“Practical Consequences” in Hertz Corp. v. Melinda Friend

Two weeks ago, the Supreme Court heard oral arguments in a case called The Hertz Corporation v. Melinda Friend, et al. At issue in the case is the appropriate test for determining which State constitutes a corporation’s “principal place of business” for diversity jurisdiction purposes. In September 2007, Melinda Friend et al. filed a class action lawsuit against Hertz Corporation in California state court; shortly thereafter Hertz sought to remove the lawsuit to federal court, arguing that it is incorporated in Delaware and that its principal place of business is New Jersey, where its corporate headquarters are located. Friend countered that California should be considered Hertz’s principal place of business because Hertz conducts more business in California than in any other state.

The California district court and the Ninth Circuit agreed with Friend, applying the so-called “total activity” or “substantial predominance” test, which holds that if a corporation’s “business activity [in one State] ‘is significantly larger than any other state in which the corporation conducts business,’” that State “‘is the corporation’s principal place of business.’” The Ninth Circuit’s approach is consistent with the “total activity” test adopted by the Fifth, Sixth, Eighth, Tenth, and Eleventh Circuits; only one Circuit, the Seventh, has adopted the headquarters test advocated by Hertz. Based on the November 10 oral argument transcripts, the Supreme Court appears poised to reverse the Ninth Circuit (and the prevailing approach in the Fifth, Sixth, Eighth, Tenth, and Eleventh Circuits) and to adopt a rebuttable presumption that a corporation’s “principal place of business” is the State in which its corporate headquarters are located.

The briefs and oral argument in the case provide a tour de force of statutory interpretation arguments, from references to (1) the ordinary meaning of “place” to (2) dictionary definitions to (3) the meaning given to “principal place of business” in the Bankruptcy Code and other statutes to (4) statutory purpose to (5) legislative history, including the rejected proposal rule, to (6) arguments about Congress’s intent. But what I find most striking in reading the oral argument transcript (and Hertz’s brief) is the emphasis placed on the simplicity and ease of administration of the “headquarters” test, as opposed to other tests for “principal place of business.” Statutory interpretation scholars long have noted the role that “pragmatic concerns” or “practical consequences” play in judicial interpretation of statutes. In a recent manuscript in progress, I further have posited that there are two, sometimes competing, strains of practical consequences which judges take into consideration when interpreting statutes: the ease of administering the interpretation versus the sensibility of the policy effected by the interpretation. The “administrability” strain of practical concerns focuses on the effect that the interpretation will have on judicial resources, the difficulty of implementing the interpretation, and the clarity and predictability of the rule created, while the “policy sensibility” strain of practical concerns focuses on whether the interpretation fosters consistent application of the statute over time, creates arbitrary policy outcomes, or produces unjust results.

In evaluating the appropriate test for “principal place of business” in Hertz, the Roberts Court seems focused on both strains of practical consequences—and, at least as far as I can glean from the oral argument transcripts, both strains seem to favor the “headquarters” test. Indeed, the practical consequences concerns raised by the Justices during oral argument can be broken out as follows:

 Practical Concerns Favoring “Headquarters” Test   

1. Justice Ginsburg suggested that when a corporation has “dispersed operations,” then “you take the headquarters, because there’s no way to pick among” other tests and “it certainly isn’t worth the labor to try to do that.”  (Administrability)

2. Justice Ginsburg suggested that “if it’s got to be one place, why not just keep it simple and say presumptively it’s the business headquarters, in a particular case you could show otherwise.”  (Administrability)

3. Justice Sotomayor suggested that “the corporate headquarters where management is, where the direction for the operation of the business is coming from, is the place that needs the most protection in this system because they are the ones making the decisions, and so [are] the ones who need to be protected from local bias.” (Policy Sensibility)

4. Justices Ginsburg, Scalia, and Roberts worried that under the Ninth Circuit’s/Friend’s test, California would be the “big winner,” qualifying as the “principal place of business” for most corporations because “it’s an enormous State” with “10 percent of the population.”  (Policy Sensibility)

5. Justice Stevens expressed concern that “it’s important to have a rule that makes it easy for the plaintiff to decide what is the citizenship of the defendant” and argued that “it’s a lot easier for a plaintiff” to figure out where a corporation is headquartered than “to analyze [its] business all over the country.”  (Both Administrability and Policy Sensibility)

Practical Consequences Favoring “Total Activity” Test

1. Justice Sotomayor expressed concern that an absolute “headquarters” rule could lead to “ridiculous” applications in cases where the corporation’s headquarters and nothing else were located in one state, while its business activity took place primarily in another.  (Policy Sensibility)

By my count, that’s 5 practical consequences points for the “headquarters” test versus 1 point for the “total activity”/”substantial predominance” test. Moreover, the one practical concern which the Justices raised about the “headquarters” test—that it might produce arbitrary results—can be neutralized by making the “headquarters” rule a rebuttable presumption rather than an absolute rule, as the Justices’ statements at oral argument suggest they are likely to do.

Prediction:  Look for an opinion rich with plain meaning arguments, dictionary definitions, references to other statutes using the phrase “principal place of business,”  and a nod at the legislative history—but which also relies heavily on arguments about the simplicity and practical sensibility of the “headquarters” rule as justification for rejecting the “total activity” test employed by the majority of Circuits and adopting a rebuttable presumption that a corporation’s “principal place of business” is the State in which its headquarters are located. I suspect the opinion will be unanimous or near-unanimous.

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