Friday, October 30, 2009

United States Supreme Court considers a corporation's 'principal place of business'

An important question, with significant implications for contemporary corporate law theory will be heard by the United States Supreme Court on November 10. The matter in question is Hertz Corp. V. Friend (08-1107), which poses the question of which State can be considered to be a corporation’s ‘principal place of business’.


The issue has arisen against the backdrop of a class action against the company, for the violation of state wage and labour laws. The suit was filed in a California State Court, in response to which Hertz Corp. removed the action to Federal district court. Before the Federal district Court, the respondents argued that Hertz’s principal place of business was California, hence it was a Californian citizen, and not different from any other plaintiff. On this basis, it was contended that the matter be remanded back to the State Court. The district court, relying on the ‘place of operations’ test, considered several factors like ‘the location of employees, tangible property, production activities, sources of income, and where the sales take place’, and concluded that since Hertz Corp.’s business in California was ‘significantly larger than any other state in which the corporation conducts business’, California was its ‘principal place of business’ in the United States. This decision was affirmed on appeal by the Ninth Circuit, whose decision is available here.


In its petition for certiorari before the Ninth Circuit Court of Appeal, and now before the United States Supreme Court, Hertz contends that the different circuits in the country are applying four different tests to determine the ‘principal place of business’, necessitating some clarity from the Supreme Court about the appropriate test to be used. The Seventh Circuit uses a ‘nerve center’ test focussed on the location of the ‘corporate brain’ or the corporate headquarters; the third circuit looks at the corporation’s center of activity, while some other circuits rely on the totality of the corporation’s activities (the Fifth, Sixth, Eighth, Tenth, and Eleventh Circuits). Of these, for a wide range of reasons, Hertz advocates the use of the ‘nerve center’ approach, according to which, its principal place of business would be New Jersey and not California. It is also supported in this view by the United States Chamber of Commerce. The respondents contend that though the tests being used are different in nomenclature, they result in very similar conclusions. Further, the Congress has specifically preferred the use of ‘principal place of business’ over ‘place of incorporation’ in §1332 of the Class Action Fairness Act of 2005 (“CAFA”). The ‘principal place of business’ being a term of art borrowed from bankruptcy law, it must be decided the way it is in bankruptcy law, i.e., by considering a wide range of factors, and not only the place of incorporation.


This has given rise to issues of whether corporations having a presence in more than one State should be allowed to chose which jurisdiction they can be sued in, and to what extent the theoretical headquarters of a corporation can be given precedence over the practical headquarters of its operations. Thus, the issue is of great significance, not only in the specific context of the CAFA, but also in corporate law theory in general. Particularly, given the similar controversy that has arisen around tax avoidance and multi-national corporations, the hearing on November 10, and the subsequent decision is of great interest. A more detailed discussion of the issues involved is available here, and copies of the briefs in the matter are available here.

1 comment:

Anonymous said...

Thanks for highlighting this. It is an important question - with respect to taxation, with the proliferation of DTAAs the question will soon turn on the definition of residence in the relevant treaty. I believe there is some case-law under Section 6 of the Income Tax act on the issue in India at present.

The briefs of the parties before the US Supreme Court show how important good legal writing can be. It is high time that the higher judiciary in India introduced compulsory written submissions in final hearings on substantial questions of law. Indian highly lawyers unfortunately tend to be repetitive in formulation of grounds.