United States District Court, Northern District of California
June 21, 2001
BYRON HO, PLAINTIFF,
IKON OFFICE SOLUTIONS, INC.
The opinion of the court was delivered by: Judge Wayne D. Brazil, United States Magistrate Judge.
ORDER DENYING MOTION TO REMAND AND CASE MANAGEMENT ORDER
Following the Ninth Circuit's ruling in Tosco Corp. v. Communities for
a Better Environment, 236 F.3d 495 (9th Cir. 2001),
the court raised sua sponte the question of Ikon's corporate citizenship.
In order to determine Ikon's "citizenship," we must identify the state that
is most appropriately considered Ikon's "principal place of business."
*fn1 If Ikon's principal place of business is a state other than
California the court must retain jurisdiction. If,however, we conclude
that California is Ikon's principal place of business the parties are not
diverse and the court must remand.
II. Policy Underlying Diversity Statute
The primary purpose of the diversity statute is to avoid prejudice against
"outsiders."*fn2 Corporations who have minimal contact with the public
in a particular state are not likely to be recognized as "locals." The
Congress that provided for diversity jurisdiction was concerned that a
local jury sifting in state court might exhibit bias in favor of a
"local" party who was suing an out-of-state party. Because federal courts
draw from a wider jury pool, removal to federal court, so the theory
goes, provides a more neutral forum. In contrast, parties who have a
great deal of contact with the public in a particular state are not
likely to be considered outsiders and, therefore, are not likely to be
victims of discrimination by "local" jurors sifting in state court.
III. Discussion A.The Applicable Law
In the Ninth Circuit the court must apply one of two tests in order to
identify Ikon's "principal place of business." If any state contains a
"substantial predominance" of icon' s corporate business activities, the
court applies the "place of operations" test. Industrial Tectonics, Inc.
v. Aero Alloy ["ITI'], 912 F.2d 1090 (9th Cir. 1990). The state that
substantially predominates, if any, is icon' s principal place of
business. In applying the substantial predominance test, the courts are
to compare, one at a time, the state in issue to each other individual
state in which the company is present. "[D]etermining whether a
corporation's business activity substantially predominates in a given
state plainly requires a comparison of that corporation's business
activity in the state at issue to its business activity in other
individual states. [citations omitted.] Thus, "substantial predominance'
does not require the majority of a corporation's total business activity
to be located in one state, but instead, requires only that the amount of
[the] corporation's business activity in one state be significantly
larger than any other state in which the corporation conducts business."
Tosco, 236 F.3d at 500. The alternative test for identifying a
corporation's principal place of business is to be used only if applying
the "place of operations" test as clarified in Tosco,the party seeking to
invoke federal jurisdiction proves that "no state contains a substantial
predominance of the corporation's business activities." Tosco , 236 F.3d
at 500 quoting ITI, 912 F.2d at 1094. That alternative test is known as
the "nerve center" test. Under it, the state in which the corporation's
core executive and administrative functions are carried out is its
"principal place of business."
The courts developed the "nerve center" test knowing that, under the
law as fashioned by Congress, only one state could be deemed a
corporation's "principal place of business" — and that there would
be instances in which a corporation's activities would be spread so
thoroughly and so
relatively evenly among many states that the only
principled basis for identifying the one state that should be deemed the
corporations principal place of business would be by locating the place
where the corporation chose to center ultimate power over corporate
policy and administration. In other words, there would be circumstances in
which mapping a corporation's operations would fail to identify a true
center of corporate activity — because that activity was spread
so relatively evenly and so widely among such a substantial number of
states. See ITI, 912 F.2d at 1093 ("courts generally assign greater
importance to the corporate headquarters when no state is clearly the
center of corporate activity") (emphasis added).
Plaintiff contends that California contains a substantial predominance
of Ikon's corporate business activity. Accordingly, plaintiff moves the
court to deem California Ikon's principal place of business and to remand
the case to the state court.
Ikon asserts that it maintains a relatively small presence in every
state and that n state substantially predominates. In that setting, icon
argues, the court must apply the nerve center test. According to Ikon,
Pennsylvania constitutes its nerve center. Thus according to Ikon, the
court has diversity jurisdiction. The law places the burden of persuasion
on these issues on the party seeking to invoke the court's diversity
jurisdiction. ITI, 912 F.2d at 1092. Ikon must prove, under the Tosco
test, that no state contains a substantial predominance of its business
activity. B. Comparison of Ikon's Presence in Various States
We utilize the analysis in Tosco as an aide to determining whether
application of the place of operations test, as we applied it in Ghaderi,
would be consistent with Congress' intentions as reflected in the
diversity jurisdiction statute and with Ninth Circuit case law. See,
Ghaderi v. United Airlines, Inc., 136 F. Supp.2d 1041 (N.D.Cal. 2001).
In order to determine whether any state contains a "substantial
predominance" of Ikon's corporate activity we consider several factors,
among those "the location of Ikon's] employees, tangible property,
production activities, sources of income, and where sales take place."
Tosco, 236 F.3d at 500 citing ITI, 912 F.2d at 1094.
The parties submitted evidence on a variety of factors relating to
Ikon's business activities in California and in other states. We
summarize that evidence below with respect to each factor.
As this court previously has stated, at least for some kinds of
companies, the location of a corporation's employees is important
evidence about where the corporation interacts with the public.
Ghaderi, 136 F. Supp.2d at 1045.
First, we consider the number of local people Ikon employs in a given
state. Ikon employs a total of 39,600 employees. It employs people in all
50 states. The evidence supports a finding that no single state contains
as much as 10% of Ikon's employees See, Declaration of Thomas
Reiter in Support of Defendant Ikon Office Solutions Opposition to
Motion to Remand, filed June 6, 2001 ("Reiter Decl."), at ¶ 8.
California; maintains the largest percentage of Ikon's employees, 8.6%.
Ikon employs 7.4% of it employees in Texas, 4.9% of its employees in
Pennsylvania, 4.9% of its employees in New York and 4.8% of its employees
In addition to employment relationships, we evaluate the number of
Ikon' s employees who interact with consumers in a particular state. The
evidence Ikon has
submitted supports a finding that 3072 California
employees (7.76% of Ikon's total number of employees) interact with the
public. Additionally, 2, 620 Texas employees (6.62% of Ikon's workforce),
1, 813 New York employees (4.5 8% of Ikon's workforce), 1,698 Florida
employees (4.29% of Ikon's workforce) and 985 Pennsylvania employees
(2.49% of Ikon's workforce) interact with the public. Reiter Decl., at
The evidence demonstrates that Ikon has greater contact with the public
in California than in any other state — but that the corporation's
contact is spread relatively evenly among many states and that the
percentage of public contact that occurs in California is less then 10% of
the national total.
2. Consumers/(Service Provided)
Ikon' s primary business activities are "sales and service." Reiter
Decl. at ¶ 9. Ikon submitted evidence about the distribution of
employees who interact with the public. See, section 1 above. Ikon does
not, however, set forth evidence from which we can determine the number
of local consumers to whom its employees make or solicit sales and to
whom they provide service. For example, all of Ikon's employees in a
particular state may interact with the public, but if they are all selling
to and servicing the same five clients Ikon's public contact is minimal.
Without evidence relating to the number of clients in each state we
cannot meaningfully evaluate this factor.
3. Tangible Property
The evidence supports a finding that Ikon owns 166, 662 square feet of
real' property. Reiter Decl. at ¶ 10. Over fifty five percent of
that property is located it Georgia, 20.7% is located in Missouri and
11.7% is located in Arizona. Ikon also lease property in Pennsylvania and
Illinois. The record demonstrates that Ikon neither owns nor leases any
property in California.
4. Sources of Income
In the last fiscal year, Ikon earned $4.4 billion in revenue. Sales and
servicing in California generated 7.9% of this revenue. Texas business
activities generated 5.4% of Ikon's revenue; Florida business activities
generated 5.3%; Pennsylvania business activities generated 4.6%; New York
business activities generated 4.1%, and Massachusetts business activities
generated 3.6%. No state generated more than 10% of Ikon's annual
revenue. Reiter Decl., at ¶ 11. Ikon earned more revenue in
California than any other state — but, like its employees, its
revenues were widely distributed among a large number of states —
no one of which accounted for even 8% of the total.
5. Locus of Other Commercial Transactions
No party has submitted evidence pertaining to commercial transactions
other than sales and servicing.
6. Executive and Administrative Functions
We also examine where the corporation's executive and administrative
functions take place. The evidence supports a finding that Ikon conducts
its executive and administrative functions primarily in Pennsylvania.
See, discussion section D infra.
C. Ikon Has Proved That No State Contains a "Substantial
Predominance" of its Business Activity
Plaintiff argues that California substantially predominates — and
sets forth a numerical comparison of states based on the above factors
that plaintiff contends
parallels the kind of comparison that this court
conducted in Ghaderi. Motion at 3 (Ikon conducts "17-46%" more activity
in California than in the next most active state). Ir Ghaderi we
determined that the defendant's presence in California significantly
outweighed its presence in any other state. But this case is
distinguishable from Ghaderi in important respects. In light of these
material differences, the court finds that it is inappropriate to
identify Ikon' s principal place of business using the "place of
operations" test. In Ghaderi the parties identified only two states in
which the corporate defendant United) maintained a significant percentage
of its operations: California and Illinois. Most significantly, the
percentage of the corporation's total operations conducted in each of the
two states was high — between 20-40%, depending on the factor in
question. Stated another way, Illinois and California each separately
contained a relatively large portion of United's entire business
activities — and United was very visible and active in both
states. In Ghaderi, we concluded that when a substantial percentage of a
corporations s overall business activity occurs in each of two states,
such that in each of the two states it is likely that the corporation
would be considered `local' and not an outsider, "the difference between
the magnitude of activity in the two states need not be very large to be
considered `substantial'" as that word is used in the "substantial
predominance test. Because, under the facts in Ghaderi, the corporation
was not likely to be considered an outsider in either of the two states
in which it was so visibly present, it served all of the policy
considerations that inform analysis of diversity jurisdiction to construe
the word "substantial" somewhat narrowly in that setting. The situation
in the case at bar is quite different. There are no states in which a
substantial percentage of Ikon's business activity occurs. Regardless of
the measure used, there is no state that can claim even 9% of Ikon's
business.*fn3 And there are a good many states in which the level of
Ikon's activity, measured by a percentage of all of the corporation's
business, is only a few percentage points less than in California. So we
confront a situation in which a national corporation's business activity
is spread relatively evenly among a substantial number of states —
so that there is no state (or no two states, as in Ghaderi) which clearly
predominate, and no state (or two states) in which there is a
substantially greater likelihood than in several others that the
corporation would be viewed by jurors as "local'.
It does not follow from the fact that a slightly higher percentage of
all of Ikon's business activity occurs in California than in several
other states that California jurors are likely to consider Ikon a local
company — or more likely to consider it a local company than jurors
in New York, Florida, Texas, or Pennsylvania. Because, by a considerable
margin, California is the largest state, measured by population and
economic activity, there often will be somewhat more activity in
California than in any other individual state for truly national
corporations. But it is highly unlikely that Congress intended every
national corporation that does more business in California than in any
other single state, by virtue of that fact alone, to be deemed a citizen
California for purposes of diversity jurisdiction. Such a rule would
distort access to federal court in California — making it more
difficult (than Congress intended) for California plaintiffs to sue out
of state companies in federal court and more difficult for out of state
defendants to remove cases to federal court in order to avoid the risk of
local prejudice. Where, as here, the percentage of the corporation's
activities in each of many states is 50 modest, it is especially
important for the court to take into account the distorting effect (on
the numbers that reflect relative activity in the many states) of the
forum state's size.
Moreover, we would relegate to legal oblivion the nerve center test
if; on the facts of this case, we were to follow the analytical path
suggested by plaintiff.*fn4 We have no authority to so alter the
doctrinal landscape. The cases under whose guidance we won indicate that
the nerve center test remains appropriate — when, given the
policies that inform analysis of diversity jurisdiction issues, use of the
"place of operations" test would not reliably identify the one state that
should be deemed the center of corporate activity or the one state in
which a substantial predominance of the corporations s business is done.
For all these reasons, we hold that, Ikon has established that "no
state contains a substantial predominance of [its] business
activities."Tosco, 236 F.3d at 500. Accordingly, we apply the nerve
center test. As a matter of law, it is the nerve center test, not the
place of operations test as applied by this court in Ghaderi, that most
appropriately identifies a corporation's principal place of business (for
purposes of diversity jurisdiction) when, as here, a national
corporation's business activities are spread relatively evenly over a
substantial number of states and when there is no one state in which more
than 10% of that activity occurs.
D. Ikon's Nerve Center is Pennsylvania
According to Ikon, under the nerve center test, its principle place of
business is Pennsylvania. Ikon's headquarters is located in
Pennsylvania. All corporate officers work out of that office. Ikon's
corporate policies and procedures arise from its headquarters. See,
Reiter Decl. at ¶¶ 4, 5 •. Plaintiff suggests that Pennsylvania does
not constitute Ikon' s nerve center. More specifically, plaintiff asserts
that management employees outside of Pennsylvania "have responsibility
for corporate management and policy making." Reply at 3. In support of
his position plaintiff cites the deposition testimony of Amy Turner, a
California employee. Ms. Turner indicates that, as a member of various
corporate committees, she has contributed to the development of certain
corporate policies and procedures. Ms. Turner's testimony indicates that
she has helped to establish corporate procedures. However, Ms. Turner's
testimony does not overcome evidence the Pennsylvania is Ikon's nerve
center. First, she helped to establish operational procedures. The
evidence does not support an inference that she helped to establish
corporate administrative policies or larger business strategies. Second,
she did so only as one member of a committee comprised of managers from
all over the country. Third, her direct supervisor works in
Pennsylvania. Fourth, she indicates that someone "in corporate" provided
input for these procedures and "policies" and that someone from
"corporate" had to approve
them before they could be implemented. See, Turner Depo., at 39,
4 1-42, 46, 48-51.
Accordingly, the court FINDS that Ikon has submitted evidence that
would support a finding that Pennsylvania constitutes Ikon's principal
place of business under the nerve center test.
IV. Case Management Orders
Following the hearing on plaintiffs Motion to Remand the court
conducted a case management conference. The court's pretrial scheduling
orders will be the subject of a separate written order. The court VACATES
the status conference scheduled for June 28, 2001, at 1:00 p.m.
For the reasons described above, plaintiff and Ikon are diverse.
Plaintiffs Motion to Remand is DENIED.