Latest Legal News: Corporations Win Federal Court Access Battle

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Corporations Win the Forum Shopping War With Hertz Corp. v. Friend


As litigators, cynics and viewers of A Civil Action know, how and where a lawsuit is brought can determine its outcome at least as often as the merits of the case. Perhaps the most potent civil procedure decision is the case's forum: state or federal court. Generally, corporate defendants prefer federal courts and plaintiffs' attorneys prefer state courts. As a result, "forum shopping" battles dominate the early stages of proceedings, as the sides fight over whether a corporation can be deemed a "citizen" of the state the plaintiffs come from; if both sides are from the same state, the case stays in that state's court.So frequently the big issue is where a corporation has citizenship. The Circuit Courts have interpreted the key statutory language -- citizenship exists where the "principal place of business" is -- in a few ways, but most assess the "total activity" of the corporation, including its purposes, type of activity and legal site, and most of the others similarly look to the operations of the business as a whole. Only the 7th Circuit focuses on the company's "nerve center," essentially meaning the place where the company is headquartered.

In Hertz Corp. v. Friend, our business-friendly Supreme Court unanimously swept away the case-by-case assessments of where businesses actually conduct their business and adopted the 7th Circuit's nerve center approach. Now corporations can insure federal diversity jurisdiction -- plaintiffs and defendants coming from different states -- whenever they most want it by (re)locating their headquarters.

Expect this decision to produce two dynamics. First, some corporations will relocate out of states where the courts are viewed as particularly plaintiff friendly, insuring claims against them will not be brought in those courts. Second, corporations will threaten to leave if the state legislatures don't amend their laws to make corporate-friendly outcomes more likely if the case is heard in the state court.

Think those outcomes sound far-fetched? Delaware's corporation-friendly laws have led over 50% of publicly traded companies and 63% of the Fortune 500 to incorporate there, regardless of where they do business. Consider also that corporations routinely threaten legislatures that they will leave if don't get the legal changes sought -- usually tax breaks -- and consider that the stakes in litigation can reach billions of dollars.

Will Congress view this decision like the Ledbetter v. Goodyear Tire & Rubber Co. case, in which the Supreme Court made a business-friendly statutory interpretation that shut off access to the courts, and promptly overturn it with a statute? Probably not, as plaintiffs' preference for state courts is not as sympathetic as plaintiffs being underpaid because they're women. Nonetheless, the decision similarly appears to thwart the intent of the statute it interprets.

Prior to 1958, a corporation's citizenship was based on its place of incorporation only. Congress found that businesses were deliberately avoiding local courts by getting out-of-state charters, and so amended the statute to include the "principal place of business" language. With "principal place of business" now so narrowly defined that a company like Hertz, which does twice as much business in California than anywhere else in the country, cannot be deemed a California citizen required to litigate California law claims in California courts, perhaps Congress will be moved to overturn this decision too.

Lippmann/Kaye Bronx Criminal Court Unconstitutional; Thousands of Misdemeanor Convictions Face Reversal

In an earlier post, I noted that New York's new Chief Justice Jonathan Lippmann reportedly puts his preferred outcomes ahead of technical rules. Well, in his last job as chief administrator of the courts, he and then-Chief Justice Judith Kaye decided to make the Bronx criminal court system more efficient by combining two courts, a decision just ruled unconstitutional by New York's Appellate Division First Department. If this ruling is upheld, whatever the efficiency-based merits of combining the courts, the result could be upending thousands of misdemeanor convictions. New Yorkers can only hope that the Court of Appeals will decide Lippmann and his predecessor Chief Justice Kaye paid sufficient attention to technical rules.

And in the Business of Law . . .

At Reed, Smith revenue is down and profits up. Crowell & Moring had a great year, but its D.C. kin didn't -- Venable's results were flat, and Hogan & Hartson down. Latham & Watkins picked up four Vinson & Elkins partners, and Weil, Gotschal & Manges managed to bill $300k/day for its work on the Lehman Brothers bankruptcy.
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