When forced to litigate in the U.S., many businesses – especially multinational ones – prefer to be in federal rather than state court. The U.S. Supreme Court just made it a bit easier to fulfill that desire.

Most construction disputes are contract cases not involving federal law, so a federal court will only have jurisdiction if the suit involves more than $75,000 and is between citizens of different U.S. states. The key question is usually: where is a corporation a “citizen” for the purpose of determining whether such “diversity of citizenship” exists?

By statute, a corporation is a citizen of both the state (1) where it is incorporated, and (2) where it maintains its “principal place of business.” While the state of incorporation is obvious, for nearly 60 years, federal courts have struggled to define a corporation’s principal place of business. Last month, the United States Supreme Court reconciled divergent tests and clarified this at last. In Hertz Corp. v. Friend, No. 08-1107, slip op. (Feb. 23, 2010), the Court held that a corporation’s principal place of business is just one place, its headquarters. By limiting corporations to one static principal place of business, Hertz increases the number of states where a corporation is not a citizen, meaning it increases the likelihood of getting access to the federal courts in a particular case.

For 60 years, the Circuit Courts of Appeal have been split over where a corporation had its principal place of business. Some circuits held it was the state containing the corporation’s “nerve center.” Others held it was any state where the corporation conducted significant activities. Thus, in the Ninth Circuit a corporation had a principal place of business wherever the corporation conducted “significantly larger” or “substantially predominant” operations. Under such fluid standards, corporations with a presence in all 50 states might be considered a citizen of most or even all 50 states, effectively precluding access to federal courts. What’s worse, the fluidity of the tests made it impossible to predict the outcome from one case to the next.

In Hertz v. Friend, Hertz was sued by California residents in state court. Hertz removed to federal court, asserting it was not a California citizen. The lower court concluded Hertz’s principal place of business was California under the Ninth Circuit test, Hertz was a California citizen, and thus there was no jurisdiction in federal court. The Ninth Circuit agreed.

The Supreme Court reversed, concluding that a corporation’s principal place of business is best interpreted as “the place where a corporation’s officers direct, control, and coordinate the corporation’s activities.” The Court noted in most cases, this should be the state containing the corporate headquarters, “provided that the headquarters is the actual center of direction, control, and coordination.” Id. Hertz’s headquarters is in New Jersey, so it was not a citizen of California and the federal court thus had jurisdiction.

With this relatively simple test for determining principal place of business, Hertz reduces the likelihood that a corporation will be deemed a citizen of more than two states, and makes predictable what those states are. So corporations should have relatively predictable access to federal courts in the remaining 48 states.

Michael McNamara
Andrew Ness

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