With the continued rise of class action lawsuits in the United States, employers were often uncertain about where they might be subject to high-stakes class action litigation in state court. That uncertainty was resolved by the United States Supreme Court in Hertz v. Friend, ___ S. Ct. ___, 2010 WL 605601 (Feb. 23, 2010).

Background on the Law of Corporate Citizenship

A company can be sued in any state where it does business. If a lawsuit is brought in state court, an employer can remove the case to federal court provided that the amount in controversy exceeds $75,000 and the parties are citizens of different states. 28 U.S.C. § 1332 (a). For class actions, the amount in controversy must exceed $5 million and any member of a putative class must be a citizen of a different state than any defendant. 28 U.S.C. § 1332 (d). A corporation is deemed to be a citizen of the state in which it is incorporated as well as the state in which it has its “principal place of business.” 28 U.S.C. § 1332(c). Until the Supreme Court’s decision in Hertz, federal courts often struggled to determine the location of a corporation’s “principal place of business.” Hertz, slip op. at 11-13. For example, in California, federal courts applied a “total activity test” that assessed the amount of relevant business activity that an employer conducted in the state, and if that activity was significantly larger than its activity in other states, the employer was deemed to be a California resident. Hertz, slip op. at 2-3. This test often required corporations to disclose detailed facts about their revenue and business activities, and tended to determine citizenship on the basis of a state’s population. See Hertz, slip op. at 2, 15.

The U.S. Supreme Court’s Decision

The Supreme Court rejected the total activity test, holding that a corporation’s principal place of business is “where a corporation’s officers direct, control, and coordinate the corporation’s activities . . . in practice it should normally be the place where the corporation maintains its headquarters—provided that the headquarters is the actual center of direction, control and coordination” of the company. Hertz, slip op. at 14. The Court’s decision is welcome news to multi-state employers who can now better predict where they will be subject to class action and other high-stakes state court litigation. The decision should also decrease the cost of litigating the question of corporate citizenship.