In Hertz Corp. v. Friend (No. 08-1107), the Supreme Court is being asked to clarify the test for determining a corporation’s “principal place of business” when determining whether complete diversity of citizenship exists. The federal courts of appeals currently use four different tests to determine the principal place of business under 28 U.S.C. § 1332. The Ninth Circuit used the “place of operations” test to conclude that Hertz is a California citizen (and that diversity of citizenship thus was lacking). Hertz argues that, given California’s sheer size, this test will always be weighted toward a finding that a nationwide corporation is a California citizen: 12 percent of the nation’s population resides in California, and corporations often have commensurate business operations in California. Under the Ninth Circuit’s test, those operations render the corporation a California citizen for purposes of determining federal jurisdiction.

Hertz was argued November 10, 2009. The Court’s decision could have a profound impact on state and federal court litigation, since it will potentially come into play whenever a corporation sues or is sued in diversity.

Stolt-Nielsen S.A. v. AnimalFeeds Int’l: Class-Wide Arbitrations When the Arbitration Agreement is Silent

The Federal Arbitration Act, 9 U.S.C. § 1 et seq., expresses a federal policy favoring arbitration. But the FAA also states that parties can only be compelled to arbitrate in accordance with the terms of their arbitration agreement. Stolt- Nielsen S.A. v. AnimalFeeds International Corp. (No. 08-1198) asks whether an arbitration may proceed on a class-wide basis if the arbitration agreement is silent on that issue. The Second Circuit ruled that it could, affirming the outcome in an arbitration AnimalFeeds had initiated on behalf of a class.

In its petition for writ of certiorari, Stolt-Nielsen calls class arbitration “a fundamentally different animal than individual arbitration,” pointing out the significantly larger scale and monetary stakes that class-wide arbitration implicates. Stolt-Nielsen argues that a party’s consent to individual arbitration cannot plausibly be inferred as consent to arbitration on a class-wide scale. This view prevails in several circuits (the Fifth, Sixth, Seventh, Eight, and Eleventh), but not in other circuits or in several state courts (including the Second and Ninth Circuits, and Illinois, California, Pennsylvania and South Carolina).

The questioning during oral argument (December 9, 2009) suggests that the Court will need to work through a thicket of threshold questions before it resolves the ultimate issue. The justices and the lawyers debated whether the propriety of class arbitration depends on a conclusion that the arbitration agreement does not prohibit class arbitration, or whether the arbitrator must determine that the agreement authorizes it. The justices also probed what parties must do to contractually “agree” to class arbitration. Must the contract contain an express provision, or may the arbitrator use “background” rules (such as industry practices or state law policies favoring or disfavoring class arbitration) as tools for contract construction? Once these questions of contract construction are resolved, FAA law and policy enter the picture if the arbitrator cannot conclude (under whatever mode of contract construction) that there was no meeting of the minds on class arbitration. The Stolt-Nielsen decision will have implications not only for litigation, but for the drafting of future arbitration agreements as well.

Shady Grove Orthopedic Assoc. v. Allstate Ins.: Effect in Federal Court of a State Statute Restricting Class-Wide Arbitration

In another case with important implications for class actions, the Court is presented with the question of whether a state statute restricting class actions can prohibit a case from proceeding as a class in federal court. In Shady Grove Orthopedic Assoc. v. Allstate Insurance Co. (No. 08-1008), Shady Grove and other class members filed suit to recover statutory interest, claiming that Allstate violated a New York insurance statute. A New York law provides that an action to obtain penalties under state statutes may not proceed as a class action unless the statute that imposes the penalty specifically allows class actions. The district court agreed with Allstate, that the state statutory restriction on class actions supersedes Fed. R. Civ. P. 23, and dismissed the class-wide claim. The Second Circuit affirmed.

Shady Grove Orthopedic Assoc. was argued November 2, 2009. The justices explored whether the New York statute was “substantive” or “procedural,” and hypothesized a state statute that prohibited all class actions. Allstate’s counsel argued that the determination of whether that hypothetical statute was substantive or procedural would need to be made with reference to its purpose, but conceded that “it’s not always easy” to draw the line between substance and procedure. The outcome of Shady Grove could be far-reaching. Indeed, Allstate’s brief included a lengthy appendix of state statutes it says would be invalidated if this New York law here is held to be subordinate to Rule 23.

Merck & Co. v. Reynolds: Inquiry Notice Under the Federal Securities Laws

The statute of limitations on a federal securities fraud claim begins to run when the plaintiff has actual notice of the fraud or is placed on “inquiry notice” that it may have been defrauded. Merck & Co., Inc. v. Reynolds (No. 08-905) asks the Court to clarify what “inquiry notice” means in this context. Some circuits (including the Fourth and Eleventh) hold that an investor has “inquiry notice” if he possesses enough facts to suggest the possibility of fraud. Other circuits (including the First, Sixth, Seventh, and Tenth) hold that an investor is on “inquiry notice” when a reasonable investor could have, upon investigation, discovered sufficient facts to file a lawsuit. The Ninth Circuit, joined by the Third Circuit in Merck, has held that the statute does not begin to run until the plaintiff has evidence of the elements of the claim without the necessity of performing an investigation. In Merck, the Third Circuit concluded that product liability lawsuits, an FDA warning letter, and articles in medical journals and the popular press questioning the safety of Vioxx, did not place investors on notice that Merck committed securities fraud.

The Court heard argument in Merck November 30, 2009. Merck advocated for the adoption of an “inquiry notice standard,” meaning that the statute of limitations starts to run when information in the public domain “suggest[s] the possibility” of fraud. The United States argued in support of the shareholders, arguing that “[s]cienter is an essential element” of a securities fraud claim, and that the limitations period does not begin to run until shareholders have discovered (or should have discovered) facts establishing scienter. Merck picked up on this theme in rebuttal, emphasizing that the “narrow issue before the Court … is whether a plaintiff must possess information specifically relating to scienter in order to be on inquiry notice.” Merck then stated that the statute of limitations refers to facts constituting a violation of a 10(b), not the facts establishing the elements of a private cause of action for that violation.

In addition to providing a uniform rule as to when the limitations period begins to run in securities fraud cases, Merck also could have an impact on other statutes of limitations that are triggered by inquiry notice.