Supreme Court Ruling May Help Employers Find a More Level Playing Field in Litigation

Posted: March 2, 2010

A U.S. Supreme Court decision may make it easier for corporate employers to avoid defending wage and hour, employment and other lawsuits in state courts, which are “home” forums to their adversaries and often are seen as favorable to plaintiffs.

Employers generally can remove cases filed in a state court to federal court, based on “diversity of citizenship” between the parties, where the employer’s “principal place of business” is in a state of which the plaintiffs are not citizens.

This place of business, the Supreme Court has ruled, is best interpreted as “the place where a corporation’s officers direct, control, and coordinate the corporation’s activities” or “nerve center” – usually, its headquarters – rather than where the corporation does the major portion of its business. Hertz Corp. v. Melinda Friend et al., No. 08-1107 (Feb. 23, 2010). Thus, in Hertz, where suit was brought in a California state court by two California citizens, the corporation, which is headquartered in New Jersey, may be entitled to remove the case to federal court, despite earlier rulings rejecting the move because of the large amount of Hertz’s business generated in California.

The Facts

The litigation in Hertz began when two California citizens sued the company in California state court for alleged violations of state wage and hour law on behalf of a class of similarly-situated California citizens. Hertz sought to remove the case, asserting that the federal court possessed diversity jurisdiction because the company, which has its corporate headquarters in New Jersey, was a citizen of New Jersey rather than California.

The federal district court disagreed. It determined that the company was a citizen of California because the amount of business activity it conducted in the state was significantly larger than in other states. Because Hertz and the two plaintiffs were both California citizens, the court held it did not have diversity jurisdiction over the case. The U.S. Court of Appeals for the Ninth Circuit affirmed, and Hertz appealed to the U.S. Supreme Court.

The Supreme Court’s Decision

A unanimous Supreme Court overturned the Ninth Circuit’s ruling. Looking for a “single, more uniform interpretation” of the term “principal place of business” for determining a corporation’s citizenship for diversity purposes, the Court rejected the “business activities” test applied by the Ninth Circuit. Instead, it adopted the “nerve center” test, explaining that such an approach, “which ordinarily equates that 'center’ with a corporation’s headquarters, is simple to apply comparatively speaking.” The Court remanded the case for further litigation to determine where Hertz’s “nerve center” is located.

“Complex tests produce appeals and reversals, encourage gamesmanship, and … diminish the likelihood that results and settlements will reflect a claim’s legal and factual merits,” Justice Breyer wrote on behalf of the Court. The “nerve center” test, on the other hand, is “sensible” and “relatively eas[y] to apply.”

Companies cannot however, manipulate the “nerve center” test by establishing a corporate headquarters that is “nothing more than a mail drop box, a bare office with a computer, or the location of an annual executive retreat,” the Court cautioned.

What Does it Mean?

“This holding impacts companies with headquarters in a state other than the state where they conduct most of their business,” says Jackson Lewis partner Stephen Munger. “Such companies often are targeted for state wage and hour class actions in states where they conduct much or most of their business. By adopting the nerve center test for determining citizenship of a corporation, the Supreme Court has given these employers another avenue to remove state wage and hour class actions to federal court. Given the many advantages of litigating wage and hour cases in federal court, the decision should give such corporations some relief.”

Like Hertz, many companies conduct a large portion of their business in California because of its population and market size. Under the Ninth Circuit’s prior corporate citizenship analysis, such companies would be amenable to suit in plaintiff-friendly California courts, without hope of removal to a federal court because of diversity. By focusing instead on the corporate “nerve center,” the Supreme Court's decision may give companies a better chance of finding a level playing field in litigation.

Jackson Lewis attorneys have extensive experience advising clients regarding the procedural and substantive aspects of class action litigation, including state wage and hour claims.