Sunday, November 15, 2009

'Principal place of business' - Oral Arguments in Hertz v. Friend

An earlier post had discussed the issue in Hertz v. Friend, which calls upon the United States Supreme Court to determine what is the ‘principal place of business’ of a corporation having operations in more than one State. The Court heard the matter on 10th November, and the transcript is available here. Unfortunately, while it makes interesting read, the potential the case seemed to have for a discussion on general corporate law theory remains unrealised. A majority of the arguments focussed only on the policy behind the Class Action Fairness Act, with a very limited discussion of concepts like ‘headquarters’ or ‘gaming the system’.

The idea of ‘headquarters’ formed a substantial portion of the petitioner’s arguments, where he was required to discuss the effect of following a headquarter-rule for determining the principal place of business. The headquarter was defined as the place from which the corporation is ‘directed and controlled’. The ultimate test the petitioners seemed to be advocating is that there is a strong presumption in favour of the headquarters being the principal place of business, which can be rebutted if it is proved to be a sham. As to the defendants contention that ‘principal place of business’ was a term of art borrowed from bankruptcy laws, the petitioner argued that they are two terms referring to the same thing.

The defendants focussed more on the policy behind the CAFA, and suggesting that the Congressional intent clearly sought to depart from the headquarters being considered the principal place of business. It was contended that following the headquarters test would allow corporations to ‘game the system’, and should not be allowed. Justice Scalia responded by suggesting that ‘gaming the system’ should not really be a concern since it wasn’t much of a concern in determining the citizenship of individuals. In conclusion, the respondents submitted that the ‘principal place of business’ has to be determined with reference ‘first to the location of employees, tangible properties and production activities, and then second to income earned, purchases made and where sales take place’.

Thus, the oral arguments failed to churn up the discussions on corporate law that could have been expected, and barring the few issues mentioned above, focussed entirely on the policy behind the CAFA and diversity jurisdiction in the US in general. It now remains to be seen what the Court finally chooses as the primary basis of its decision.

Other discussions of the case are available here and here.

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