Are All National Corporations Now Californians? Defining a Corporation's "Principal Place of Business" for Diversity of Citizenship Purposes

Abstract

This article previews the issues and arguments in Hertz Corp. v. Friend, on the Supreme Court’s 2009-10 docket. The issue the Court will address is whether, in the interests of simple and efficient judicial administration, federal courts should apply a nationwide corporate “headquarters” test to determine a corporation’s principal place of business in order to satisfy federal diversity jurisdiction requirements under 28 U.S.C. § 1332(c)?

The federal diversity statute provides federal court jurisdiction for citizens of different states. The statute further provides that a corporation is a citizen of both the place of its incorporation, as well as the corporation’s “principal place of business.”

The federal district courts apply an array of different tests and standards to determine where a corporation’s principal place of business is for diversity purposes. The Ninth Circuit applies a “substantial predominance” or “place of operations” test.

The Supreme Court is being asked to reject the Ninth Circuit’s test, and instead to apply a corporate “headquarters” test to determine a corporation’s principal place of business.Hertz’s appeal in this litigation raises an interesting problem in federal court diversity jurisdiction and which has generated a hodge-podge of legal standards and rules throughout the federal lower court system.

The Supreme Court has not yet spoken on this issue and, therefore, the Hertz appeal presents the Supreme Court with the opportunity to bring some clarity to the appropriate test for determining a corporation’s citizenship ― particularly with reference to a corporation’s “principal place of business” ― to satisfy federal diversity requirements.

The appropriate test to determine a corporation’s principal place of business arises in diversity cases, where a corporation’s citizenship is governed by two standards set forth in 28 U.S.C. § 1332(c). This provision deems a corporation to be a citizen of its state of incorporation as well as of the “any State where it has its principal place of business.” This latter language is the basis of contention in this appeal.

The diversity statute itself provides no guidance concerning where to locate a corporation’s “principal place of business.” Consequently, since the statute’s amendment and adoption in 1958, federal courts have articulated an impressive array of different standards, rules, and tests for evaluating a corporation’s principal place of business for determining corporate citizenship. In turn, in applying these various test, federal courts have articulated a long list of factors relevant to a court’s determination of a corporation’s principal place of business.

The Hertz appeal is a highly significant case because the Supreme Court has not addressed the appropriate test for determining a corporation’s principal place of business since the diversity statute was amended in 1958 to add this criterion for corporate parties.

Thus, for more than fifty years, federal courts have created and applied a hodge-podge of tests, standards, and factors to determine a corporation’s principal place of business. Thus, the Supreme Court may take this opportunity to bring some order to this doctrinal morass.The Supreme Court will have to deal with the reality that despite the impressive array of different tests and standards to determine a corporation’s principal place of business, federal courts have applied these various tests for more than fifty years, and usually without controversy.

Only the Seventh Circuit applies the simple “headquarters test.” The array of tests across federal courts may not be doctrinally tidy, but the various tests best reflect modern American corporate existence. Moreover, given that many modern corporations have complex business structures that reach across numerous states, the Court may conclude that a simple test for determining a corporation’s principal place is not an appropriate standard to resolve this highly fact-based question.