The auto rental giant Hertz is incorporated in Delaware, has its headquarters in New Jersey and does its biggest volume of business in California. So where is Hertz's "principal place of business?"
The answer depends on which federal appellate court is asking the question. During the past 51 years, federal courts have used a hodgepodge of tests to determine a corporation's principal place of business. The U.S. Supreme Court today, for the first time, will consider what is the correct test in Hertz Corp. v. Friend, a case involving Hertz employees who claim the company violated California's wage-and-hour laws.
What the Supreme Court decides, in effect, will determine the battlefields on which class action and other litigation involving multistate corporations will be fought. Will it be what corporations perceive to be the friendlier forum of the federal courts or the plaintiff-sympathetic state courts?
Hertz, backed by such national business organizations as the U.S. Chamber of Commerce, is urging the justices to decide that a corporation's principal place of business for determining federal court jurisdiction is the corporation's headquarters. The "headquarters" approach offers a bright-line, certain and efficient way of determining a corporation's citizenship, according to Hertz high court counsel, Sri Srinivasan, a partner in the Washington office of O'Melveny & Myers. Under that approach, Hertz's principal place of business would be New Jersey and it could fight the wage-and-hour claims in federal court because, under the federal diversity jurisdiction statute, its New Jersey citizenship is different from the citizenship of the California employees suing it.
But that test ignores the realities of how multistate corporations do business, countered Robert Stein III, a partner in the Santa Ana, Calif., office of Adorno & Yoss, whose co-counsel, Todd Schneider of San Francisco's Schneider Wallace Cottrell Brayton Konecky, will argue for the Hertz employees.
Stein and his supporters argue that it makes more sense to look at whether any single state contains a substantial predominance of the corporation's business activity -- including facilities, employees and revenues. The 9th U.S. Circuit Court of Appeals took that approach in October 2008, decided Hertz's principal place of business was California, and sent the wage-and-hour lawsuit back to state court.
"It's very, very important for the Supreme Court to resolve this," said A. Benjamin Spencer of Washington and Lee University School of Law. "Today you can have a district court in New Jersey, knowing Hertz is headquartered there, that would be inclined to say New Jersey is Hertz's principal place of business. And, you have a district court in California saying it's California. Analytically, you can't have that. It can't be both."
BRAIN VERSUS BRAWN
Before 1958, the federal diversity statute said a corporation was only a citizen of its state of incorporation. But Congress found that some corporations engaging in local business were able to circumvent their local courts and get into federal court by getting out-of-state charters. Its evidence: more cases involving state-law claims and parties having the same citizenship were burdening the federal courts.
Congress amended the diversity statute to state that a corporation was a citizen of its state of incorporation and of the state where it had its "principal place of business." Congress wanted to reduce the federal courts' caseload and to preserve the original purpose of diversity jurisdiction, which was to protect true foreign corporations from the biases of local courts and juries. Congress believed a corporation was unlikely to face prejudice in a state where it had its principal place of business.
Congress, however, did not define principal place of business, and so the federal courts filled that void with varying and conflicting approaches.
The 5th, 6th, 8th, 10th and 11th circuits use a "total activity" test that examines the company's purposes, type of business and legal site of its operations. The 1st, 2nd and 4th circuits apply a variation of that test, and the 3rd Circuit looks for the "center of corporate activity." The 9th Circuit compares the states in which the corporation operates to determine where it has a "substantial predominance" of its operations.
The 7th Circuit is the only circuit that uses the "nerve center" test, explaining in one decision, "[W]e look for the corporation's brain, and ordinarily find it where the corporation has its headquarters." This circuit finds the location from which the company's chief executives control and direct activities at all other corporate sites.
"Part of the virtue of the 7th Circuit test is it is simple and easily administrable, and particularly in the jurisdiction context, the Supreme Court has said repeatedly that is a very important consideration," said O'Melveny's Srinivasan. "We don't want satellite litigation and full-fledged minitrials on the threshold question of whether a case should be in federal court at all."
Congress "rightly thought," he said, that companies, as a general matter, are identified with their headquarters. Wal-Mart Stores Inc., for example, is considered an Arkansas corporation even though it has substantially more business and employees in Texas.
Under the 9th Circuit's approach, Wal-Mart could never remove state lawsuits to federal courts in Texas, but could remove cases to federal court in Arkansas. If the goal is to protect foreign companies from local bias, he said, that result makes no sense because there is little risk of prejudice against Wal-Mart in Arkansas and greater risk in Texas.
"We don't think that's the result Congress would have intended," said Srinivasan. In fact, he added, given California's size, economy and population, any national corporation doing business there would likely be deemed a citizen of California under the 9th Circuit test. Hertz also relies heavily on the dictionary meaning of principal place of business. Under the ordinary meaning of those terms, Srinivasan said, a corporation is a citizen of the state in which it maintains its most influential or important site -- its corporate headquarters.
But Srinivasan's opponent, Stein, counters that the fact that all of the circuits, excepting the 7th, look to the business realities -- a corporation's people and property -- in determining principal place of business represents "a pretty good consensus" that the Supreme Court should do the same.
"The purpose of diversity jurisdiction is to keep foreign corporations from venues hostile to them because they are foreign," Stein said. "So it makes more sense if you look to where your property and people are, than where your officers sit."
Consider The Boeing Co., he suggested -- a company that grew up in Washington state, has more than 70,000 employees there, but recently moved its headquarters to Chicago, where about 500 will be employed.
"If you look at where Boeing is least likely to be treated as a foreigner, it would be in Washington," Stein said. "To say you can manipulate federal jurisdiction just by leasing a building and calling it your headquarters makes no sense. You end up with a lot of state law claims on federal dockets."
Stein also argues that, if Congress had intended a corporation's principal place of business to mean its corporate headquarters, it would have used that language. Instead, he said, Congress drew the phrase from the Bankruptcy Act, which called on courts to examine a company's operations to determine where it actually did its business.
Washington & Lee's Benjamin said the 7th Circuit's headquarters approach offers a clear standard, while the other circuits' approaches are not as predictable and clear. The Supreme Court generally prefers bright-line rules to guide the lower courts, but, he and others said, it is difficult to predict where the Roberts Court will come out in this dispute.
What national businesses ultimately want from the Supreme Court is certainty as to where the principal place of business is, said Gregory Korman, a partner in the Los Angeles office of Katten Muchin Rosenman. The federal Class Action Fairness Act, which made clear Congress' intent that qualifying national class actions should be tried in federal courts, "really brought the pot to a boil" on this question.
Benjamin agreed, adding, "I don't think there's anything particularly wrong with either approach. It's more important that the Court resolve it now than how it is resolved. At least there will be a uniform, national standard."