One of the most perplexing problems that litigators often face is where to bring a lawsuit. In the federal courts jurisdiction can be established either by demonstrating the case involves an issue directly related to federal law (federal question) or by demonstrating diversity jurisdiction. In most cases of diversity, the parties, the plaintiff and the defendant, must be citizens of different states. Again the problem is not difficult when dealing with flesh and blood people.
However, when one of the parties is a corporation, the problems begin. This is because federal law defines the corporate citizenship as a duality. A corporation is a citizen (1) in the state in which it is incorporated and (2) where it has its principal place of business. Unfortunately, the concept of "principal place of business" is vague at best. In the case of Hertz Corporation v. Friend the United States Supreme Court directly addressed the issue of corporate duality.
Of course, whether the court improved or aggravated the situation is still open to debate. In that case the Hertz Corporation was sued by a group of California citizens in a state court. Hertz, sensing the probable hostility of a California jury, asked that the case be removed to federal court, arguing that the proper forum would be in New Jersey where its corporate headquarters was located. The plaintiffs disagreed. In the alternative, they maintained that Hertz's "principal place of business" was really located in California because it was in California that Hertz did the vast majority of its business. The trial court agreed, ruling that California was the corporation's principal place of business.
The appeals court followed suit, but the U.S. Supreme Court did not. The Supreme Court ruled that a corporation has its "principal place of business" where its nerve center is located, that is, the state in which the activities of the corporation are controlled by corporate management. New Jersey, then, was the proper forum for Hertz, not California. Ironically, although in this case Hertz, the corporate defendant, won the battle, their victory may prove to be a mixed blessing. It is a victory because it will help corporations get into federal court by making diversity a more straightforward proposition.
However, the decision will also increase the number plaintiffs that can sue the corporation in federal court, especially in class action cases. Why does limiting a corporation's principal place of business increase the number of potential plaintiffs? Think about that question when diversity jurisdiction is covered later in the chapter.
[See Hertz Corporation v. Friend, No. 08-1107, slip. op. (February 23, 2010); and Michael McNamara and Christine Henge, "‘Hertz' Expands Companies Access to Federal Court," The National Law Journal , April 12, 2010, pp. 16-17.]
Opening Case Questions
1. Is this case a civil lawsuit or a criminal action? Explain
2. Why does this case begin in the state court? Explain.
3. Why would the defendant corporation want to move the case into the federal court system? Explain.
4. Under what circumstances can a case be held in the federal court system? Explain.
5. What Article in the U.S. Constitution established the federal court system and what branch actually establishes the courts? Explain.