Randy Barnhart

Hertz, Diversity Jurisdiction, and a Corporation's Principal Place of Business

An interesting twist in the US Supreme Court's opinion in Hertz earlier this year. 

In cases removed from state court to federal court on the basis of alleged diversity jurisdiction, defendant corporations may erroneously assume, contrary to Hertz, that so long as their operations take place in a state, their principal place of business is in that state. Not so!

Since Hertz, the “place” of business does not refer to a state, but to a particular place within a state.

As the Hertz court explained: “Three sets of considerations, taken together, convince us that this approach, [i.e., “nerve center” being the “principal place of business”] while imperfect, is superior to other possibilities.” The first consideration is the statute’s language:

The statute’s text deems a corporation a citizen of the “State where it has its principal place of business.” 28 U.S.C. § 1332(c)(1). The word “place” is in the singular, not the plural. The word “principal” requires us to pick out the “main, prominent” or “leading” place. 12 Oxford English Dictionary 495 (2d ed. 1989) (def.(A)(I)(2)). Cf. Commissioner v. Soliman, 506 U.S. 168, 174, 113 S.Ct. 701, 121 L.Ed.2d 634 (1993) (interpreting “principal place of business” for tax purposes to require an assessment of “whether any one business location is the ‘most important, consequential, or influential’ one”). And the fact that the word “place” follows the words “State where” means that the “place” is a place within a State. It is not the State itself.

Hertz, 130 S. Ct. at 1192-93 (italics by the court). So, even if a defendant corporation's operations are all within a single state, that state is note necessarily the corporation's place of business; rather, the particular place within a state where  the corporation's "nerve center" is located is its "principal place of business," and that place could be in a different state.

Staying Out of Federal Court - Removal and Remand, Part 2

In my previous post (Part 1) on this topic, I mentioned that earlier this year “the U.S. Supreme Court adopted the ‘nerve center’ approach to determining a corporation’s ‘principal place of business’ for diversity jurisdiction under 28 U.S.C. § 1332(c) (1). Hertz Corp. v. Friend, 559 U.S. ----, 130 S.Ct. 1181 (2010).” The Hertz “Court explained the phrase ‘principal place of business’ refers to the place where a corporation’s high level officers direct, control, and coordinate the corporation’s activities, i.e., its ‘nerve center.’” Praetorian Ins. Co. v. Analy Mortg. Ctr., 2010 WL 3985261 (C.D. Cal. Oct. 8, 2010).

“In determining the existence of diversity jurisdiction, a corporation is a citizen of both its state of incorporation and the state where it has its principal place of business. 28 U.S.C. § 1332(c)(1); Hertz Corp. v. Friend, --- U.S. ----, 130 S.Ct. 1181, --- L.Ed.2d ---- (2010)” Mendoza v. Sky Harbor Inn, 2010 WL 3400793 (D. Ariz. Aug. 26, 2010). 

Especially relevant in the 9th Circuit and the districts courts thereof: The Hertz court held that “a corporation’s principal place of business, for diversity jurisdiction purposes, is its nerve center, abrogating Tosco Corp. v. Communities for a Better Environment, 236 F.3d 495, 500-502 (9th Cir. 2001).” Mendoza, supra. 

The Hertz court found that the “nerve center” test “is simple to apply comparatively speaking. The metaphor of a corporate ‘brain,’ while not precise, suggests a single location.” Hertz Corp. v. Friend, 130 S. Ct. 1181, 1193 (2010). 

In re Hydroxycut Mktg. & Sales Practices Litig., 2010 WL 2998855 (S.D. Cal. 2010), is instructive. There, the court found: “Iovate U.S.A.’s C.E.O. and sole director Terry Begley, resides and maintains his office in Oakville. Begley makes all the high level decisions for Iovate U.S.A., including entering into contracts with retailers, purchasing product from Iovate Health Sciences Inc., and giving instructions to Kuene and Nagel, the independent company that Iovate U.S.A. contracts with for warehousing and distribution of Iovate’s products. . . . [I]t is clear that Iovate U.S.A.’s nerve center is in Oakville, where Begley directs, controls and coordinates Iovate U.S.A.’s activities.”

Other courts also have found the “nerve center” to be located where the sole corporate officer, the corporate brain, works. See e.g., Astra Oil Trading NV v. Petrobras Am. Inc., 2010 WL 3069793 (S.D. Tex. 2010)(“AOT’s principal place of business is where its sole officer and CEO—Mike Winget—implements, directs, controls, and coordinates AOT’s business activities.”); McCarthy v. Bank of New York/Mellon, 2010 WL 2144241 (D. Mass. 2010)(“The Bank has introduced evidence that . . . its Chief Executive Officer and President work in the New York headquarters. Based on these facts, the Bank has its principal place of business in New York and is a citizen of that State.”).

Practitioners should also check and compare these cases: Miller v. Swiss Re Underwriters Agency, Inc., 2010 WL 935697 (C.D. Cal. 2010) (finding “nerve center” in New York because “primary administrative functions, including Human Resources, Legal, Logistics, and Information Technology, among others, are, in large part, handled out of New York”)(citing Hertz); Guitar Holding Co. v. El Paso Natural Gas Co., 2010 WL 3338550 (W.D. Tex. 2010)(indicia of “nerve center” included marketing, such as developing new customer relationships and maintaining old ones, business development, such as planning and implementing new projects, managing customer orders, ensuring all customer inquiries addressed, and facility planning); Reagan Enterprises, LLC v. Senior Solutions Now, Inc., 2010 WL 1345697 (N.D. Miss. 2010)(“This court finds that the defendant’s “nerve center” and therefore “principal place of business” is in Mississippi. The company's website lists the corporation's “General Office” as 7203 Goodman Road, Olive Branch, Mississippi. The same address is provided as the address of the corporation in the printable brochure. The office telephone numbers for the CEO and founder, for the President, and for in-house counsel are all Mississippi telephone numbers.”).

Hertz really did change the universe with regard to the citizenship of a corporation, especially smaller entities with just one or a few top officers who can easily set up the nerve center virtually anywhere without too much trouble. Please comment with new cases applying Hertz!

Staying Out of Federal Court - Removal and Remand, Part 1

Recently, in a case in California involving a catastrophic rollover of a Ford 15-passenger van, the resident California defendants removed it to the federal district court (northern district). Defendants do that. Ultimately, the defendants, including Ford Motor Company, which manufactured the defective vehicle, want the case in a federal court in Michigan.

Plaintiffs will file a motion for remand for want of what's called diversity jurisdiction, required for a case in federal court which presents no federal question.

“An action filed in state court may be removed only if the district court could have exercised jurisdiction over the action if originally filed there.” Duncan v. Stuetzle, 76 F.3d 1480, 1485 (9th Cir. 1996); 28 U.S.C. § 1441(a) and (b). For diversity jurisdiction to exist, each plaintiff must be diverse from each defendant. Strawbridge v. Curtiss, 3 Cranch 267, 7 U.S. 267, 2 L.Ed. 435 (1806). Federal diversity jurisdiction “must be rejected if there is any doubt as to the right of removal in the first instance.” Gaus v. Miles, Inc., 980 F.2d 564, 566 (9th Cir.1992) (underscoring added); 28 U.S.C. § 1332(a). “The removal statute is strictly construed against removal jurisdiction.” Boon v. Allstate Ins. Co., 229 F. Supp. 2d 1016, 1019 (C.D. Cal. 2002) (citing Gaus, supra).

“The burden of proof is on the defendant to prove the existence of jurisdictional facts.” Boon, 229 F. Supp. 2d at 1019 (citing Gaus, supra). “The ‘strong presumption’ against removal jurisdiction means that the defendant always has the burden of establishing that removal is proper.” Gaus, 980 F.2d at 566. That is, the “‘strong presumption’ against removal jurisdiction means that the defendant bears the burden of proving the propriety of removal.” HSBC Bank USA, N.A. v. Bryant, 2009 WL 3787195 (S.D. Cal. 2009). The removing defendant . . . bears the burden of establishing that removal was proper by a preponderance of evidence. See e.g., Sanchez v. Monumental Life Ins. Co., 102 F.3d 398, 403-04 (9th Cir.1996).

Indeed, the US Supreme Court has now unequivocally held that the “burden of persuasion for establishing diversity jurisdiction, of course, remains on the party asserting it.” Hertz Corp. v. Friend, 130 S.Ct. 1181, 1194 (2010); see also Franco v. Empire Sw. Holdings, Inc., 2007 WL 951841 (S.D. Cal. Mar. 12, 2007)(“Plaintiffs have pointed to documentation that interjects doubt as to whether Defendant Cannon’s domicile is diverse from that of Plaintiffs. Therefore, the Court resolves this doubt against a finding of federal jurisdiction and Plaintiffs’ motion to remand the case to state court is GRANTED.”).

Part 2 coming soon!

Long-arm Jurisdiction and E-mail Contacts

With co-counsel in Colorado and California, a major action against Ford Motor Co, among other defendants, has been filed in Alameda County, for personal injury and death caused by the defective 15-passenger van manufactured by Ford.

Ford's "nerve center" is in Michigan, where it has its headquarters, so the California trial court has to be satisfied that it can exercise jurisdiction over Ford. It can. There is no question that Ford has the required "minimum contacts" with California and its residents. As to other defendants, the jurisdictional issue may be litigated (via motions to dismiss, etc.), and so the recent opinion by the Colorado Supreme Court, The Foundation for Knowledge in Development v. Interactive Design Consultants, may be relevant.

When a plaintiff in one state, say California or Colorado, files suit against a nonresident defendant, she must satisfy both the state's long-arm statute and constitutional due process. "Colorado’s long-arm statute," for example," extends jurisdiction to the maximum extent allowed by the due process requirements of the [US] Constitution."

"With respect to tort claims," the Colorado court has “previously indicated that negligent conduct in a foreign state which causes injury in Colorado may be deemed an act committed within Colorado for purposes of the long-arm statute.”

The Colorado court noted the standard requirement that a defendant have “certain minimum contacts with the forum state such that maintenance of the suit does not offend traditional notions of fair play and substantial justice.” The analysis typically parses the exercise of personal jurisdiction between general or specific jurisdiction.

“A court has general jurisdiction over a defendant if the defendant conducted continuous and systematic activities that are of a general business nature in the forum state.” This is why the California court in Alameda County has jurisdiction over Ford in the suit over the defective 15-passenger van.

"A court has specific jurisdiction over a defendant if the “injuries triggering the litigation arise out of and are related to activities that are significant and purposefully directed by the defendant at the residents of the forum state.” This is why the California court in Alameda County should have jurisdiction over some of the other defendants in the suit.

The usual test is whether "the alleged injury arises out of and is related to 'activities that are significant and purposefully directed by the defendant at residents of the forum.'" This is where the Colorado Supreme Court's opinion covers some new ground, new because the economy is rapidly becoming the internet economy.

The evidence for jurisdiction in the Colorado case included negotiations, which culminated in a contract, "conducted by email ... communications originating in Colorado."

Does that mean that the first email contact with the non-resident defendant originated in Colorado? If the defendant sent the first e-mail, what result? Often, e-mail communications are a long series of emails on account of the parties hitting the "reply" button rather than initiating a new e-mail. After a while, the "origin" of the e-mail communications might be disputed.  What do you think?

The Colorado case involved not only breach of contract, but the tort of misrepresentation. In tort cases, the tort, "in itself, creates a sufficient nexus between a defendant and the forum state that satisfies the due process inquiry and establishes specific jurisdiction." For those cases, "there is no need for further minimum contacts analysis because the defendant is so connected with the forum state that traditional notions of fair play and substantial justice are not offended by the forum state’s exercise of personal jurisdiction over the defendant.”

The plaintiff in the Colorado case alleged that the "misrepresentations occurred by ... email conversations exchanged between Rhode Island and Colorado." But the Colorado court's opinion then noted that the defendant in Rhode Island "certainly understood that his communications with [the plaintiff] would be received in Colorado." So, for the contract claim, the e-mail communications must originate in Colorado while for the tort claim the e-mail communications must be received in Colorado.  Is that right?

Finally, the Colorado Supreme Court addressed the "reasonableness" of hauling the Rhode Island defendant into a Colorado court. The test for that involves: "(1) the burden on the defendant; (2) the forum state’s interest in resolving the controversy; and (3) the plaintiff’s interest in attaining effective and convenient relief."

As for the first factor, the opinion found that "much of the evidence is presumably electronic, thereby mitigating the burden of gathering and presenting this evidence in Colorado." Presumably, producing old-fashioned snail mail--you know, paper, typewriters or printers, envelops and licking stamps--might be too burdensome, but not e-mail.

Funny, isn't it, the plaintiff presumably also has all those e-mails too! If so, there is no burden on the defendant at all, for what plaintiff wouldn't produce the e-mails which could prove her case!

Click here for the court's opinion.