Hertz Corporation v. Friend

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Argued November 10, 2009. Decided February 23, 2010.

Authorship: Sina Kian of Stanford Law School

Docket: 08-1107

Issue: Whether the location of a nationwide corporation’s headquarters can be considered for purposes of determining principal place of business for diversity jurisdiction citizenship under 28 U.S.C. § 1332.

Contents

Briefs and Documents

Decision

VACATED and REMANDED in a 9-0 opinion. Justice Breyer wrote for the Court. (February 23, 2010)

Oral Argument

Transcript (November 10, 2009)

Merits Briefs

Amicus Briefs

Certiorari-Stage Documents

Opinion Recap

Sina Kian originally wrote the following for SCOTUSblog:

Although the jurisdictional question posed by 28 U.S.C. § 1332(c)(1) seems simple – where is a corporation’s principal place of business – answering the question was not, an inconsonance that gave rise to the Court’s decision in Hertz Corp. v. Friend. Prior to the Court's holding, the courts of appeals had adduced at least three different tests to answer this question, and even those employing the same test applied it differently. Today, the Court resolved the issue, unanimously holding that for purposes of federal diversity jurisdiction, a corporation’s principal place of business is where its “high level officers direct, control, and coordinate the corporation’s activities.”

The Court adopted this approach for three reasons. First, the text leans in that direction. The word “place” is singular, implying a single place where the “principal”—i.e., main, prominent, or leading—business is occurring. Moreover, the phrase “the State where it has its principal place of business” implies that courts should look for a place within a state, rather than activities taking place throughout the state. These textual cues all point to a headquarters test, which turns on the location of the corporation’s “brain” rather than on identifying the state that hosts the largest share of the corporation’s activities. This reasoning, alongside the Court’s third rationale—that the legislative history offers support for an approach sensitive to simplicity—allowed the Court to default to its second rationale, which comes across as its greatest concern: “administrative simplicity is a major virtue in a jurisdictional statute,” mainly because it will help enhance predictability and avoid costly procedural determinations.

The sparse media attention afforded to the decision should not obscure its significance. As a practical matter, Hertz v. Friend fundamentally changes how lower courts will determine corporate citizenship in diversity cases in every circuit but the Seventh, the only circuit that was already employing a nerve center test. For example, before this ruling, many corporations had their largest operations in California by virtue of the state’s size. As a result, they were deemed citizens of the Golden State and thus potentially subject to California’s laws and regulations, as applied by California’s state courts. Yesterday’s decision alters that dynamic.

The Court’s opinion, authored by Justice Breyer, reflects on five decades of judicial experience with the principal place of business clause. The story began in 1958, when Congress amended the diversity statute to include that “a corporation shall be deemed to be a citizen . . . of the State where it has its principal place of business.” 28 U.S.C. §1332(c)(1). The approaches subsequently taken by the courts of appeals fell into roughly three camps: the “nerve center” test (Seventh Circuit), the “center of activity” test (Third Circuit), and the “totality of corporate activity” test (the Fifth, Sixth, Eighth, Ninth, Tenth, and Eleventh Circuits). In other words, as Justice Breyer wrote, “the phrase . . . has proved more difficult to apply than its originators likely expected.”

In this thicket of options, Hertz offered the simpler test: the corporation’s principal place of business is in the state that hosts its headquarters. But if Hertz agreed with Frédéric Chopin that “[s]implicity is the final achievement,” the respondents preferred H.L. Mencken’s philosophy, that “[f]or every problem there is a solution which is simple, clean and wrong.” They argued for a totality test that would better accommodate the history and policies underlying diversity jurisdiction.

In siding with Hertz, the Court rejected “an unmediated judicial effort to apply the statutory phrase . . . in light of the general purpose of diversity jurisdiction.” Such a quixotic effort, Justice Breyer wrote, “seems doomed to failure,” as courts will never be able to determine with certainty whether and to what extent a specific corporation will be subject to local prejudice.

At the same time, the Court did not abandon that effort entirely, and thus declined to adopt a test that would rely solely on the location of the headquarters. As Justice Breyer explained, the nerve center will in practice “normally be the place where the corporation maintains its headquarters,” but the sine qua non of a nerve center is that it is “actual center of direction, control and coordination.” (emphasis added). Thus, empty headquarter buildings will not suffice if the opposing party can show that decisions are made elsewhere. This compromise indicates that in the world of aphorisms about simplicity, the Court in Hertz v. Friend agreed with Albert Einstein: “Everything should be made as simple as possible, but not simpler.”

Oral Argument Recap

Sina Kian originally wrote the following for SCOTUSblog:

On Tuesday, November 10, the Court heard oral arguments in Hertz Corp. v. Friend. The case arose from a dispute over diversity jurisdiction, and the question presented was simple, or at least simple to state: how should courts determine a nationwide corporation’s “principal place of business”?

Justice Sotomayor—the most active Justice during this argument—set the tone by acknowledging that any rule was susceptible to reductio ad absurdum arguments: “the problem with every test is that you can find an exception that makes the application ridiculous.” Throughout the argument, several Justices voiced preliminary agreement that any rule should operate as a rebuttable presumption. But that left the question: what should be the default rule?

Arguing for Hertz Corp., Sri Srinivasan advocated for a headquarters test, which – as the name would suggest – locates the principal place of business in the State that hosts the corporation’s headquarters. Arguing for the respondents, Todd Schneider defended a multifactor test that focuses, in particular, on the primary location of a corporation’s “people and property.”

Srinivasan focused on the benefits of a simpler, more administrable test and emphasized the costs that would result if complex inquiries were necessary in each case to determine subject matter jurisdiction. This strategy could afford to settle for a draw on arguments about statutory construction and Congressional intent, thus allowing the Court to resort to a policy analysis and, presumably, the simplest rule.

Schneider, by contrast, generally focused on Congressional intent. The term “principal place of business” was plucked from the bankruptcy context, where most courts had employed a multifactor approach. The multifactor test is also more resistant to corporate efforts to game the system by strategically locating their headquarters, a general concern that explains why Section 1332 looks to the principal place of business in addition to the place of incorporation. This strategy placed administrability on the back burner to emphasize its portrayal of Hertz as advocating a change inconsistent with Congress’s intentions.

Both advocates’ narratives were pushed and peppered with primarily policy concerns. Justice Scalia was perhaps an exception to this focus: he stressed that if Congress wanted a multifactor approach, “it would have said, the principal State in which business is done.” Although each attorney received roughly the same number of comments and questions (approximately thirty-five for Hertz, compared with approximately thirty-seven for Friend), the Court seemed more anxious about the multifactor test. In particular, the primary concern about Hertz’s position – raised by Justice Sotomayor – dealt with how to define “headquarters,” whereas the consternation about a multifactor test ran a bit deeper. Justice Sotomayor noted confusion among the lower courts, while Justices Scalia and Ginsburg seemed dismayed that the multifactor test produces an outcome in which many national corporations are considered to be citizens of California just by virtue of the state’s size. The Chief Justice echoed this concern, noting that it would result in a quintessentially Washington corporation like Starbucks being deemed a citizen of California. Justice Ginsburg also emphasized that the respondents’ multifactor test is significantly more complex – which, as Justices Kennedy and Stevens noted, creates problems for smaller litigants.

Notably, the Court did not appear to have any concerns about its jurisdiction to adjudicate the matter under 28 U.S.C. §1453, a matter raised in petitioner’s brief.

Argument Preview

Sina Kian originally wrote the following for SCOTUSblog:

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.”

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