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Pick a Standard: How Will Employers Remove Cases to Federal Court?

On November 10, 2009, the United States Supreme Court heard oral arguments in Hertz Corp. v. Friend.  The case seeks to determine the appropriate standard for establishing a company’s place of business for purposes of federal diversity jurisdiction. For employers, this case establishes the parameters for removal of certain class-action lawsuits brought by employees in plaintiff-friendly state courts to federal court, a usually more preferable venue.

In this case the employer, a well known car rental company, is incorporated in Delaware with its corporate headquarters in based in New Jersey. California has the highest percentage of the company’s rental facilities, vehicle transactions, revenues generated and employees—significantly ahead of second-place Florida.  Hertz operates in forty-four (44) states.

Employees filed a class action in California state court against the company alleging that it had violated state wage and hour laws. The class was limited to employees in California.  Hertz then removed the action to federal district court pursuant to the Class Action Fairness Act (CAFA), which provides that class actions may be removed to federal court when there is “minimal diversity” and an amount in controversy over $5 million.

The plaintiffs sought to remand the case back to state court claiming that the company was a citizen of California and therefore not diverse from any plaintiff, as required for minimal diversity. The question then arose: where is Hertz’s principal place of business?

The district court applied the 9th U.S. Circuit Court of Appeals “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.” The district court concluded that, using this test, California was Hertz’s principal place of business, and it sent the case back to state court. The 9th Circuit affirmed, and Hertz filed a petition for certiorari, which the Supreme Court granted on June 8, 2009.

In seeking high court review, Hertz noted that the federal circuit courts of appeal are currently using four different tests for determining a corporation’s principal place of business. 

  • The 9th Circuit’s “place of operations” standard
  • The 7th Circuit uses a “nerve center” test, which exclusively emphasizes the location of the “corporate brain”—ordinarily defined as the place “where the corporation has its headquarters.”
  • The 3rd Circuit looks at the corporation’s center of activity, and
  • Several Circuits analyze the totality of the corporation’s activities (the 5th, 6th, 8th, 10th, and 11th Circuits).

At oral arguments, Hertz argued for the “nerve center test” based on the location of a company’s headquarters, 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 and it also preserves diversity jurisdiction in all but a company’s headquarters state.  Hertz’ attorney 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. 

In contrast, the employees defended the 9th Circuit test as a fairer assessment of where a company’s “people and property are.”  Counsel for the employees also argued that the 9th Circuit test 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.

During the proceeding, Justice Ruth Bader Ginsburg stated that under the 9th Circuit test, “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.”  Justice Scalia stressed that if Congress wanted a multifactor approach, “it would have said, the principal State in which business is done.”  Though most of the court appeared to accept some version of a headquarters standard, several justices appeared concerned about the possibility that it might result in abuse by corporations seeking to avoid state courts. Justice Sonia Sotomayor suggested that “there has to be something more to the test. . . .There has to be some form of activity in that place.” She suggested a compromise under which 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.”

This is an important case will have a major impact on where class-action litigation will occur in the future.  Florida leads the nation in wage and hour collective action litigation brought in Federal court.  Look for  an update on the decision after the Supreme Court decides the matter.

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