Which State is a Nationwide Corporation’s Principal Place of Business?

By Anna Christensen
on Oct 29, 2009 at 9:50 am

Below, Sina Kian of Stanford Law School previews Hertz Corporation v. Friend, one of two cases to be heard by the Supreme Court on Tuesday, November 10. Check the Hertz Corp. v. Friend (08-1107) SCOTUSwiki page for additional updates.

Hertz Corp. v. Friend poses a question that has surprisingly escaped the Supreme Court’s attention until now: where is a corporation’s “principal place of business”?  Hertz argues that its “principal place of business” is its corporate headquarters in New Jersey.  The respondents favor a multi-factor approach that in this case points to California.  There is a good reason for the Court’s delay in addressing the question: until the recently passed Class Action Fairness Act of 2005 (“CAFA”), remand orders were generally insulated from appellate review. Assuming the Court does not dismiss the case on other grounds, its holding will determine the scope of diversity jurisdiction under §1332, and will almost certainly join Iqbal in next year’s batch of Civil Procedure textbooks.

Background

Petitioner Hertz Corporation is incorporated in Delaware and has its corporate headquarters in New Jersey.  Although the company operates in forty-four states, California has the highest percentage of the company’s rental facilities, vehicle transactions, revenues generated, and employees – well ahead of second-place Florida.

In 2007, respondents Melinda Friend and John Nhieu filed a class action in California state court against Hertz Corporation, alleging that the company had violated state wage and hour laws.  The putative class was limited to employees in California.  Hertz then removed the action to federal district court pursuant to the CAFA, which as relevant here provides that class actions may be removed to federal court when there exists minimal diversity and an amount in controversy over $5 million.  When the respondents moved to remand the case, arguing that Hertz was a citizen of California and thus not diverse from any plaintiff, the question then arose: where is Hertz’s principal place of business?

The district court applied the Ninth Circuit’s “place of operations” test, which considers a number of factors – such as “the location of employees, tangible property, production activities, sources of income, and where the sales take place” – to determine whether a corporation’s business in one state is “significantly larger than any other state in which the corporation conducts business.”  If this inquiry does not identify a particular state as the corporation’s “home,” courts then must determine “where the majority of [a corporation’s] executive and administrative functions are performed.”  The district court concluded that, under the first prong of the test, California was indeed Hertz’s principal place of business, and it remanded the case to state court.  On appeal, the Ninth Circuit affirmed.  Hertz filed a petition for certiorari, which the Court granted on June 8, 2009.

Petition for Certiorari

In its petition, Hertz argues that certiorari is warranted because the circuits are employing four different tests for determining a corporation’s principal place of business.  In contrast with the Ninth Circuit’s “place of operations” test, for example, the Seventh Circuit uses a “nerve center” test that exclusively emphasizes the location of the “corporate brain” – ordinarily defined as the place “where the corporation has its headquarters.”  Other circuits look at either the corporation’s center of activity (the Third Circuit) or the totality of the corporation’s activities (the Fifth, Sixth, Eighth, Tenth, and Eleventh Circuits).  The divergent approaches, Hertz contends, create an untenable situation in which a corporation’s “principal place of business” can vary by circuit.  Furthermore, the Ninth Circuit’s “place of operations” test renders all nationwide corporations citizens of California, merely by virtue of the state’s size.  Finally, such a test is confusing and complicated, encouraging wasteful litigation over what should be a simple question: where is a corporation’s principal place of business?  The cert.-stage amicus brief filed by the Chamber of Commerce stresses the latter point and lauds the “nerve center” approach for its simplicity, though it ultimately urges the Court to grant certiorari to establish any uniform rule, which in its view would be preferable to the splintered status quo.

The respondents’ brief in opposition argues that the split is overstated; regardless of what the circuits call the test that they employ, they generally achieve a uniform outcome in practice. On the merits, the respondents characterize Hertz’s policy goals as superficially appealing, but fundamentally at odds with Congress’s intent in enacting Section 1332: having courts make a pragmatic determination regarding which state serves as a corporation’s principal place of business.

Merits

Hertz argues that the principal place of business is wherever the corporate headquarters are located, and advances two statutory arguments to this end.  First, the statute defines citizenship as being in “the State where [the corporation] has its principal place of business.” The singular tense of the emphasized language implies that courts should look to a single location within a state, rather than aggregating all of a corporation’s operations throughout a state.  Such an approach necessarily directs courts to the corporate headquarters.  Second, even if aggregation were appropriate, the plain meaning of “principal” requires courts to look to the “most influential, consequential and important” place of business, which again necessarily points to the headquarters.

Hertz also argues that a headquarters test is consistent with the two policy goals underlying § 1332: (1) preserving a federal forum for out-of-state corporate defendants, who might otherwise face biased local courts; and (2) preventing local corporations from removing local controversies to federal court simply because they have incorporated in a different state.  Moreover, Hertz adds, its headquarters rule will create an easily administrable jurisdictional rule.

The respondents counter that if the principal place of business simply meant the company’s headquarters, Congress would have provided as such.  The singular language implies that, even if the corporation operates nationwide, only one state can be its principal place of business.  This language does not preclude courts from aggregating operations to determine which state is the corporation’s principal place of business.  Moreover, Hertz’s arguments fail because Congress consciously adopted the “principal place of business” as a term of art borrowed from the bankruptcy case law, in which courts relied on a multi-factor approach to determine where a corporation had its principal place of business.  The respondents also argue that corporations can thwart the policy goals of §1332 by creating ghost headquarters in other states to avoid litigation in local courts.  Indeed, they note, a recent study found that the rate at which U.S. corporations relocate their headquarters is “significant.”

Finally, respondents dispute Hertz’s contention that the Court should adopt the headquarters approach because it would create a bright-line, easily administrable jurisdictional rule.  As a preliminary matter, the multifactor approach has been in use for nearly five decades by every circuit but the Seventh, and has generally produced consistent results.  Moreover, this approach is not the first or only complex and fact-bound jurisdictional issue:  similarly complicated inquires are required to determine citizenship/domicile, personal jurisdiction, standing, and CAFA jurisdiction.  Nonetheless, even if simplicity were an overriding goal for jurisdictional issues, the headquarters test does not achieve that goal. Many corporations have multiple headquarters, or multiple offices that could be described as headquarters.  Thus, Hertz’s proposal simply supplants the uncertainty around the principal place of business with uncertainties about how to define “headquarters.”