The “Headquarters Test” or a Multifactor Approach?

By Anna Christensen
on Nov 11, 2009 at 3:43 pm

Below, Stanford Law School’s Sina Kian recaps yesterday’s oral argument in Hertz Corporation v. Friend.  Sina’s earlier preview of the case is available here.  Check the Hertz Corporation v. Friend (08-1107) SCOTUSwiki page for additional updates.

Yesterday the Court heard oral arguments in Hertz Corp. v. Friend.  The case arose from a dispute over diversity jurisdiction, and the question presented was simple, or at least simple to state: how should courts determine a nationwide corporation’s “principal place of business”?

Justice Sotomayor—the most active Justice during this argument—set the tone by acknowledging that any rule was susceptible to reductio ad absurdum arguments: “the problem with every test is that you can find an exception that makes the application ridiculous.”  Throughout the argument, several Justices voiced preliminary agreement that any rule should operate as a rebuttable presumption.  But that left the question: what should be the default rule?

Arguing for Hertz Corp., Sri Srinivasan advocated for a headquarters test, which – as the name would suggest – locates the principal place of business in the State that hosts the corporation’s headquarters.  Arguing for the respondents, Todd Schneider defended a multifactor test that focuses, in particular, on the primary location of a corporation’s “people and property.”

Srinivasan focused on the benefits of a simpler, more administrable test and emphasized the costs that would result if complex inquiries were necessary in each case to determine subject matter jurisdiction.  This strategy could afford to settle for a draw on arguments about statutory construction and Congressional intent, thus allowing the Court to resort to a policy analysis and, presumably, the simplest rule.

Schneider, by contrast, generally focused on Congressional intent.  The term “principal place of business” was plucked from the bankruptcy context, where most courts had employed a multifactor approach.  The multifactor test is also more resistant to corporate efforts to game the system by strategically locating their headquarters, a general concern that explains why Section 1332 looks to the principal place of business in addition to the place of incorporation.  This strategy placed administrability on the back burner to emphasize its portrayal of Hertz as advocating a change inconsistent with Congress’s intentions.

Both advocates’ narratives were pushed and peppered with primarily policy concerns. Justice Scalia was perhaps an exception to this focus:  he stressed that if Congress wanted a multifactor approach, “it would have said, the principal State in which business is done.”  Although each attorney received roughly the same number of comments and questions (approximately thirty-five for Hertz, compared with approximately thirty-seven for Friend), the Court seemed more anxious about the multifactor test.  In particular, the primary concern about Hertz’s position – raised by Justice Sotomayor – dealt with how to define “headquarters,” whereas the consternation about a multifactor test ran a bit deeper.  Justice Sotomayor noted confusion among the lower courts, while Justices Scalia and Ginsburg seemed dismayed that the multifactor test produces an outcome in which many national corporations are considered to be citizens of California just by virtue of the state’s size.  The Chief Justice echoed this concern, noting that it would result in a quintessentially Washington corporation like Starbucks being deemed a citizen of California.  Justice Ginsburg also emphasized that the respondents’ multifactor test is significantly more complex – which, as Justices Kennedy and Stevens noted, creates problems for smaller litigants.

Notably, the Court did not appear to have any concerns about its jurisdiction to adjudicate the matter under 28 U.S.C. §1453, a matter raised in petitioner’s brief.