Justices skeptical of plaintiff’s stand on corporate citizenship
Tuesday, November 10, 2009
By Stephen Langel
Special to Civil Justice Research & Education Project
WASHINGTON, D.C.–Attorneys representing the plaintiff Melinda Friend in her suit against Hertz Corp. had a tough time today convincing U.S. Supreme Court justices to adopt their test to establish where a corporation has its “principal place of business.”
The case could have broad implications for companies and class action plaintiffs as the Supreme Court has never decided how to define principal place of business for purposes of establishing an industry’s citizenship. This has been the case since Congress passed the underlying statute in 1958.
The plaintiff’s attorney Todd Schneider argued that 50 years of precedent, including nearly every circuit court, support a balancing of factors to determine where Hertz, the nation’s largest car rental chain, is a citizen for the purposes of filing claims under the Class Action Fairness Act of 2005. Hertz allegedly violated California’s wage and hour laws, but has sought to have federal, not state court, preside.
Justices including conservative Antonin Scalia and liberals Ruth Bader Ginsberg and Sonia Sotomayor appeared skeptical of this line of argument.
Schneider, a founding partner at Schneider Wallace Cottrell Brayton Konecky based in San Francisco, argued that there are decade’s worth of precedent that support a test which balances a number of facts to determine where a company is a citizen.
Among the factors the 9th Circuit has considered in this and other citizenship cases are where the majority of employees, production activities, sources of income and sales are found.
This test gives the most comprehensive, most accurate view of where citizenship should be by looking at a company’s actual business practices, he added. The 9th Circuit agreed with the district court that Hertz was a citizen of California because the highest percentage of its business is in that state. While Hertz has 20 percent of its business in California, the second largest share is 14 percent in Florida.
This “substantial predominance” test is necessary to ensure that large corporations do not “game the system” to ease the path to federal courts, which have a history of being more sympathetic to business interests, he added. No other courts, save the 7th Circuit, have supported Hertz’s proposal that a company’s headquarters alone should decide citizenship, Schneider said. These courts have established a very clear definition of principal place of business over the years. Not only have civil courts agreed, but so have a number of bankruptcy courts, he added.
Schneider argued that congressional intent also points to the balancing test as Congress wanted to provide companies a “shield” to protect themselves from local bias, rather than a “sword” to choose a more favorable venue. Such bias would be more likely where the company has less of an actual presence.
But Scalia countered that a true balancing test would pit California versus the rest of the United States, not another state. Ginsberg and Sotomayor agreed, with Sotomayor calling it “arbitrary” that the lower court found that Hertz having 20 percent of its business in California was sufficient to find the company a resident of that state.
Scalia and Ginsberg attacked the policy behind such a test, arguing that California could have an unfair advantage in asserting citizenship because it is the most populous state. As an example, Scalia pointed to Starbucks, which was founded in Seattle, Washington and has its headquarters there. When Schneider admitted that Starbucks is considered a citizen of California based on the amount of its business in that state, Scalia responded sarcastically, “That’s a surprise.”
Many of the justices’ concerns mirrored the arguments that Hertz has been making for a company’s headquarters to be the sole determinant of citizenship. Eighty percent of Hertz’s business is outside California, said its attorney, Sri Srinivasan, of O’Melveney & Myers. So Srinivasan argued that looking to California alone is insufficient. Beyond that, a company’s headquarters is the best indication of citizenship because that is where the corporate decisions are made, he added.
Ginsberg challenged Srinivasan by asking why only the 7th Circuit uses headquarters as the basis for citizenship. Srinivasan responded that while most circuits used a balancing test, these decisions were all based on the original, flawed verdict from the 3rd Circuit. That court failed to look at the basic definitions of “principal place of business,” which is a company’s headquarters, and other courts followed suit.
Ginsberg also questioned why bankruptcy courts do not use the headquarters test. Srinivasan countered that just because some courts took a different approach under bankruptcy law does not mean that Congress would want to apply that approach to civil cases.
Ginsberg continued to challenge Hertz, adding that if Congress meant for a company’s headquarters to be their principal place of business, why they didn’t just say so. Srinivasan responded that principal place of business was just another way of saying headquarters.
Srinivasan also argued that the 9th Circuit’s balancing test was too complicated and time consuming, undermining the need to establish clear and consistent judicial standards. The balancing test would be confusing, time-consuming and costly, Srinivasan added.
Finally, Srinivasan noted that there were no examples where a company sought to gain an unfair advantage by moving their headquarters. Scalia agreed, calling such a move a “large task” that would involve moving company leadership and their families.
The justices are expected to decide the case in the coming months. The Hertz Corp. ve Melinda Fried, No. 08-1107