Corporations and Diversity Jurisdiction

Last month the U.S. Supreme Court granted certiorari inFriend v. Hertz Corporation, in which the Ninth Circuit had affirmed the remand of a class action case against Hertz for lack of diversity jurisdiction, applying the circuit’s “place of operations” test. For a company like Hertz, what that means is that even though their executive offices and place of incorporation are elsewhere, they are still being deemed a citizen of California simply because they have more employees and operations in California than any other state. Hertz argues in its petition for certiorari first that the Supreme Court should resolve a split in the Circuits as to how to define a corporation’s citizenship based on such potentially conflicting formulations as “nerve center” or “place of operations,” and second that it is unfair not to take California’s huge population into account in applying whatever test the Supreme Court approves. In other words, national corporations like Hertz are likely to have more employees and operations in California than any other state, merely because that is required to serve California’s much larger population than any other state, not because their operations are actually directed from California.

Looking at the narrow issue of how to define a corporation’s principal place of business, Hertz’s argument does seem to have some appeal. But perhaps this case will prompt a re-examination of the broader question of the reasons for diversity jurisdiction in the first place. Diversity jurisdiction is justified to allow an out-of-state person (including corporations of course) to avoid the prejudice that might exist in the state court system by removing a case to federal court, which is supposedly above such parochial concerns. In practice diversity jurisdiction is rarely invoked for that reason. In fact, I can only recall one case in nearly 30 years of practice where I sought out a federal forum because I was seriously concerned about the prejudice that might have affected the result in state court. More often, the federal forum is preferred for other reasons, such as different procedural rules, supposedly greater attention to complex legal issues, or advantages that might accrue from a more suburban jury. In the Hertz case, the Ninth Circuit mentioned the policy considerations behind diversity jurisdiction, noting that because of its extensive California operations, “Hertz is not in jeopardy of being mistreated in California courts.”

So while on the one hand it may seem unfair to make national corporations like Hertz citizens of California, when they can seek the perceived advantages of federal court in most other states, on the other hand it is not obvious that they are prejudiced by being required to defend cases by California citizens in California state courts. It will be interesting to see how the U.S. Supreme Court resolves this issue.

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