A seemingly simple question—which court should decide a lawsuit—that made it all the way to the U.S. Supreme Court has sent ripples through the corporate law world in general and employment law in particular. It’s an example of the kind of case HR professionals need to understand.
On Feb. 23, the Supreme Court’s unanimous decision in Hertz Corp. v. Friend (08-1107, 2010 U.S. 1897, 2010) made it more likely that a company sued in one state but based in another will be able to move the case to federal court.
For North Carolina employers, the case means that some lawsuits filed in state court might be more easily transferred to federal court.
Why cases go to federal court
When a corporation is a party to litigation, it has been surprisingly difficult to determine the corporation’s “citizenship.”
Removing a case from North Carolina state court to federal court requires either a “federal question” or “diversity jurisdiction” test. In employment cases, the federal question test typically applies when a former employee sues, alleging a violation of Title VII, the ADA, theor some other federal civil law.
The diversity jurisdiction path could come into play when all parties are citizens of different states. Diversity jurisdiction was originally intended to protect out-of-state parties from local prejudice favoring an in-state party.
Under diversity jurisdiction, a corporation is deemed to be a citizen of its state of incorporation and the state “where it has its principal place of business.” It’s easy to determine where a business is incorporated. Defining its principal place of business has been murkier.
Various federal courts focus on the location of different aspects of company functions. Some courts looked for the company’s “nerve center”—the place where “the corporation’s high-level officers direct, control and coordinate the corporation’s activities.” Others analyzed business activity on a state-by-state basis, determining the principal place of business based on where the total activity is largest or most predominant.
If the Supreme Court had adopted this second approach, it would have posed a hurdle for a North Carolina corporate defendant with significant revenue or operations here but incorporated in another state.
Principal place of business?
Rental car giant Hertz, like many corporations with a North Carolina presence, operates nationwide. When several Californians sued Hertz for wage-and-hour violations, the company removed the case to federal court, citing diversity jurisdiction. Hertz argued that since it operates in 43 states other than California, it was a citizen of New Jersey, where it is headquartered.
Hertz offered a variety of evidence to establish that, arguing that its California revenue and number of employees, transactions and facilities paled in comparison to its operations in all other states.
The federal court rejected Hertz’s argument, concluding that it did more business in California than any other state. Thus its principal place of business was California, not New Jersey.
The U.S. 9th Circuit Court of Appeals agreed, so Hertz appealed to the U.S. Supreme Court.
At the ‘nerve center’
The Supreme Court unanimously disagreed with both lower courts. It adopted a “nerve center” approach to determining Hertz’s principal place of business.
According to the Supreme Court, a corporation’s principal place of business “should normally be the place where the corporation maintains its headquarters provided that the headquarters is the actual center of direction, control and coordination”—the nerve center—and not simply an office where board meetings are held.
With the new Hertz decision, the Supreme Court has at least made the path to the federal courts a clearer and more manageable affair for North Carolina employers.
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