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CAFA Law Blog Information, cases and insights regarding the Class Action Fairness Act of 2005

To Be Or Not To Be!

Posted in Legal Publications and Articles, Wage and Hour

Kimberly Nakamauru, Comment, Touching a Nerve: Hertz v. Friend’s Impact on the Class Action Fairness Act’s Minimum Diversity Requirement, 44 Loy. L.A. L. Rev. 1019 (Spring 2011).

In her article, Kimberly Nakamauru, a 2011 J.D. Candidate at Princeton University analyzed the United States Supreme Court’s decision in Hertz v. Friend, 30 S. Ct. 1181 (2010)’s impact on CAFA’s minimum diversity requirement.

The plaintiffs in Hertz had initially filed a class action complaint in a California state court against their employer – the Hertz Corporation (“Hertz”), seeking damages under California wage and hour laws for failure to provide overtime wages, meal and rest breaks, and vacation pay. The plaintiff class comprised California citizens who had allegedly suffered harms similar to the named plaintiffs.

Hertz removed the action to the Northern District of California under CAFA. The plaintiffs filed a motion to remand primarily arguing that removal was improper for lack of CAFA diversity jurisdiction because the class members and the defendant were all California citizens.

To prove that it was diverse from the plaintiffs, Hertz submitted a declaration by an employee relations manager that purported to show that Hertz’s principal place of business was in New Jersey rather than California. At the time of this lawsuit, federal courts applied one of three different tests to determine a corporation’s principal place of business:  (1) the ‘place of operation’ test; (2) the ‘nerve center’ test; and (3) the ‘total activities’ test.

The U.S. Court of Appeals for the Ninth Circuit applied the place-of-operations test when it determined a corporation’s principal place of business.  Accordingly, the District Court for the Northern District of California applied that test and found that California was Hertz’s principal place of business. Hertz appealed the remand order. The Ninth Circuit affirmed the District Court’s holding finding that the District Court had correctly applied the place-of-operations test to determine Hertz’s principal Place of business.

The U.S. Supreme Court granted certiorari to resolve the difference among the Courts of Appeals as to the correct test for determining the corporate citizenship. The Supreme Court unanimously held that the principal place of business is best read as referring to the place where a corporation’s officers direct, control, and coordinate the corporation’s activities. It is the place that Courts of Appeals have called the corporation’s ‘nerve center.’ And in practice, it should normally be the place where the corporation maintains its headquarters – provided that the headquarters is the actual center of direction, control, and coordination, i.e., the ‘nerve center,’ and not simply an office where the corporation holds its board meetings.

The Supreme Court first performed a textual analysis on the text of 28 U.S.C. § 1332(c)(1) and found that the place at issue is a leading place within a state rather than the state itself.

Second, the Supreme Court opted for the comparatively simpler nerve-center test to promote administrative ease and increased predictability. The Supreme Court considered the nerve-center test to be comparatively simpler than other tests because a corporation’s headquarters, which is typically equated with its nerve center, suggested a single location. The Supreme Court held that zeroing in on a single, predictable location, for example, is much easier than trying to choose from amongst many places where a corporation conducts its general business activities.

Finally, the Supreme Court reasoned that 28 U.S.C. § 1332(c)(1)’s legislative history indicated a preference for a simple test.

Accordingly, because of Hertz’s unchallenged declaration indicating that its center of direction, control, and coordination and its headquarters were located in New Jersey, the Supreme Court concluded that its principal place of business was New Jersey under the nerve-center test. The Supreme Court then vacated and remanded the case to the Ninth Circuit for further proceedings consistent with its ruling.

In her article, the author notes that although, Hertz, was a unanimous decision that provided a definitive test for interpreting where a corporation’s 28 U.S.C. § 1332(c)(1) principal place of business is located, it did not mention how Hertz would be applied with respect to CAFA’s minimal diversity standard codified in 28 U.S.C. § 1332(d)(2). The author notes “[u]nder CAFA, federal courts have jurisdiction if ‘any member of a class of plaintiffs is a citizen of a State different from any defendant.’  With respect to a corporate defendant that has two citizenships, however, CAFA’s minimal diversity requirement can be read in two ways. Must both of a corporate defendant’s § 1332(c)(1) citizenships be diverse from that of any plaintiff to warrant federal jurisdiction, or just one?”

The author notes that some courts have held that CAFA’s minimal diversity requirement is not satisfied when a class includes only citizens of a state in which the corporate defendant is either incorporated or has its principal place of business because the corporation cannot prove that there is a plaintiff who is a citizen of a state different from the defendant. The Fourth Circuit’s decision in Johnson v. Advance America, 549 F.3d 932 (4th Cir. 2008) according to the author was the best example of an appellate court preventing a corporation from creating CAFA jurisdiction based on its one diverse citizenship. The Fourth Circuit held that the defendant could not rely on its Delaware citizenship to create minimal diversity with the South Carolina plaintiffs while ignoring that the corporation was also a citizen of South Carolina.  The court explained that § 1332(c)(1)’s use of the conjunctive ‘and’ between ‘state by which it has been incorporated and state where it has its principal place of business’ gave ‘dual, not alternative, citizenship to a corporation whose principal place of business is in a state different from the state where it is incorporated.’  The court concluded that § 1332(c)(1)’s statutory language prevented the defendant from relying on its one diverse citizenship when its other citizenship would destroy federal jurisdiction.

In contrast, a District Court in Georgia in Fuller v. Home Depot Services, LLC, No. 1:07-CV-1268-RLV, 2007 WL 2345257 (N.D. Ga. Aug. 14, 2007) held otherwise. The court found that defendant had satisfied minimal diversity even though its principal place of business was in Georgia and the plaintiff class comprised citizens of Georgia because Home Depot was incorporated in – and was accordingly a citizen of – Delaware.  The Fuller court reasoned that although Home Depot was a Georgia citizen, it was also a Delaware citizen, and therefore, was diverse from at least one member of the class as required by CAFA.  Unlike the court in Johnson, the Fuller court held that the corporate defendant could rely on its one diverse citizenship to satisfy CAFA’s minimal diversity requirement.

The author observed that while the Hertz Court did not address the precise minimal diversity issue that Johnson and Fuller raised, its emphasis on the statutory language suggests that the Supreme Court was more likely to follow Johnson than Fuller.  The author notes that “[e]ven though Fuller comports with Congress’s intent to expand federal diversity jurisdiction, given that (1) the Supreme Court in Hertz expressed a preference for plain-language analysis; (2) the federal courts have statistically rejected expansive readings of CAFA; and (3) CAFA did not amend § 1332(c) strongly suggests that Congress did not intend CAFA to ‘completely rewrite the most basic concepts in federal jurisdiction jurisprudence by … completely preventing corporate defendants from being sued in a class action in state court.’”

Finally, the author concludes that, the plight of the corporate defendant sued in a ‘judicial hellhole,’ while providing a moderately compelling rationale for removal, cannot override more than fifty years of carefully worded legislative history designed to rein in corporate forum shopping.