Introduction
Is it fair to have two different standards for determining
diversity jurisdiction: one for individuals and another for corporations? Does
this distinction perpetuate corporate power and weaken the people? If
corporations are considered “people” when seeking protections under the First
Amendment, why are they not considered “people” when determining where a
lawsuit is allowed to be filed and disputed?
diversity jurisdiction: one for individuals and another for corporations? Does
this distinction perpetuate corporate power and weaken the people? If
corporations are considered “people” when seeking protections under the First
Amendment, why are they not considered “people” when determining where a
lawsuit is allowed to be filed and disputed?
A Corporation Over Here, A Person Over There
Diversity jurisdiction permits civil cases to be heard in
federal court, as opposed to state court, even if they address state law[1].
If there is not complete diversity, then the case must go through the state judicial
system. There is no diversity if the plaintiff and defendant are citizens of
the same state.
federal court, as opposed to state court, even if they address state law[1].
If there is not complete diversity, then the case must go through the state judicial
system. There is no diversity if the plaintiff and defendant are citizens of
the same state.
The citizenship of a corporation can be determined by the
state where it has its principal business dealings (“nerve center”) or
the state where it is incorporated[2].
The citizenship of an individual is determined by an individual’s single place
of permanent residence.
state where it has its principal business dealings (“nerve center”) or
the state where it is incorporated[2].
The citizenship of an individual is determined by an individual’s single place
of permanent residence.
In the Citizens United
v. FEC case, it was determined that the First Amendment protects a corporation’s
right to political speech. Additionally, the Supreme Court found that the
requirement of a business to provide health insurance covering specific forms
of contraceptives violated the First Amendment rights of business owners in Burwell v.
Hobby Lobby when the plaintiffs indicated it was against their
religious beliefs.
v. FEC case, it was determined that the First Amendment protects a corporation’s
right to political speech. Additionally, the Supreme Court found that the
requirement of a business to provide health insurance covering specific forms
of contraceptives violated the First Amendment rights of business owners in Burwell v.
Hobby Lobby when the plaintiffs indicated it was against their
religious beliefs.
What’s the big deal?
The U.S. Supreme Court has agreed, on at least two occasions,
that corporations are, in fact, people. However, diversity jurisdiction clearly
delineates between individuals and corporations when determining which system a
case can be heard. Corporations
may prefer a "fairer" federal court for their cases to “limit their
losses” and cases
may be more likely to be dismissed. Hertz Corp. v.
Friend, the case from which the corporate citizenship test was
conceived, exemplifies a corporation’s preference to be heard in federal,
versus state, court.
that corporations are, in fact, people. However, diversity jurisdiction clearly
delineates between individuals and corporations when determining which system a
case can be heard. Corporations
may prefer a "fairer" federal court for their cases to “limit their
losses” and cases
may be more likely to be dismissed. Hertz Corp. v.
Friend, the case from which the corporate citizenship test was
conceived, exemplifies a corporation’s preference to be heard in federal,
versus state, court.
It could be argued that the system seems to support what is
most advantageous for corporations rather than individuals.
most advantageous for corporations rather than individuals.
Conclusion
Corporations and individuals alike are provided the benefit
of free political speech and religious protection. However, if corporations are
defendants in civil cases, it seems their path to a federal court is made
easier by the citizenship test, perhaps placing plaintiffs in a weaker
position.
of free political speech and religious protection. However, if corporations are
defendants in civil cases, it seems their path to a federal court is made
easier by the citizenship test, perhaps placing plaintiffs in a weaker
position.
This looks great! I need to figure out how to post mine this way.
ReplyDeleteI can help! Just give me a call!
ReplyDeleteI read through the Hertz Corp v. Friend decision and understand the arguments made on both sides. On one hand, Hertz feels it will receive a fairer shake in federal court and limit their losses under federal jurisdiction, and the citizens of CA suing Hertz under state wage and hour laws know that that the California judiciary has an interest in protecting them. Though not headquartered in CA, it is troublesome, however, that the corporation can avoid all state laws they may be subject to under CA court jurisdiction, because they do significant business in that state.
ReplyDeleteI like Jaclyn's distillation of the key points here. California's employment laws have long been more progressive than the federal baseline, and a corporation that cannot afford to meet those stricter standards has every right to restrict its operations to cheaper environs. (Utah touts its "business-friendly" reputation for a variety of reasons, but this is surely among them.)
DeleteSurely, this facet of "corporate citizenship" inspires a natural inclination to declare a business's "nerve center" in whichever of its outposts has the most permissive employment law. I am somewhat heartened by this excerpt, near the end of V.B:
Indeed, if the record reveals attempts at manipulation—for
example, that the alleged “nerve center” is
nothing more than a mail drop box, a bare office with a
computer, or the location of an annual executive retreat—
the courts should instead take as the “nerve center” the place of actual direction, control, and coordination, in the
absence of such manipulation.
Certainly, if they had to mention it, somebody's had the audacity to try it!
Jaclyn and Erin...Hertz cannot avoid application of California state law; the law will still be applied even if the lawsuit is tried in a federal court. We will discuss this in class.
DeleteIn the Legal Research and Writing class I took at SLCC, we discussed the concept of corporations as people and noted that the first time this occurred was not People United but in Santa Clara County v. Southern Pacific Railroad Company, 118 U.S. 394 (1886). If I remember correctly, it sounds like that part of the holding was largely dormant for the majority of the previous century and wasn't revived until Citizens United.
ReplyDeleteAs to the point Kate made in her conclusion, I would agree that individuals may be harmed by the issue of a corporation's location. I know at my firm, one of the organizations we represent is based out of Utah and the contracts drafted require any litigation to be heard in the 3rd District Court in Summit County. Since the client has business dealings all over the United States, this may make it difficult for any customers to pursue claims against the client (though in this instance, the customers contracted away the right to choose the forum anyway). In such circumstances, it can be difficult for an out of state client because they will most likely have to hire counsel that is in the forum state as well as travel to the forum state for depositions, hearings, and trial.
Peter, I had not really considered securing representation in another state and the challenges that may bring. I am looking forward to hearing more about how these concepts and processes work in a more local way.
DeletePeter...you raise a valid point regarding the hardships that "forum selection" clauses in contracts may present, but this is a separate issue unrelated to diversity jurisdiction and is a discussion for another day
DeleteCorporations need the protection of diversity jurisdiction otherwise, they would probably have multiple lawsuits brought against them from all over the country. A corporation has two "homes" or residences. The first is the state in which they are incorporated and the second is the state in which they are headquartered. If these states are different, then each state would have general jurisdiction over the corporation. This may work in favor of corporations, because they can choose which states to reside in based on that state's substantive law.
ReplyDeleteHowever, an individual or individuals that are residents from the same state can file a claim against a corporation if there is specific jurisdiction. In order to exercise specific jurisdiction there cannot be a third party. The suit has to arise from the defendant's contacts with the forum.
Raelene...you are mixing up the related, but separate issues of subject matter jurisdiction and personal jurisdiction, which is understandable and easy to do. We will discuss this in class, particularly on Saturday when we specifically address personal jurisdiction.
DeleteI reviewed Justice Breyer's opinion in Hertz Corp. v. Friend in which he refers to three sets of considerations that convinced the Court to use the "nerve center" approach in determining jurisdiction. The first reason is the plain language of the federal diversity jurisdiction statute ( §1332(c)(1)) supports it. Second, administrative simplicity is a major virtue in a jurisdictional statute, meaning that the “nerve center” approach is simple and easy to apply. Third, the statute’s legislative history suggests that the words “principal place of business” should be interpreted to be no more complex than an earlier, numerical test that was criticized as too complex and impractical to apply. As Justice Breyer states, "A “nerve center” test offers such a possibility. A general business activities test does not."
ReplyDeleteLeila...Good summary of the Court's reasons for sticking with the "nerve center" test. The opinion was unanimous and shows the Court is often pragmatic.
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ReplyDeleteFrom the research I have done on this topic it appears that corporations prefer federal courts to state courts due to the presumption that they are predictable, more transparent, and less subjective to local biases in state courts. I believe that this could be seen as favoring a corporation over individuals who may not get that same privilege. However, corporations are generally playing a different role in society and the structure of diversity jurisdiction displays that role.
ReplyDeleteIt is crucial that corporations have accessibility to federal courts and I say this for a few reasons. As a corporation, your products or services are likely hitting multiple areas in the country (especially a national or even international corporation) you are more likely to be sued due to the volume of people interacting with your business. As a corporation it would be frustrating for the corporation and their legal counsel to be expected to know and understand the specific laws, rules, and regulations of each of the states their corporation dips into. This could be one of the reasons that the federal courts are willing to take on these cases because if a corporation had the need to provide a form of legal counsel everywhere their company potentially had a liability, it would cost the corporation a large amount of resources which would ultimately be passed along to the consumers.
Another concern could be that of the “home court advantage”. If corporations were forced to appear in the state in which the plaintiff filed the lawsuit, then the plaintiffs would have the advantage. Judges and juries, even though it is subconsciously, tend to favor the locals.
As an individual I feel that the likelihood of being sued by someone in a neighboring state is very unlikely, whereas this is a constant concern for a corporation that extends beyond one state. In this context I can see how effective the law is for corporations.
Your point about the rarity of individual lawsuits across state lines is well taken. Still, it might be more likely than it appears -- notably, in the Northeast, where many cities have "commuter suburbs" in a neighboring state. (Someone who lives in Jersey City, NJ may very well work in New York City, for example.)
DeleteCloser to home, it is perhaps less common but certainly not unheard of for metro areas to spill across state lines: a vehicle collision in Pullman, WA could easily have one driver from Pullman and one from nearby Moscow, ID.
Jordan, thanks for providing a different perspective. You are right to highlight how if the current system was adjusted, it may become biased in favor of an individual. I also agree that the citizenship test for corporations, thereby eliminating the need for knowledge of every state's specific laws, likely creates a more efficient system. I don't know if there is a better option than what is currently in place.
DeleteJordan...you make some persuasive policy reasons why many corporations prefer being in federal rather than state court, but individuals can use diversity to their benefit as well (as pointed out by Erin), e.g. to remove a state court case to federal court when a citizen of state A is sued by another citizen in state B. Also, companies that do business in many different states must necessarily familiarize themselves with the laws of each state in which they do business. We will talk further about this in class.
DeleteInspired by Kate's link to the blog post from Max Kennerly, Esq., I went looking for an update on the vacancy rate. I found The American Bar Association's latest available data* on judicial vacancies and their cascading effects throughout the system -- notably, long delays and likely dismissals, as Kate mentions above.
ReplyDeleteAs we've touched on in class, delays tend to work to a defendant's advantage. Corporations' preference for the federal system reflects that advantage; it also raises worthwhile questions about the leisurely pace at which the Executive and Legislative branches work to fill judicial vacancies. The drawn-out, fruitless tug-of-war over Merrick Garland's nomination in 2016 was a prime specimen of the inefficiency that results from such partisan brinkmanship. The judicial branch's full functionality took a distant backseat to zero-sum ego conflict between the Legislative and Executive branches.
This is where my accounting background (read: uptight killjoy nature) makes me wonder about an inherent conflict of interest for senators whose campaigns have accepted generous consideration from certain corporate entities, such as PACs and SSFs, going on to stymie an already-bottlenecked judicial system in its efforts to rule on lawsuits brought against said corporate "persons." Checks and balances are a crucial component of the system, but stonewalling of the kind we witnessed in 2016 is all check, and no balance.
*These numbers are said to be updated every Friday, but August 10th is the most recent I could find under the relevant tag. If someone can locate the update as of last Friday, please accept my compliments!
Erin, your research is impressive (!!!) and I think your perspective because of your accounting background is exactly why I was excited about this program! I am grateful you found data to support the case delay/dismissal as I was worried about the speculative nature of the corporate "advantages" I read about. Thank you for your incredibly thorough and thoughtful post!
DeleteAnd thank YOU for a great springboard! I welcome any challenges to my multiple tangents here as well...I appreciate how well everyone else has articulated their perspectives here.
DeleteErin and Kate...the problem created by unfilled judicial vacancies in terms of case delay is of vital importance, but in some parts of the country cases are disposed of more quickly in federal court than state court.
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ReplyDeleteIs it “fair” to have two different standards for determining diversity jurisdiction between individuals and corporations? One could make an argument for either side. I am of the opinion that individuals and corporations are different and therefore do require different standards.
ReplyDeleteI agree corporations may have an advantage since, the point has been made that they can choose to have their “nerve center” wherever it may work to their advantage when it comes to litigation. The opposing view would say it also wouldn’t be “fair” for corporations to be faced with the cost and challenge of having counsel that is in all states they operate in. Fact is corporations have much higher exposure for lawsuits than an individual does.
TNT...much of what courts do is "line drawing" and differentiating between groups and different fact situations, particularly when the legislative branch uses broad language. In terms of "fairness" allowing corporations to be citizens of two states where individuals can only be a citizen of one state often means corporations will be able to remove state cases in fewer case if they only had one state of citizenship. In fact, the legislative history shows that limiting the number of federal court diversity cases was one of the goals of Congress in adding the "principal place of business" phrase to the diversity statute.
DeleteThis is such an interesting case with so many different ways to interpret. I think this discussion boils down to one word: fair. What is fair? Who determines fair? According to my research on this case and others like it, there has been much debate over who has the advantage and disadvantage when a corporation is being sued by an individual (or individuals). There has been an inconsistency in general when determining diversity jurisdiction which adds to the confusion of what is fair. Sometimes it appears as a diversion tactic on the part (in this case) of the corporation or it could simply be a way for the corporation to level the playing field a bit. Very interesting discussion.
ReplyDeleteTricia, when I drafted my post, I was definitely worried about taking a hard stance because I could see the other side. You raise a great point that everyone's definition of "fair" is going to be a bit different so how do we objectively determine that. If we look at my post, it could very well be argued that while the current system *might* be advantageous to corporate defendants, we do not know that an alternative system (or treating corporations as people for determining citizenship) would not then favor a "person." If someone subscribes to my thoughts above, I am not sure it would be easy to find a more neutral solution.
DeleteI don't either! I think being completely neutral would be hard, especially considering many of the points brought up in these comments.
DeleteTricia and Kate... like beauty "fairness" is in the eye of the beholder. But the issue of "fairness" is one for Congress, not the Courts. The Court's role is to divine what Congress meant when it added the phrase "principal place of business" to the diversity statute.
DeleteGreat question Kate. I'm undecided on whether or not federal courts, as a general rule, lean toward cutting all corporations slack, but from my past experience directing a corporation I can say, had we ever been involved in a lawsuit, I would have much preferred the case be heard in Federal court than in State Court.
ReplyDeleteOur business operated within an industry where the services and products extend across multiple states and jurisdictions, and where federal district courts have played a bigger role in shaping the laws and regulations that govern the industry. My "hunch" is, with the exception of four or five states, many state courts around the U.S. are simply not as familiar with hearing issues specific to that industry.
Jason...experience and expertise of federal judges in particular areas of the law is often a factor in deciding whether you want your case tried in state or federal court. It also is an element that figures into "venue," which we will discuss on Saturday.
DeleteThat's a great point, Jason. I would love to learn more about the states that are corporation-friendly (i.e., Why is it advantageous to incorporate in some states over others? Is it beneficial to do principal business dealings in one state over another? Why?).
ReplyDeleteWhen I was taking my MBA courses in the early 2000’s the professor of my business law class was a Florida based attorney who had a firm opinion about corporations. Though it predates Citizens United v. Federal Election Commission, I can remember him telling the class that we should all create corporations as soon as we had one employee (ourselves). His logic went as follows:
ReplyDelete1. When someone says it is time to do the dance (court), you can choose the music (court location). His belief was that we had the ability to tilt the scale in our corporation’s favor in being able to choose federal court should a civil case arrive against us.
2. Many people in the course planned to act as management consultants as a side business in multiple states. The professor believed that creating our own single-person corporations allowed for the corporation to enter into a contract shielding us as private individuals from lawsuits. Though we as individuals were the consultant, the corporation would be the one sued if we gave poor advice that landed the company in court. For example, if I told your company to fire that problem employee ASAP and they fired the person without telling me they were a problem because they rebuffed their supervisor’s sexual advances, I may find my name in the lawsuit when the employee sues for wrongful termination. Though my intent was correct the impact may be farther reaching.
3. “If your cooperation is pulled into court do not allow the local yolkal court decide.” I am sure that is not the exact quote, but you get the just. He wanted to make sure if our product caused harm in a different state, we did not have a judge/jury of the plaintiff too close to the outcome. He thought is we could try to get the case closer to us and farther from the plaintiff’s location, we may prevail.
Many years have passed since I took the business law class and I still sporadically remember bits and parts of the knowledge. The majority of the course did come flooding back into my mind when I was reading the Salt Lake Tribune and saw Burwell v. Hobby Lobby in 2014. It puzzled my mind that a for-profit company could use a religious exemption in regards to birth control for employees. I worked for a non-profit university previously and knew there were certain medical items not covered on my insurance plan, I figured it was their right since they were aligned with a religious organization. Hobby Lobby caused me a lot of internal turmoil because the thought of a for-profit business, with religious alignment, and the rights of a corporation did not seem to lead to proper female employee medical treatment. I still struggle with the concept and figure the free market will decide.
Overall, I agree with Kate that, “if corporations are defendants in civil cases, it seems their path to a federal court is made easier by the citizenship test, perhaps placing plaintiffs in a weaker position.” Treating a corporation with human characteristics seems to make them easier to defend even when their actions may not be rooted in social justice. People run the Hobby Lobby Corporation and they run that business in a public sector, which to me means equal medical treatment for all.
Todd...you raise multiple topics for discussion, many of which we will address later in the semester. I suspect your business law professor was giving you the advice to incorporate your consulting business as a way not to forum shop, but to insulate your personal assets. There are also some tax advantages of incorporating. Nonetheless, we will discuss Kate's conclusion (and your agreement with it) in class.
DeleteTodd, great post! I wonder whether I have such a superficial understanding of the law and these cases that it is unfair to suggest that corporations be treated as "people" for all purposes. As I read your struggle with the outcome of the Hobby Lobby case, the issues feel so far removed from diversity jurisdiction so it may be reasonable for there to be separate requirements for corporations versus individuals. It is, however, a difficult pill to swallow when it seems as though one side is favored under the system.
ReplyDeleteConsistency and an element of judicial predictability are not unreasonable requests from corporations who provide services and goods across the nation and beyond. To a significant degree, it’s an operational necessity and creates an element of judicial economy. I agree it is duplicitous, but not surprising to see corporations as a collective, argue apposing points in order to advance their individual agendas, however. We, as human beings do it all the time. I understand the frustration when the higher court grants personhood to a corporation in the context of religious or political “freedom,” because the very nature of creating a business or corporation separates it from an individual on so many different fronts. The acknowledgement flies in the face of the corporate structure leveraged to support the “nerve center” framework created for diversity jurisdiction. As citizens of this country we all get to express ourselves on religious and political fronts as individuals. These rights were born of centuries of oppression, which the founders of our country sought to eliminate. Not only are we allowed to practice, but also feel free from the oppression often felt by those with opposing beliefs. Where do we draw the threshold of acceptability once precedence is set? How do we maintain the corporate/individual balance of power? I personally feel that once you obtain a business license you are agreeing to provide services for all. If your business gets so large that it spans or impacts people in multiple states, reasonable expectations for venue in litigation is fair. If a corporation wants to leverage that within the constructs of the law to their perceived advantage, then so be it. A corporation or business is not a person just because it is made up of people. It is an organization that has entered into an agreement governed by local, state, tribal and federal laws. If a person doesn’t want to engage with those they take exception with on a personal level, then don’t. But don’t open a business for everyone except those you find unworthy. It feels unconstitutional. Unintended consequences can be far reaching as these decisions are brought through the legislative and judicial process. Although it has to do with HB 2 in North Carolina, the topic of arbitrary denial of services by a business is addressed in this Comedy Central piece. This video is scary and funny all at the same time, but it goes to my threshold question and what rights should or should not be extended to corporations. Caution, there may be aspects that are a little “colorful.” I hope it is not offensive to anyone.
ReplyDeletehttp://www.cc.com/video-clips/emmbcg/the-daily-show-with-trevor-noah-putting-north-carolina-s-anti-lgbt-law-to-the-test
The issues of corporate morality and responsibility and which laws should apply to which corporations is a timely and important topic, but beyond this week's topic of jurisdiction, so hold these thoughts until a later day.
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