Supreme Court Defines Corporations' "Principal Place of Business" for Federal Diversity Jurisdiction

The United States Supreme Court recently established a uniform standard for determining corporate citizenship for federal diversity jurisdiction, defining a corporation’s principal place of business as “the place where the corporation’s high level officers direct, control and coordinate the corporation’s activities.” Hertz Corp. v. Friend, 130 S. Ct. 1181, slip op. at 1 (Feb. 23, 2010). This “nerve center” will typically be found at the corporation’s headquarters. The Court’s standard—which eliminates the panoply of tests used by federal courts across the United States—should yield more predictability for corporations and their counsel. The Hertz decision should also streamline the ability of corporations sued in state courts to remove a lawsuit to federal court based on diversity of citizenship.

Background

Generally, the U.S. federal courts have jurisdiction over cases arising under federal law (referred to as “federal question” jurisdiction), and over cases involving citizens of different states, or citizens of a state and a foreign locale, where the amount in controversy exceeds $75,000 (referred to as “diversity jurisdiction”). Under the diversity statute, a corporation is deemed a citizen of any state by which it has been incorporated and of the state where it has its “principal place of business.” 28 U.S.C. § 1332(c)(1). While the test for the state of incorporation is clear, “principal place of business” has proven to be a more difficult standard to apply. Over time, the lower federal courts have created increasingly complex and divergent tests for determining a corporation’s “principal place of business.” Different federal circuit courts of appeals have applied different one-part or two-part multifactor tests, with names such as “center of corporate activities,” “locus of operations,” “place of operations,” “nerve center,” “total activity” and “center of gravity.” Moreover, different circuits and sometimes even different district courts within a single circuit have applied these tests in different ways. These varied and complex tests encouraged time-consuming litigation over the appropriate forum for a lawsuit, distracting the parties and the courts from the merits of the dispute.

Hertz

The Hertz case provides an example of the type of complicated litigation over a corporation’s citizenship that the Supreme Court’s “nerve center” test will simplify. Plaintiffs, California citizens, sued Hertz Corporation in California state court for California wage and hour law violations, on behalf of a potential class of state citizens. Hertz sought to remove the case to federal court based on diversity of citizenship, claiming that its “principal place of business” was in New Jersey, where its corporate headquarters are located. To address the Ninth Circuit test for citizenship, Hertz submitted a detailed declaration with information on a state and national level about its facilities, business locations, employees, revenue and business transactions. In addition, the declaration reported on the location of the corporate leadership of Hertz and its domestic subsidiaries, where its core executive and administrative functions occur and the places where its major administrative operations are found. After analyzing Hertz’s business activity state by state, determining that the plurality of each of the relevant business activities was in California, and finding a significant differential between the amount of those activities in California and those elsewhere, the district court concluded that Hertz’s principal place of business was in California and, because plaintiffs were also Californians, diversity jurisdiction was lacking.

Rejecting reliance upon such a complex form of analysis, the Supreme Court unanimously adopted an expanded version of the “nerve center” test articulated more than 51 years ago by New York federal district judge Edward Weinfeld in Scot Typewriter Co. v. Underwood Corp., 170 F. Supp. 862, 865 (S.D.N.Y. 1959). Emphasizing the need for a nationally uniform interpretation of “principal place of business,” the Court held that:

“principal place of business” is best read as referring to the place where a corporation’s officers direct, control, and coordinate the corporation’s activities. It is the place that Courts of Appeals have called the corporation’s “nerve center.” And in practice it should normally be the place where the corporation maintains its headquarters—provided that the headquarters is the actual center of direction, control, and coordination, i.e., the “nerve center,” and not simply an office where the corporation holds its board meetings (for example, attended by directors and officers who have traveled there for the occasion).

Hertz, slip op. at 14. While emphasizing the relative simplicity of this test, the Court acknowledged that difficult questions will arise under its “nerve center” analysis, such as determining the citizenship of a corporation whose leadership is spread throughout the country, sharing command and coordinating functions thanks to modern technology. Turning to the case before it, the Court noted that Hertz’s “center of direction, control, and coordination, its ’nerve center,’ and its corporate headquarters are one and the same,” and are located in New Jersey, but remanded the case for further proceedings consistent with the opinion.

Analysis

The Supreme Court’s “nerve center” test will provide welcome uniformity for determinations of corporate citizenship for federal diversity jurisdiction. For those considering how best to apply this test, Hertz provides some additional guidance:

•  The principal place of business should be a single place within a state, and is not determined based on a level of activity within a state as a whole.
• A mere statement in a document, such as an SEC Form 10-K, listing a corporation’s “principal executive offices” is not, without more, sufficient proof of a corporation’s principal place of business.
• The courts will look past any manipulative attempts to define a corporation’s principal place of business and take as the “nerve center” the place of actual direction, control and coordination. For example, neither a mail drop box, a “bare office with a computer, nor the location of an annual executive retreat” will qualify as a corporation’s “nerve center.”

The test is designed to “point[] courts in a single direction, towards the center of overall direction, control, and coordination.”

Please feel free to contact any of your regular contacts at the firm or any of our partners and counsel listed under Litigation and Arbitration if you have any questions concerning this subject.