I need to explain what a corporation’s “principle place of business” is and then why you care. That will take awhile, so please bear with me, remembering always Ambrose Bierce’s definition of a corporation: An ingenious device for obtaining individual profit without individual responsibility.
We’ll begin with a quick review. In the United States two court systems coexist. Each state maintains its own state court system and the federal government maintains the federal courts. Federal courts, established in Article III of the Constitution, are courts of “limited jurisdiction” which means that Congress sets the parameters of what their powers are in a system in which the federal government has only limited powers.
When they are talking about courts’ power — the power to decide cases and order the parties around — lawyers often talk about the “jurisdiction” of a court. That is just a long, four syllable lawyer-word meaning, “the power to act.”
One of the ways that Congress controls the power or jurisdiction of federal courts is by requiring what is known as “diversity of citizenship.” Oceans of ink have been spilled explaining “diversity jurisdiction” in federal courts. But for our purposes now, we’ll use a simplified definition. For us “diversity jurisdiction” means that federal courts have the power to decide cases which arise between citizens of two different states.
We all know what states we live in, so sometimes it’s easy to determine if a federal court has “jurisdiction” to decide a civil case. (We’re only talking about civil cases today, not criminal cases.) If I am a resident of New York and I come to Massachusetts for a visit, run a red light and plow into your car causing you, a Massachusetts citizen, damage, the federal courts have jurisdiction to decide your case against me. Of course, your Massachusetts state courts also have jurisdiction to decide the case so, in my hypothetical both court systems have the power to decide your case.
So that’s easy. You live in Massachusetts, I live in New York; diversity jurisdiction exists and the federal courts can hear our dispute. But your lawyer, no dummy, will sue me in your state court.
But what about corporations? Remember, corporations have been endowed by their creators — us — with certain inalienable rights. In fact, they have all the legal rights of real people. Actually they have more; they get to live forever and we don’t.
Where does this legal fiction, this corporation, live? Since we’ve decided, against all logic, to treat it as a person, it must live somewhere. Real people do, so it must too.
All Congress has said is that a corporation lives in the state in which it has its “principal place of business.”
What does that mean? Does it mean the state in which the corporation was created? The state where its corporate offices are? Or the state where it does most of its business?
Nobody knows for sure, but the Supreme Court is getting ready to tell us.
And now we come to the part about why you care.
I won’t keep you in unnecessary suspense: You care because in a lawsuit between you and a corporation, the corporation is more likely to beat you in a federal court than in a state court — especially if it is a big corporation.
Hertz rents more cars in California than anywhere else. In fact, it makes about 20% of all its money there. A group of California consumers, people just like you and me, sued Hertz in a class action alleging various sharp dealings on the part of Hertz, but it doesn’t matter whether it was Hertz or Goldman Sachs, or the Bank of America, or your friendly credit card company or some other behemoth corporation, say Microsoft.
What matters is that the citizens of California sued Hertz in California’s state courts. But Hertz’s lawyers know just as well as any other lawyer that Hertz will get better treatment in federal court than in a California state court. So, Hertz — as any self-respecting corporation in similar circumstances would do — removed the case from the California court and dumped into the federal court. The California citizens reacted, demanding that the federal court send the case back to the California court where it was originally filed. Now the case is before the United States Supreme Court which will decide where Hertz lives.
Guess who is going to win.
Hertz will win because corporations don’t want to get sued in California state courts, even though a great many of them make most of their money in California, love doing business there, and take advantage of California’s laws while making money.
Not that anyone will actually say that is why Hertz and corporate America are going to win the case. The justices will actually announce a new rule: “Corporations are citizens of the state where they have their corporate offices.” Some of the justices, including Justice Stevens, will even write that they are adopting this rule as a favor to ordinary citizens who need to sue corporations. The new rule will be simple and easy to apply so plaintiffs in all other states will know just to go straight to the federal court system. And lose.
Next time we’ll look at why corporations do better in federal court and also why we can safely predict that Hertz is going to win.
In the meantime, you can read the briefs filed in the Supreme Court here and read a transcript of the recent oral argument here.