The US Supreme Court’s February 23, 2010 decision in Hertz v Friend sends a clear message that our country’s highest Court set out to resolve an inconsistency among federal courts that has been very costly to employers on several levels, for too many years. Originally, the idea of diversity removal was to afford defendants whose principal place of business is in another state the opportunity to remove a case filed against it in a different state’s court to a federal court where they might otherwise receive a more fair proceeding and avoid being subject to local bias.
In order to determine whether a company’s principal place of business was outside the state, the court was to determine the “nerve center” of the company -- the location within a state from where the company’s executives outwardly run the company. But over the years, the “business activity” test, which essentially measures where most of a company’s business occurs, developed. This business activities test proved to be complex and impractical, resulting in courts remanding cases to state courts and even developing less practical, off-shoot tests.
Today, the U.S. Supreme Court has sent a message, in a very well-reasoned, historically informative and procedurally analytical opinion, that the nerve center test is the appropriate test. The Court explains that administrative simplicity is paramount (which has not been present with the inconsistencies among the federal courts) and that the legislative history of diversity removal shows that the legislators considered and rejected a type of business activity test for the very reason that such a test would prove (and has) to be complex, impractical and create incorrect results. Because a Class Action Fairness Act (CAFA) removal includes a principal place of business analysis, it seems that the Hertz ruling should apply to CAFA removals as well.
The bottom line to employers is that cases which were previously remanded to state court may and should remain in federal court when removed on proper diversity, and presumably CAFA, grounds. This translates into potentially better overall results for employers in many types of employment cases, including wage-hour class actions, where federal court judges follow precedent like White v. Starbucks, Kenny v. Supercuts, and Brown v. Fed Ex, all of which properly apply certification standards. In contrast, many state courts ignore this line of California federal court cases, and grant certification in instances where individualized issues predominate over a single common issue of fact, upon which the court relies for certification. It may also help in single-plaintiff cases and in summary judgment in that federal court judges seem to be more willing to truly analyze the parties’ briefs, weigh evidence, and are less afraid to pull the proverbial judicial trigger.
Practical challenges in the federal courts may arise if and when they are deluged with removals in states like California where state court cases are filed against defendants with a principal place of business in another state on an almost momentary basis. It is too soon to completely assess the results that will come from the Hertz case, but it is certainly going to be interesting to watch.
Employers who are currently in litigation in state courts and who have been remanded or should appropriately be in federal court, may need to reassess whether a removal is possible now and how this case may affect pending litigation. It is difficult to determine how the Hertz case will impact cases that have been ongoing for a long period of time and were remanded, but these are questions practitioners will be examining and testing in the weeks ahead. Employers can also take proactive steps in the operation of their businesses to ensure or increase chances of removal in states that are not their principal place of business. On all accounts, the Hertz case is a welcome, well-reasoned decision that may very well change the complexion of employment litigation in California, to the extent more removals will survive.