Diversity of citizenship

What Is Diversity of Citizenship?

Diversity of citizenship is a specific type of subject matter jurisdiction that allows federal courts in the United States to hear civil cases that involve parties from different states or between U.S. citizens and foreign citizens or subjects. It falls under the broader category of legal judicial system principles that define which courts have the authority to adjudicate particular disputes. This form of jurisdiction is crucial in preventing potential bias that might occur if a lawsuit between parties from different states were heard exclusively in the state courts of one party's home state. For a federal court to exercise diversity of citizenship jurisdiction, two primary conditions must be met: there must be complete diversity between the parties, and the amount in controversy must exceed a statutory minimum, currently set at $75,000.

History and Origin

The concept of diversity of citizenship as a basis for federal court jurisdiction has roots in the earliest days of the American republic. The framers of the U.S. Constitution included a provision in Article III, Section 2, Clause 1, extending the judicial power to "Controversies between Citizens of different States." This was driven by a concern that state courts might show favoritism towards their own citizens when involved in legal disputes with out-of-state residents, potentially undermining commercial stability and interstate relations.¹⁰,

Congress formally established this jurisdiction with the passage of the Judiciary Act of 1789, which laid the foundation for the federal judiciary.⁹ This act granted federal circuit courts original jurisdiction over civil cases involving diversity of citizenship where the amount in dispute exceeded $500. Over time, the specific requirements and interpretation of diversity of citizenship have evolved through legislative amendments and landmark Supreme Court decisions, notably shaping how corporations are treated for jurisdictional purposes.

Key Takeaways

• Diversity of citizenship allows federal courts to hear civil cases between parties from different U.S. states or involving foreign citizens.
• It aims to mitigate potential bias that might arise if a lawsuit were heard in a state court where one party is a resident.
• To qualify, there must be "complete diversity," meaning no plaintiff shares citizenship with any defendant.
• The amount in controversy in the dispute must exceed a specific monetary threshold, currently $75,000.
• This form of jurisdiction applies to civil actions, not criminal cases.

Interpreting Diversity of Citizenship

Interpreting diversity of citizenship primarily involves determining the "citizenship" of each party in a litigation. For individuals, citizenship is determined by their legal domicile, which is typically where they reside and intend to remain indefinitely. A person can only have one domicile, even if they own property or spend time in multiple states.

For corporations, citizenship is more complex. Under federal law (28 U.S.C. § 1332(c)(1)), a corporation is considered a citizen of both the state in which it is incorporated and the state where it has its principal place of business.,^{8 7}The Supreme Court has adopted the "nerve center" test to define a corporation's principal place of business, identifying it as the place where the corporation's high-level officers direct, control, and coordinate the company's activities, typically its headquarters.,^{6 5}This interpretation aims to provide a more predictable and uniform standard for determining corporate citizenship for diversity purposes.

Hypothetical Example

Consider a scenario where a plaintiff, Sarah, domiciled in California, wishes to sue a defendant, "InnovateTech Inc.," for breach of contract. InnovateTech Inc. is incorporated in Delaware, but its primary operational headquarters and executive decision-making (its "nerve center") are located in New York. Sarah claims damages totaling $100,000.

In this instance, Sarah is a citizen of California. InnovateTech Inc. is considered a citizen of both Delaware (its state of incorporation) and New York (its principal place of business). Since Sarah (California) is not a citizen of Delaware or New York, and the amount in controversy ($100,000) exceeds the $75,000 threshold, complete diversity exists. Consequently, Sarah could file her lawsuit against InnovateTech Inc. in a federal district court based on diversity of citizenship. If, however, Sarah were also a citizen of New York, then complete diversity would be absent, and the federal court would likely lack jurisdiction, sending the case to state court unless other grounds for federal jurisdiction existed. This highlights the importance of precise [legal domicile] determination for both the plaintiff and defendant.

Practical Applications

Diversity of citizenship is a fundamental aspect of American civil procedure, enabling a party to access the federal court system for disputes that might otherwise be confined to state courts. This can be a critical element of legal strategy for businesses and individuals engaged in interstate commerce or other activities that cross state lines.

For instance, a business with operations across multiple states might prefer federal court due to perceived neutrality, specific procedural rules, or a national precedent. The statute governing diversity jurisdiction is 28 U.S.C. § 1332, which also addresses cases involving foreign citizens or subjects. I⁴n some cases, such as certain types of class action lawsuits, the requirements for diversity may be relaxed to "minimal diversity," where only one plaintiff needs to be diverse from one defendant, rather than complete diversity among all parties. T³his jurisdictional avenue provides a forum for disputes that do not necessarily involve federal law but require an impartial tribunal due to the diverse geographic citizenship of the parties. The Federal Judicial Center provides further context on the historical and contemporary role of this jurisdiction.

²## Limitations and Criticisms

Despite its foundational role, diversity of citizenship jurisdiction faces certain limitations and criticisms. One significant challenge lies in determining the citizenship of complex entities, particularly corporations with operations spread across many states or even globally. The application of the "nerve center" test, while offering more clarity, still presents interpretive challenges for companies without a clearly defined single headquarters, such as those with highly distributed leadership or virtual workforces.

¹Critics argue that diversity jurisdiction can burden federal courts with cases that could otherwise be handled by state courts, potentially diverting judicial resources from matters of federal law. Some legal scholars have questioned whether the original concern about state court bias remains as relevant today, suggesting that the primary purpose of diversity jurisdiction may have diminished over time. Furthermore, the "amount in controversy" requirement means that many smaller interstate disputes still fall outside federal purview. The complexity in applying the rules, especially for corporate entities, can lead to prolonged jurisdictional battles, increasing litigation costs and delaying resolution.

Diversity of Citizenship vs. Federal Question Jurisdiction

Diversity of citizenship and Federal Question Jurisdiction are the two primary ways a case can establish subject matter jurisdiction in a federal court. While both allow access to federal courts, they differ fundamentally in their basis.

Confusion often arises because both types of jurisdiction provide a pathway to federal court. However, a case relying on diversity of citizenship focuses on who the parties are and how much money is at stake, whereas a case relying on federal question jurisdiction focuses on what kind of law the dispute is based upon. A single case may sometimes meet the requirements for both types of jurisdiction.

FAQs

What is "complete diversity"?

Complete diversity means that in a lawsuit with multiple parties, no plaintiff can be a citizen of the same state as any defendant. For example, if a plaintiff from New York sues two defendants, one from California and one from New York, there is no complete diversity, and a federal court would typically lack diversity of citizenship jurisdiction.

Does diversity of citizenship apply to criminal cases?

No, diversity of citizenship applies exclusively to civil actions, not criminal cases. Criminal cases are typically prosecuted by state or federal governments in the appropriate jurisdiction based on where the alleged crime occurred.

How is a corporation's citizenship determined for diversity purposes?

A corporation is considered a citizen of two places: the state where it is incorporated and the state where it has its principal place of business. The principal place of business is generally defined by the "nerve center" test, which is the place where the corporation's officers direct, control, and coordinate the company's activities, usually its headquarters.

Can a case with diversity of citizenship be heard in state court?

Yes, a case that meets the requirements for diversity of citizenship can still be heard in state courts. Federal courts have concurrent jurisdiction with state courts over such matters, meaning both systems have the authority to hear the case. However, a defendant in a state court case may choose to "remove" the case to federal court if diversity requirements are met.