inference arises when Congress chooses to use other language.” Friend argues that the language that Congress chose indicates that Congress intended for courts to determine a corporation’s “principal place of business” using a fact-sensitive approach that compares a corporation’s different places of business. Friend asserts that statutory construction favors a fact-sensitive business realities test because, “by its own terms,” the phrase ‘principal place’ requires a comparison between two or more places.
Do Interests of Simplicity and Fairness Support the “Headquarters Test” or the “Business Realities Test?”
Hertz argues that the Supreme Court should apply the headquarters test because it is clear and simple to administer. Hertz explains that corporations must report their principal office to the State Department and the Securities and Exchange Commission.Thus, determining a corporation’s headquarters, Hertz reasons, could be as easy as going online to access the Security and Exchange Commission’s website and reading its free and public annual reports containing the address of companies’ principal executive offices. Furthermore, Hertz argues, a headquarters test is clear and simple to administer because a corporation’s headquarters tend to be “fixed and permanent.”In contrast, Hertz asserts, a business realities test “makes a corporation’s citizenship dependant on the fluctuations of the markets in a State at any given time.”
In response, Friend argues that the headquarters test is not as simple as Hertz makes it out to be. Friend asserts that headquarters might be in multiple locations, such as where the CEO’s office is, where the board of directors meets, and where the corporation keeps its official records. Moreover, Friend disputes that corporations’ headquarters tend to remain in a fixed and permanent location. Friend argues that corporations relocate their headquarters often for the purpose of obtaining the benefits of a foreign state’s corporation’s laws, such as tax breaks. Whatever uncertainty about a corporation’s “principal place of business” a business realities test may cause, Friend contends, they pale in comparison to the instability of a headquarters test. This is because, Friend argues, it easier to relocate an official headquarters than to move the locus of a company’s actual day-to-day operations.
Additionally, Friend contends, when Congress passed 28 U.S.C. § 1332(c)(1), it rejected a clear and simple bright line test, efficient as it may be, in consideration of other policy concerns. Friend asserts that Congress believed it to be “fair” that a corporation is accountable in the courts of the state where it conducts most of its business. Friend maintains that a rule that only looks at the location of a corporation’s headquarters would defeat the purpose behind the statute, because the headquarters of a corporation can be far from the actual operations of the business. Friend asserts that “diversity jurisdiction was not designed to allow a major California employer such as Hertz to profit from California’s large economy and then, for purposes of removal, avoid the jurisdiction of California’s courts.”
Hertz does not dispute that in enacting 28 U.S.C. § 1332(c)(1), Congress intended to prevent corporations from having unfettered access to federal courts simply by placing their headquarters in a state different from the ones where they may do all their business. But, Hertz adds, Congress also intended for large corporations doing business in many states to have access to federal courts for protection from local bias that might exist in state courts. In support of its position, Hertz emphasizes the fact that Congress recently amended § 1332 as part of the Class Action Fairness Act to broaden the ability of corporations to gain access to federal courts using diversity jurisdiction. Hertz emphasizes the necessity of allowing corporations access to federal courts as a means of protection from forum shopping and plaintiffs’ attorneys racing to file actions in potentially biased state courts. The headquarters test, Hertz argues, furthers Congress’ end in providing corporations with access to federal courts.
The Supreme Court’s ruling in this case could broadly affect the way multistate corporations conduct their business and the specific recourse available to plaintiffs seeking to litigate state law claims against them.
The parties’ dispute centers primarily on statutory interpretation. Petitioner Hertz Corporation (“Hertz”) argues that under 28 U.S.C. § 1332(c)(1) a corporation’s “principle place of business,” is the physical location of its headquarters. See Brief for Petitioner Hertz Corporation at 15. Respondents Melinda Friend, et al. (“Friend”) counter that § 1332(c)(1) requires a “business realities test,” under which a court would consider the actual reach of a corporation’s activities. See Brief for Respondents Melinda Friend et al. at 12. However, regardless of what congress intended when enacting the statute, in reaching the correct answer, the Court will have to weigh competing public policy interests supporting the interests of multistate business, on the one hand, and plaintiffs’ interests in having a venue in state court, on the other. As such, several amicus curiae have submitted briefs.
Advocates for business argue that the “nerve center” test is appropriate, because it’s clear, predictable, reliable and in line with congressional intent. Furthermore, the Chamber of Commerce of the United States, et al. (the “Chamber”) argues that allowing multistate corporations to remove claims to federal court is important to avoid locally elected judges’ perceived anti-foreign-corporation bias. The Chamber stresses that the location of a corporation’s headquarters is central to its identity, and a corporation and its customers should be able to know with certainty where the corporation is located. Finally, the Chamber stresses that it is unrealistic to assume a corporation would change the location of its headquarters only to avoid particular state courts, because so many other factors weigh in a corporation’s decision to locate its headquarters in a particular place.
On the other side, advocates for workers’ rights stress that state courts and plaintiffs alike have a significant interest in having claims arising under state workers’ rights laws adjudicated in state courts. Moreover, Legal Aid points to the fact that allowing the California courts to adjudicate claims between California plaintiffs and companies conducting a significant amount of their business in California is more efficient, because the California courts are larger and better equipped to handle these claims than the federal courts. Generally, Legal Aid contends, litigating state law workers’ rights claims in federal court requires workers to travel greater distances and produce witnesses at much greater expense, thus creating an undue burden on plaintiffs. According to Legal Aid, allowing removal in cases like these offends basic concerns of federalism by allowing a corporation to engage in substantial business within a state without subjecting itself to the jurisdiction of its courts.
The central question in this case—what is the “citizenship” of a multistate corporation for purposes of diversity jurisdiction—has resulted in a broad circuit split. Some circuits, such as the Seventh Circuit, apply a bright line “nerve center” test which looks to the physical location of a corporation’s headquarters to determine its citizenship. See Metropolitan Life Ins. Co. v. Estate of Cammon, 929 F.2d 1220, 1223 (7th Cir. 1991). Other circuits, such as the Ninth Circuit, only apply the nerve center test if no individual state contains a “substantial predominance” of the corporation’s operations. See Tosco Corp. v. Communities for a Better Environment, 236 F.3d 495, 500 (9th Cir. 2001). Other circuits fall in the middle, generally holding that the nerve center test applies by default, but can be defeated by weighing a variety of factors. See e.g., OGB Occupational Therapy v. RHA Health, 357 F.3d 375 (3d Cir. 2004); Diaz-Rodriguez v. Pep Boys Corp., 410 F.3d 56 (1st Cir. 2005); J.A. Olson Co. v. City of Winona, 818 F.2d 401 (5th Cir. 1987); Gadlin v. Sybron Int’l Corp., 222 F.3d 797 (10th Cir. 2000).
Ultimately, this case provides the Supreme Court with the opportunity to alleviate confusion and uncertainty for both plaintiffs and corporations alike by creating a clear rule for lower courts to apply when determining whether or not a corporation is a “citizen” of any particular state for purposes of diversity jurisdiction.
This case presents the Court with the opportunity to further clarify the process by which to determine the location of a corporation’s principal place of business, which will, in turn, determine corporate citizenship for the purposes of 28 U.S.C. § 1332 diversity jurisdiction. The Court’s decision may have a sweeping effect on corporations’ ability to remove lawsuits to federal court.