When litigating a claim, if the parties reside in different states, the claim may be brought in federal court, as opposed to state court, under diversity of citizenship grounds. If an action is brought in state court, and diversity of citizenship exists, the parties may request that the case be removed from the state court to the federal court. The issue of diversity is important since, most plaintiffs prefer to sue in state court, where the “home town” advantages are much more real, and thus defendants often try to remove the case to federal court.
In a unanimous ruling on Tuesday, February 23, 2010, the United States Supreme Court has determined that for the purposes of diversity of citizenship, a corporation will be deemed a resident of the state only where the company’s executives maintain their offices. The Court held that the “principal place of business” is located at the “corporate headquarters” or “nerve center” where the corporation’s officers “direct, control, and coordinate the corporation’s activities.”
This is an important ruling because although a corporation could sell their products in all fifty states, that corporation cannot be considered a resident of any state its products are sold, except the state in which its corporate headquarters is located. If someone claims they bought a defective product in their home state, they can no longer “hometown” the corporation in a product liability suit by bringing their action in their home state court. If the litigant attempts to gain the hometown advantage by commencing the action in state court, the corporation will be able to swiftly remove the case to federal court on the basis of diversity of citizenship.
Effectively, this ruling provides corporations with another strategic avenue to increase the likelihood of fair litigation, without the claimant obtaining the hometown advantage. This ruling may also change the structure of class action suits, where one representative member is chosen from the class for the purposes of determining diversity. If the class wants to litigate in state court, the only state court option will be that state where the corporation is headquartered, and the representative of the class will have reside in the same state as the corporation. Corporations selling products in many states should be prepared to ask for removal to federal court any time they are sued in state court, and should expect to see an increase in federal litigation as a result of this decision.
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Special thanks to Alison Weintraub for her contributions to this post.