Thursday, February 25, 2010

Access to federal court just got a little bit easier for corporations

Employers like to be in federal court. According to a recent study by the American Constitution Society, plaintiffs only win 15% of the time on employment discrimination suits in federal court. Thus, it is often critical for employers to have their cases heard in federal court.

Federal courts, however, are courts of limited jurisdiction. There are two main avenues to get a case into federal court—lawsuits premised on a federal statute (known as federal question jurisdiction), and lawsuits with more than $75,000 in controversy where no defendants hail from the same state as any plaintiff (known as diversity jurisdiction). Whenever a party is sued in state court, that party may remove the suit to federal court, provided the federal court would otherwise have jurisdiction.

For purposes of diversity jurisdiction, a corporation is a citizen of its state of incorporation and the state where it has its principal place of business. When a large corporation does business in a number of states, however, determining its “principal place of business” often presents courts with a challenge. On Tuesday, in Hertz Corp. v. Friend, the United States Supreme Court decided what “principal place of business” means:

We conclude that “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 head-quarters—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 (for example, attended by directors and officers who have traveled there for the occasion).

Why is this case important to employers?

  1. As noted above, employers like to be in federal court. This case expands employer’s access to federal court by limiting the number of states in which it can be found to be a citizen for diversity purposes. By limiting a corporation’s principal place of business to the corporate nerve center, corporations will be able to remove a greater number of lawsuits.

  2. Employers only have 30 days after receipt of a state court lawsuit to remove the case to federal court. The determination of whether to remove a case has to be made quickly. Therefore, it is important to get counsel involved in the litigation as early as possible so that the removal date—which cannot be extended under any circumstances—is not missed.

For additional analysis of this opinion, I suggest the following:

Presented by Kohrman Jackson & Krantz, with offices in Cleveland and Columbus. For more information, contact Jon Hyman, a partner in our Labor & Employment group, at (216) 736-7226 or