Diversity Rule for Businesses|Challenged in Supreme Court

WASHINGTON (CN) - In a case that could substantially reduce the number of cases heard in federal courts, the Supreme Court tackled for the first time a centuries-old rule that allows businesses to remove cases out of state court.

Doctrine calls for Federal Courts to hear cases pitting opponents from different states. That has been interpreted to mean businesses can declare themselves citizens of the state where they are incorporated, versus where they do business, which allows them to move a case into federal court.

The issue arose when Melinda Friend filed a class action against Hertz for violating California's wage and hour laws. The car-rental company requested that the case be tried in federal court under the diversity requirement because its headquarters are in New Jersey. Friend contends that the company is based in California.

Sri Srinivasan, with O'Melveny & Myers, argued on behalf of Hertz. He said that a company's "principal place of business," as written in the law, should be read to mean headquarters, and called the definition a simple solution.

Todd Schneider, with Schneider Wallace Cottrell Brayton Konecky, represented Melinda Friend. He said that in determining the company's base, the location of the company's outlets and employees should be taken into strong consideration because corporations are seen as the least foreign where they have the biggest presence.

"Why didn't they say place of doing business? That's not the terminology that they used," Justice Sonia Sotomayor said.

When considering the case, the 9th Circuit, which affirmed a district court's determination that California was Hertz's principal place of business, noted that Hertz had 43 percent more employees, 75 percent more property, and 60 percent more revenue in California than in any other state. Twenty percent of the company's business was conducted in California.

"California is going to be the big winner in this," Justice Ruth Bader Ginsburg said. "It's going to be able to keep all those cases in its state court because so many multi-state corporations, I imagine, would come out just the way Hertz does."

Sotomayor challenged the notion that business be measured by comparing one state to another. "I'm having a hard time understanding what the appreciable difference is between 20 percent and 14 and the balance being spread over so many other places," she said, referring to Florida as the place of 14 percent of Hertz's business.

Justice Antonin Scalia also appeared critical. "I don't understand why, somehow, a Californian is more likely to identify with Hertz simply because there are more Californians and, hence, more Hertz outlets, than a New Jerseyite is likely to identify with Hertz," he said. "Per capita, there are probably as many Hertz outlets in New Jersey as there are in California."

The justices appeared less critical of Srinivasan's argument that a company's headquarters determines the principal place of business.

"So what constitutes headquarters?" Sotomayor asked. "How many executives have to live there? What else has to exist there? And then what is the default rule if those things don't exist?"

Scalia appeared to give a helping hand to Hertz after Srinivasan agreed with Ginsburg's suggestion that the headquarters be used to determine the site of business if a corporation does not have a dominant state.

Scalia chimed in. "It seems to me, to do that, you abandon your principal argument, which is that 'place' doesn't mean 'state,'" he said. "You don't want to throw away that good argument."

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