9th Circuit Details Corporate Citizenship Tests
In a significant case for credit card issuers and retailers, the Ninth Circuit has detailed the application of its tests of corporate citizenship for purposes of federal jurisdiction. In Davis v. HSBC Bank Nevada, N.A., et al., the Court held that retailer Best Buy is not a citizen of California merely because it has more presence in this state than in any other state.
In Davis, plaintiff sued credit card issuer HSBC and retailer Best Buy, asserting claims for violation of California's unfair competition statute, §17200, and false advertising statute, §17500, alleging the companies defrauded consumers by failing to adequately disclose the credit card's annual fee. Defendants removed the case to federal court based on the Class Action Fairness Act of 2005 ("CAFA"). Plaintiff moved to remand based on the local controversy exception to federal jurisdiction, 28 U.S.C. §1332(d)(4), which bars federal jurisdiction where, among other things, at least one defendant is a citizen of the original forum state. The district court granted plaintiff's motion to remand. Defendants appealed.
On appeal, the Ninth Circuit reversed the district court's holding that Best Buy is a citizen of California, holding the local controversy exception does not apply and that CAFA jurisdiction exists. The Court cited its two tests to determine a corporation's principal place of business and citizenship: (1) the "place of operations" test, under which a corporation's principal place of business is the state in which "a substantial predominance of corporate operations" occur; and (2) where there is no substantial predominance, the "nerve center" test, under which a corporation's principal place of business is the state in which "the majority of its executive and administrative functions are performed."
Applying this framework, the Ninth Circuit held that the district court improperly concluded that Best Buy has its principal place of business in California, and is thus a citizen of California, because it has a greater presence in California than in any other state. The Court held that this merely reflects that California is the most populous state and that this "predominance" of operations did not amount to a "substantial predominance." The Court reversed and remanded.
Significantly, the Court also noted that "when a corporation has operations spread across many states, the nerve center test is usually the correct approach" to determine corporate citizenship.
