For a corporation, the U.S. Supreme Court’s axiom may soon be: Home is where the headquarters is.
The Court heard oral arguments Tuesday in Hertz Corp. v. Friend, which raises a seemingly simple but vexing question crucial for corporations: For purposes of diversity jurisdiction, where is a company’s principal place of business?
The answer will be crucial in determining whether a corporation can be sued in federal court, as it might prefer, or in plaintiff-friendly state courts.
Acting in a class action by Hertz employees over wages and hours filed in California, the U.S. Court of Appeals for the 9th Circuit determined that, even though its headquarters is in New Jersey, Hertz is a citizen of California because more business activities occur there than in any other state. With both sides deemed to be from California, there was no federal diversity jurisdiction, so the case went to state court. Hertz appealed to the high court.
Hertz’s lawyer, Sri Srinivasan of O’Melveny & Myers’ Washington office, argued for a simpler test, namely where a company’s headquarters is, or “the site from which a corporation directs and controls all the company’s operations throughout all of its locations.” That is a “relatively straightforward” determination that the public can easily ascertain, Srinivasan said, and it also preserves diversity jurisdiction in all but a company’s headquarters state.
Srinivasan cited the example of Wal-Mart Stores Inc., which is “universally recognized to be an Arkansas corporation.” But under the 9th Circuit’s standard, it might be viewed as a Texas company, because it has more stores and employees there than any other state.
Justices seemed sympathetic, with Justice Anthony Kennedy stating that “not all diversity suits have major law firms in them” that would be able to make the calculations necessary to locate a company’s citizenship under the “complex tests” of the 9th and other circuits.
Todd Schneider of San Francisco’s Schneider Wallace Cottrell Brayton Konecky, who argued for the Hertz workers, defended the 9th Circuit test as a fairer assessment of where a company’s “people and property are.”
But Justice Ruth Bader Ginsburg objected that, under that standard, “California is going to be the big winner in this. It’s going to be able to keep all those cases in its state court because so many multistate corporations, I would imagine, would come out, just the way Hertz does.”
Schneider’s argument was not helped when Chief Justice John Roberts Jr. asked him where the principal place of business for Starbucks would be under the 9th Circuit test.
Schneider confessed that a court had already answered that question as California, because Starbucks Corp. has more than 100% more employees in California than in Washington state, where its headquarters is.
“That’s a surprise,” Justice Antonin Scalia said sarcastically.
Though most of the Court appeared to embrace some version of a headquarters standard, some justices appeared concerned about the possibility that it might result in abuse by corporations seeking to avoid state courts.
“There has to be something more to the test,” said Justice Sonia Sotomayor. “There has to be some form of activity in that place.” She suggested a compromise whereby a company’s principal place of business would presumptively be its headquarters or “nerve center,” but the opposing party would be able to challenge that designation. “You can rebut it if it is a shell headquarters.”
Tony Mauro can be contacted at email@example.com.