Welcome to Federal Court

February 23, 2010 11:45 AM

The U.S. Supreme Court has ruled unanimously that a corporation's principal place of business is where the executive's work (HQ), not where the company does business. The practical effect of this ruling is that it will be harder to sue corporations in state courts, which are often more plaintiff-friendly than federal courts. For example, in this case Hertz employees sued the company in California, where they worked, for unpaid overtime and vacation wages. The company tried to move the case to federal court, but it was returned to state court on the basis that most of the company's business was done in California. The 9th Circuit Court of Appeals affirmed. Justice Breyer, writing for the court, reversed. The Court's decision (pdf format) essentially holds that a company's headquarters is where it is located.

This rule is easy for judges to apply, but the result is that companies sued in any state other than the one where they have put their headquarters may "remove" those lawsuits into federal court.

Here are links to the briefs and argument transcript for this decision.

posted by bearwife (45 comments total)

Does this mean we'll see credit card executives having to move to Delaware if the CC company wants to be continue to claim that it is located in Delaware?
posted by RichardP at 11:59 AM on February 23, 2010 [5 favorites]

The "nerve center" dea is nothing new.
posted by Inspector.Gadget at 12:03 PM on February 23, 2010

So to go after Halliburton for something, you've got to go to Dubai?
posted by Kirth Gerson at 12:03 PM on February 23, 2010 [2 favorites]

For example, in this case Hertz employees sued the company in California, where they worked, for unpaid overtime and vacation wages. The company tried to move the case to federal court, but it was returned to state court on the basis that most of the company's business was done in California.

At first I thought this was about suing companies in any state that they do business in, but it looks like this will mostly affect big states like California. From the wiki recap:

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

So while this ruling may help some companies game the system by purposely locating their headquarters in legally friendly states, the other option of using a more complicated test isn't exactly perfect either.
posted by burnmp3s at 12:05 PM on February 23, 2010 [1 favorite]

And a unanimous ruling no less. Not much in the way of outragefilter here IMO...
posted by jckll at 12:06 PM on February 23, 2010 [2 favorites]

RichardP, you misunderstand the concept of "removal." "Removal" is a legal maneuver where a defendant sued in state court can request that the case be transferred to federal court in the same jurisdiction. Moving a case from jurisdiction to jurisdiction, whether between or across the federal/state judicial boundary, is possible, but requires a different motion and is an entirely different analysis.

The practical effect, as bearwife indicates, is that this makes it harder to sue national corporations in state court, but it does not in any way prevent a corporation from being sued anywhere it has sufficient minimum contacts for a court to exert personal jurisdiction over it. Plaintiffs may not be able to stick to reputedly plaintiff-friendly state courts, but they won't have to travel any more than they already do.
posted by valkyryn at 12:09 PM on February 23, 2010 [1 favorite]

Will this have any effect on companies who do their business in the US while their "HQ" is a mailbox in the Caymans?
posted by hamida2242 at 12:16 PM on February 23, 2010

Will this have any effect on companies who do their business in the US while their "HQ" is a mailbox in the Caymans?

The ruling states that the HQ is where they're running the company from, not where they're legally incorporated, or where the business happens to be done. If you're incorporated in Delaware, running a store in Texas, but your national HQ is in Idaho, then you're considered to be in the jurisdiction of Idaho.
posted by explosion at 12:25 PM on February 23, 2010

Fortunately federal judicial appointments are completely apolitical and there's been no elite mobilization affecting corporate campaign giving so even if there were policy oriented appointment strategies and more cases were moved to federal court, the judiciary would remain independant.
Naw, I'm just horseshittin' ya.
posted by Smedleyman at 12:30 PM on February 23, 2010 [2 favorites]

If you're incorporated in Delaware, running a store in Texas, but your national HQ is in Idaho, then you're considered to be in the jurisdiction of Idaho...

...and Delaware, but not Texas.

"a corporation shall be deemed to be a citizen of any State by which it has been incorporated and of the State where it has its principal place of business." - 28 U.S.C. 1332(c)(1)
posted by Pollomacho at 12:39 PM on February 23, 2010

Yay! Yet more corporatist policy being created by activist judges. Why don't they just declare all US Citizens to be "customers" instead, and strip us of voting rights to let the corporate persons stop having to masquerade behind lobbyists and such? Cut out the middle man, help the corportations make more money, and keep the politicians elected. That's what the point is, isn't it?
posted by hippybear at 12:41 PM on February 23, 2010 [1 favorite]

The key term here from established judicial precedent is "nerve center"
posted by jefficator at 12:41 PM on February 23, 2010

Hamida2242, probably not because that is not the HQ in the sense indicated in this opinion; it is their place of incorporation, which can be different (and frequently is).

I'm finding little to be upset about in this ruling. As valkyryn says, the plaintiffs here are still able to sue in California where they work and where the alleged violation was, it's not like they have to run across the country to Jersey now. The defendant can still try to transfer venues but it would not likely succeed if indeed it was a California-centric problem (and if it's not, they why SHOULD the action be based in California necessarily?)

When a case is in federal court on diversity jurisdiction (as it is here), the courts still apply state law, the same state law that would be applied if the case were brought in state court. I'm not entirely sure where bearwife gets the idea that state courts are more "plaintiff friendly" than federal courts, which is stated without support. A federal court in California draws from the same jury pool - California citizens - that a state court would draw from. Practically, the federal jury pool is a little larger than any given county's court since the districts are so much larger. You can argue about the relative competence and intelligence of state court vs. federal court judges but again, that is something where it would seem you'd like some evidence instead of just rhetoric.

Now, if you want to argue that a California state court is more "friendly" towards local plaintiffs than the relevant federal court, you might be right. But this hometown bias is one of the very justifications for having a federal court system in the first place. There are fairness arguments to be made on both sides; not every defendant from across the country is a big bad corporation, and the federal courts should have a veneer of neutrality as between parties from different states.

Again the federal court here will apply exactly the same law and, assuming they don't get transferred across the country, will draw from largely the same jury pool as state court would. Obviously the plaintiffs here felt pretty strongly about staying in state court, though; it would be cool if any experienced employment- or class-action-lawyers could enlighten us as to why.
posted by rkent at 12:42 PM on February 23, 2010 [2 favorites]

People getting confused about "jurisdiction" vs "citizenship," and about the issue of incorporation vs headquarters, should read about Diversity Jurisdiction in the federal courts, which is the actual underlying issue here.
posted by rkent at 12:46 PM on February 23, 2010

Actually, unless I misunderstand, valkyryn, it was you who were misunderstanding RichardP's misunderstanding, which was that even with today's ruling about a corporation's nerve center, a corporation is still also a citizen in its state of incorporation, which in many cases is Delaware. So the answer to RichardP's question is no, probably not. As long as a corporation is incorporated in Delaware, as many credit card (and other) companies are, it will still be deemed a citizen of Delaware in addition to being a citizen of wherever the nerve center is. See Pollomacho.

chinston, J., concurring.
posted by chinston at 12:50 PM on February 23, 2010

Executives work?
posted by UbuRoivas at 12:51 PM on February 23, 2010 [3 favorites]

hippybear, I don't think this is the place to be waving the "activist judge" flag. Any decision by the Supreme Court can be read as being "activist," since they are actually making new law. Moreover, this case was about deciding between legal tests, and as I read it the court applied the nerve center test because it is the easiest to apply. Where's the rub there?
posted by craven_morhead at 1:10 PM on February 23, 2010

I guess plaintiffs as a whole could be worse off now, but it's not obvious to me that this will be the case. Let's say an employee in Hertz's New Jersey headquarters wanted to sue a Hertz executive for sexual harassment. Under the Ninth Circuit's ruling, she couldn't sue in NJ state court because Hertz is a citizen of CA (set aside where Hertz is incorporated). Under the Supreme Court's ruling, she can sue in NJ state court. So there's a plaintiff who gains from this ruling (from the standpoint of wanting to be able to sue in state court).

In any event, "plaintiff-friendly" does not mean "better." I think federal courts are much better at dispensing rational and fair results than state courts, but that's a whole other debate.
posted by brain_drain at 1:12 PM on February 23, 2010 [1 favorite]

Correction: I should have said the employee wanted to sue Hertz for sexual harassment by a Hertz executive.
posted by brain_drain at 1:14 PM on February 23, 2010

rkent wrote: (and if it's not, they why SHOULD the action be based in California necessarily?)

Because that's where the plaintiffs were employed?

If I go buy something from a Best Buy here in Tulsa and it turns out to be defective or whatever and they refuse to abide by their return policy, I damn well ought to be able to sue them here in Tulsa. That's where I was wronged.

Whether it stays in state court or is removed to federal court doesn't matter much to me.

My understanding was that in cases like that, a suit could be brought either in the jurisdiction where the tort took place, the corporation's home state, or my home state (if the corporation was subject to the jurisdiction of my home state).

IMO, if a business does not want to be subject to a jurisdiction other than the one where they are incorporated or have their principal place of business, they ought not do business in those locations whose jurisdiction they desire not to be subject to. You don't like how Louisiana courts (a random example) work, don't do business in Louisiana. Seems pretty simple to me.
posted by wierdo at 1:18 PM on February 23, 2010

@ Pollomacho:

"a corporation shall be deemed to be a citizen

I think I found the problem
posted by hamida2242 at 1:21 PM on February 23, 2010 [4 favorites]

I guess plaintiffs as a whole could be worse off now, but it's not obvious to me that this will be the case. Let's say an employee in Hertz's New Jersey headquarters wanted to sue a Hertz executive for sexual harassment. Under the Ninth Circuit's ruling, she couldn't sue in NJ state court because Hertz is a citizen of CA (set aside where Hertz is incorporated). Under the Supreme Court's ruling, she can sue in NJ state court. So there's a plaintiff who gains from this ruling (from the standpoint of wanting to be able to sue in state court).

No. Diversity jurisdiction is an issue for federal courts only; the only impact it has on state courts is that, if there is complete diversity between the parties, a case may be removed from state court to a federal court in the same area.

To address your specific hypothetical: Plaintiff P working in the NJ headquarters of Hertz can sue Hertz in NJ state court if there is personal jurisdiction over Hertz in that state. Since it maintains its HQ there (and moreover, since the alleged wrong took place there), the answer is yes and P can sue in state court. Assuming she is also a citizen of NJ (i.e., does not commute from NY/PA/CT), they are blocked from removing to federal court because it is a state law issue and there is no diversity of citizenship.
posted by rkent at 1:23 PM on February 23, 2010

Wow, time to buy commercial real estate in Delaware.
posted by dacoit at 1:27 PM on February 23, 2010

Because that's where the plaintiffs were employed?

Yes, but they were applying for class action status, which frequently implicates parties and interests across the country.

In your particular products liability example, of course I would agree that you should be able to address an alleged wrong in the state where it occurred (and in fact this is the rule with personal jurisdiction in the US, unless a particular state should omit that from their jurisdiction statute).

But, what if you decided that the product you were upset about was inherently defective as designed, and you wanted to start a class action for everyone in the US who had also bought one? This would implicate a bigger set of interests; there would need to be some investigation of the factories where it was designed and built, and it might turn out that there were many more affected people in a different venue. Would it not be arguably more fair to resolve the dispute in one of those locations, even if it's less convenient for you personally?

Anyway, I don't want to babysit this thread, I just think bearwife is making a lot out of a relatively ho-hum civil procedure holding. If there is some solid evidence that this would impose unfair burdens on plaintiffs in general, I'm open to being convinced, but so far that seems to be a matter of bare assertion.

We're talking here about a choice between two entirely competent court systems, not whether a suit can be brought at all.
posted by rkent at 1:30 PM on February 23, 2010 [2 favorites]

rkent, that's my point, although I wasn't clear about it -- I was using "couldn't sue in state court" as shorthand for "would likely have her state case removed to federal court." Plaintiffs who file lawsuits in state court want to avoid removal to federal court. In my hypothetical, under the 9th Circuit's ruling, her lawsuit likely would be removed to state court, whereas under the S.Ct. ruling, it couldn't be removed. So she's better off under the S.Ct. ruling.
posted by brain_drain at 1:34 PM on February 23, 2010

That was responding to rkent's 4:23 comment, not the one right before mine.
posted by brain_drain at 1:35 PM on February 23, 2010

correction again: her lawsuit likely would be removed to federal court - argh! enough civ pro today!
posted by brain_drain at 1:36 PM on February 23, 2010

A company I used to work for has its HQ in Texas but its president works in Philadelphia, mostly telecommuting, as I understand things. It's not a big company; they just happen to have hired a president who works in Philadelphia. One of my friends who works there is trying to figure out what that means in terms of appropriate venue as a matter of theoretical interest.

This isn't a question that would have come up even ten years ago, but technology has changed the way people work enough that physical presence doesn't limit workers the way it used to. It makes you wonder what weirdnesses the decision will generate for companies that don't have a location structure of HQ and subsidiary offices.
posted by immlass at 1:43 PM on February 23, 2010 [1 favorite]

hippybear, I don't think this is the place to be waving the "activist judge" flag. Any decision by the Supreme Court can be read as being "activist," since they are actually making new law. Moreover, this case was about deciding between legal tests, and as I read it the court applied the nerve center test because it is the easiest to apply. Where's the rub there?

My understanding, although perhaps without good basis, has always been that it is more difficult to get matters brought to trial in the federal system than in the state systems, for a variety of reasons. And it seems to me, if this is true, that changing the trial venues from state to federal courts is a measure designed specifically to keep private citizens from pursuing legal matters against corporations through lack of access, lack of responsiveness, higher barriers of entry, etc.

It's not like there are huge numbers of corporations seeking to sue private citizens. But without the power of the courts, there is no power that individuals have against corporate wrongdoing. And even those avenues are being cut off, it seems.

Perhaps "activist judge" sounds wrong to you, but I don't see much happening in the avenues of power in favor of the individual in the face of encroaching corporate power these days.
posted by hippybear at 1:54 PM on February 23, 2010

We're talking here about a choice between two entirely competent court systems, not whether a suit can be brought at all.

Conventional wisdom is that federal courts are, on the whole, much more competent than state court systems (except for the federal courts' ridiculous backlog of cases and the resulting delays). The federal judges are "better," in that they tend to have a more impressive pedigree before becoming judges. A gig as a federal judge is certainly more desirable than a gig as a state judge, so it's going to draw from a more talented pool of aspirants. Federal judges are political appointees, yes, but so are many state judges. And the state judges who are elected come with all the baggage that other elected officials possess: a need to pander to the voting public for reelection purposes, and capture by various interests (political parties, any group with money...) supporting them for reelection.

Just look back at the history of which plaintiffs wanted to end up in federal courts vs. state courts. Civil rights plaintiffs trusted federal courts more than local (read: racist) courts. A victim of domestic violence wanted to wind up in federal court, because it was much more likely the state's local judge played football with her husband in high school.

The dichotomy between federal and state courts isn't about political parties. It's more about elitist-vs.-populist. If you thought the law was on your side, you'd opt for the elites. If you thought local outrage (especially mistrust of "outsiders") benefited you, you might try to stay in state courts.
posted by aswego at 1:56 PM on February 23, 2010 [2 favorites]

Sorry I didn't highlight more clearly what is significant here -- the decision is particularly significant for class actions, as the second link in the post points out.
posted by bearwife at 1:56 PM on February 23, 2010

Without having read the whole decision, just the news recaps, it looks perfectly logical and would seem to be the right decision.
posted by caddis at 2:22 PM on February 23, 2010 [1 favorite]

Given that many execs live in Connecticut, California and New York, which seem generally more citizen friendly than Delaware, is there no way this should be considered a win?
posted by rr at 2:22 PM on February 23, 2010 [1 favorite]

If this means more cases go to Fed court, it's kind of a boon to my state (California) where there's a bit of a budget crisis going on that is apparently hurting our state court system. Less cases against corporations in state court will free up of a good chunk of the docket.
posted by jabberjaw at 2:33 PM on February 23, 2010 [1 favorite]

“Would it not be arguably more fair to resolve the dispute in one of those locations, even if it's less convenient for you personally?”
I’ll cede that it seems a lot easier and more efficient to just consider a company’s HQ to be their location.
(And I'll cede any other factual, legal or omission errors here, just sort of thumbnailing. I'm not a lawyer)

But the class action was a group of Californian Hertz employees. There are state class actions, no? (I'm not sure this was or wasn't tho) And in terms of fair, there’s that whole ‘the rich and poor are equally barred from sleeping under public bridges’ thing going on. It’s easier for people to bring a class action lawsuit, share costs, all that.

I mean, ok, you don’t want a court in one state to be biased over some other state. Ok. But if Joe Blow works in California, and the company he works for does business in California, and Blow and a group of his fellow employees file a lawsuit in California, why does it matter where the company’s HQ is?

The beef for me (IANAL) seems to be that if we’re going to treat corporations as citizens, then it ‘lives’ wherever its effects are most felt. Otherwise, and this happens all the time, it can make paper headquarters wherever it likes, and in any number regardless of how many widgets it makes or sells or cars it rents somewhere else.

I mean “We conclude that the phrase 'principal place of business' refers to the place where the corporation's high level officers direct, control and coordinate the corporation's activities"
Ok – which high level officers? Which line of control? Development? Sales? Production? Which activities?
Back to square one there with ‘principal business.’ So why not follow the money? Most of Hertz (or whoever's) actual money is made here, so that's where they 'live.'

And since corporations don’t actually have a physical body, that’s a big grant in mobility over someone who has to lug their carcass to another state to be a resident (wealthy folks excepted).
Just looks to me – ‘looks’ and again IANAL – like the supreme court doing more ass kissing for corporate benefit. And it’s not like they haven’t been doing a bunch of that.
posted by Smedleyman at 3:32 PM on February 23, 2010 [1 favorite]

I mean “We conclude that the phrase 'principal place of business' refers to the place where the corporation's high level officers direct, control and coordinate the corporation's activities" Ok – which high level officers? Which line of control? Development? Sales? Production? Which activities? ... Just looks to me ... like the supreme court doing more ass kissing for corporate benefit. And it’s not like they haven’t been doing a bunch of that.

Meaning no offense, perhaps you should read the entire opinion. The reason they chose the "nerve center" rule (over a rule more along the lines of "where its effects are most felt") was specifically to address exactly the ambiguities you raise - it is thought that the "nerve center" approach is more straightforward since typically a company has a well publicized HQ and a well defined team of high-level executives. If you want to talk about "effects" those are much more diffuse and ill-defined.

And, I'd just like to reemphasize:

But if Joe Blow works in California, and the company he works for does business in California, and Blow and a group of his fellow employees file a lawsuit in California, why does it matter where the company’s HQ is?

Nothing in this opinion prevents anyone from litigating in California. The sole impact is on whether the case proceeds in the California state court system or the Federal Court system, located in relevant part in California. And yes, both systems have class actions (sorry if the bit about transferring venue was a derail; there was nothing about venue transfer in this case, I was just pointing out as an aside that sometimes even that is appropriate, depending on circumstances).
posted by rkent at 4:18 PM on February 23, 2010

So, after reading this discussion, it sounds like it should the original post should be modified to read
This rule is easy for judges to apply, but the result is that companies sued in any state other than the one where they have put their headquarters may "remove" those lawsuits into federal court if the case does not deal with an incident/plaintiffs located solely in that state

Does this sound correct, or are there more subtleties that I'm missing?
posted by jacalata at 5:33 PM on February 23, 2010

Plaintiff lawyers want to be in state court because (1) they have far more influence over state trial court judges than federal trial court judges due to differences in their typical pre-bench careers and the manner in which they gain (and, in the case of state court judges, retain), their seats and (2) they can typically benefit from small(er) counties and other jurisdictions from which to draw jurors who are going to be plaintiff-friendly, versus the bigger federal jury pool.

In California, for example, judges are either elected in contested elections in which plaintiff lawyers are the key donors, or are appointed by the Governor (not without input from the same trial lawyers), and all judges (initially appointed or elected) face re-election, and in the money counties rare is the judge who could be re-elected if he draws concerted plaintiff lawyer oppositions. By contrast, Federal judges are recommended to the President by one of the two U.S. Senators typically with the sub-advice of a very distinguished judicial selection panel that tries hard to be apolitical. State court judges are typically from a significantly lower tier of law school and less competitive legal employment than federal judges, who are drawn from the absolute top tier of most elite lawyers. With lifetime tenure, federal judges can't be intimidated by trial lawyers, and often have no social connection to them, either, not coming from the same grimy-courthouse-hallway background.

To continue the example of California, plaintiff lawyers HATE the big multi-county jury pools in federal court. Sue in San Francisco state court and a defendant is lucky to have one juror in 12 who doesn't hate (or fail to understand) basic free market or assumption of risk principles. Sue in San Francisco but have to accept federal court, and all of a sudden a bunch of business owners and executives and military veterans from Marin and San Mateo (conservative by SF standards) get into your jury pool.
posted by MattD at 5:53 PM on February 23, 2010 [1 favorite]

it is more difficult to get matters brought to trial in the federal system than in the state systems

Filing in federal court has been cheaper in my limited experience. Much nicer courtrooms, too. (My experience is as a plaintiff in civil rights litigation in San Francisco, CA).
posted by ryanrs at 6:04 PM on February 23, 2010

jacalata: More like "The rule is easy to apply, and the result is that a corporation can remove to federal court unless sued in a state where (1) it is incorporated, or (2) it has its 'nerve center' / HQ, by a plaintiff who is also a citizen of that state." Essentially one or two states where they are "citizens" and cannot remove on the basis of diversity, whereas before there may have been arguments to include additional states for corporate "citizenship."

MattD: thanks for the info, that's the kind of thing I was curious about.
posted by rkent at 7:09 PM on February 23, 2010

The dichotomy between federal and state courts isn't about political parties. It's more about elitist-vs.-populist. If you thought the law was on your side, you'd opt for the elites. If you thought local outrage (especially mistrust of "outsiders") benefited you, you might try to stay in state courts.

In my experience, federal judges tend to maintain better control over their dockets -- they move cases along quickly (federal judges will dismiss a case for lack of prosecution much more quickly than state judges will). Attorneys for corporations feel more "in control" in federal court because the federal courts are simply more orderly and predictable. State courts can be complete madhouses, where trials are continued over and over, trial judges make seemingly arbitrary rulings, and the case can be dragged on forever with little oversight by the judge. The quickly, orderly procedures of federal courts tend to take away from plaintiffs the threat of tying a defendant up in court for many years.
posted by jayder at 7:28 PM on February 23, 2010

“A corporation is an artificial being, invisible, intangible, and existing only in contemplation of law. Being the mere creature of law, it possesses only those properties which the charter of its creation confers upon it.” -- Justice John Marshall, Dartmouth College v. Woodward, 1819

Those were the days.
posted by blucevalo at 7:37 PM on February 23, 2010 [1 favorite]

I'm going to go out on a limb and say that this isn't going to be on the bar exam today.
posted by greekphilosophy at 5:29 AM on February 24, 2010 [1 favorite]

This case will be of interest mostly to law students taking CivPro next year. Otherwise, nothing to see here, move along.
posted by falconred at 3:16 PM on February 24, 2010

"it is thought that the "nerve center" approach is more straightforward since typically a company has a well publicized HQ and a well defined team of high-level executives."
Ok, makes sense.
posted by Smedleyman at 5:21 PM on February 24, 2010