11/30/2009 05:09:09 PM EST
Hertz Corp. v. Melinda Friend, et al.
On November 10, 2009, the Supreme Court heard oral argument in Hertz Corp. v. Melinda Friend, case to determine an unsettled jurisdictional question that arises in federal courts: for purposes of diversity jurisdiction, where is a company’s principal place of business? That term, which was added to Section 1332 of the USC purportedly to protect out-of-state corporations from perceived state court biases, has never been defined by Congress.
Excerpt:
[O]ver the years, federal courts have adopted various, and at times, conflicting interpretations [of what constitutes a company’s principal place of business] . Some courts apply a "total activities" test (or a variation of this test) that looks at such things as the nature of a company's activities and the site of its operations. The Seventh Circuit applies a "nerve center" test, which means effectively, the location of the company's headquarters (i.e., the location where all corporate decisions are made). The Ninth Circuit attempts to determine where the company has a "substantial predominance" of its operations by comparing the states in which the corporation operates. The Hertz case involves the Ninth Circuit's "substantial predominance" test. Hertz, backed by numerous national business organizations, is advocating that a company's "principal place of business" is the location of its headquarters. Plaintiffs/respondents argue that such a test ignores the realities of modern business operations. They argue that the "principal place of business" should be the state in which a substantial predominance of the corporation's business activity occurs. While the Ninth Circuit's test is at issue in Hertz, the Supreme Court will likely take the opportunity to establish a single method for establishing diversity jurisdiction for corporations.
Background.
The plaintiffs/respondents brought claims in state court against Hertz under California's wage and hour laws on behalf of a class of other California workers. Hertz removed the case to federal district court pursuant to the Class Action Fairness Act of 2005 ("CAFA") (Pub. L. No. 109-2, 119 Stat. 4). CAFA provides that class actions may be removed to federal court when there is minimal diversity and the amount in controversy exceed $5 million. Hertz claimed diversity jurisdiction because it is incorporated in Delaware and headquartered in New Jersey, and thus is not a citizen of California. The plaintiffs/respondents moved to remand the case, arguing that, under Ninth Circuit precedent, Hertz was a citizen of California and not diverse from any plaintiff. The Ninth Circuit applies a "place of operations" test (or "substantial predominance"), under which the court considers a number of factors to determine corporate citizenship. These factors include the location of employees, tangible property, production activities, sources of income, and where the sales take place. Based on these factors, the court decides whether a corporation's business in one state is "significantly larger than any other state in which the corporation conducts business." If there is no state with a "substantial predominance" of corporate operations, courts within the Ninth Circuit use the "nerve center" test to determine that corporation's "principal place of business," i.e., where the majority of corporate executive and administrative functions are performed. See Tosco Corp. v. Cmtys. for Better Env't, 236 F.3d 495, 500 (9th Cir. 2001)(per curiam). Under this analysis, the district court concluded that California was Hertz's "principal place of business," because Hertz's business in California was significantly larger than in any other state. The district court then remanded the case back to state court, which Hertz immediately appealed.
On appeal, the Ninth Circuit affirmed, holding that the district court correctly found that Hertz's operations in California satisfy the "substantial predominance" test, thus establishing corporate citizenship in the state. Hertz Corp. v. Melinda Friend, et al., 297 Fed. Appx. 690, 691 (9th Cir. 2008). Hertz filed a petition for certiorari, which the Court granted on June 8, 2009. [footnotes omitted]