A little-noticed U.S. Supreme Court decision from this year will have an important effect on the work of our Illinois wage and hour class action lawyers. In Hertz Corp. v. Friend et al., No. 08-1107, __ S. Ct. __ (Feb. 23, 2010), the court ruled that the “principal place of business” test for a corporation’s citizenship refers to the place where the corporation’s high-level officers direct, control and coordinate its activities. This clarifies the law and resolves a number of discrepancies among lower courts around the country. It also overturns a Ninth U.S. Circuit Court of Appeals decision denying that federal courts have diversity jurisdiction in a proposed class-action wage-and-hour case brought by employees of Hertz Corporation.
Melinda Friend and John Nhieu sued Hertz Corp. for alleged violations of California state wage laws, and sought to certify a class of California plaintiffs with similar grievances. Hertz sought to remove the case to federal court under the Class Action Fairness Act, which allows cases to be moved when they have diverse citizenship and a dispute of more than $5 million. The plaintiffs argued that Hertz was a California citizen under Ninth Circuit precedent, which held that corporations’ “principal place of business” is where their business activity is “significantly larger” or “substantially predominates.” For Hertz, they argued, that was California because the company had the most offices and business there.
Hertz, which is incorporated in Delaware, argued that its “principal place of business” was New Jersey, where its corporate headquarters is found. It conceded that it had more offices in California than in any other state, but pointed out that California is just one of 44 states where it operates and accounts for far less than 50% of its revenue, rentals, employees or locations. Nonetheless, the district court followed Ninth Circuit precedent and sent the case back to state court. Hertz appealed, but the Ninth Circuit affirmed the ruling. The Supreme Court granted certiorari.
Writing for the majority, Justice Breyer started by dismissing a jurisdictional argument raised by the plaintiffs, who claimed that the Supreme Court’s jurisdiction was improper because the law allowing Hertz to appeal a remand order mentions only courts of appeal. However, other federal statutes give the court authority, the opinion said, and “We normally do not read statutory silence as implicitly modifying or limiting Supreme Court jurisdiction that another statute specifically grants.”
Turning to the meat of the case, the justices noted that the “principal place of business” language arose in response to an overload of diversity cases in federal court, as well as concerns about abuses of diversity jurisdiction. To resolve that, Congress allowed corporations to claim citizenship where they are incorporated, “and of the State where it has its principal place of business.” But this has been difficult to apply, the opinion said, resulting in splits across the circuits. To resolve it, the justices reviewed the appeals courts’ interpretations and chose a popular “nerve center” test that assigns citizenship according to where the corporation’s business is directed and controlled, as applied in cases like Wisconsin Knife Works v. National Metal Crafters, 781 F. 2d 1280, 1282 (CA7 1986).
The justices wrote that the “nerve center” will typically but not always be a headquarters, where officers and directors do business and where the public recognizes the company to be based. This helps avoid some of the flaws of approaches like the Ninth Circuit’s, they wrote, which sometimes confuse the company’s presence in a state with the state itself. For example, a rule that measures the amount of business activity in the state could grant California citizenship to many corporations, simply because California is the largest state by population. It is also a simple rule, which benefits the courts as well as corporations. This may occasionally produce odd situations, the opinion noted, as when directors and officers are housed in a different state from that where the bulk of actual business takes place. But this is a price of simplicity. Given that rule, the justices wrote, Hertz is entitled to diversity jurisdiction because it is uncontested that its “nerve center” is in New Jersey, not California. It vacated the Ninth Circuit’s ruling and returned the case to trial court.