04.19.2010
"Nerve Center" to Determine "Principal Place of Business"
US Supreme Court Says "Nerve Center" Test to be Used in Determining a Corporation’s "Principal Place of Business"
Diversity jurisdiction in federal courts requires that all the parties to an action be "citizens" of different states. [28 USC §1332(a)] Corporations have dual citizenship for diversity purposes. They are citizens of whatever state they were incorporated in and are citizens of the state where the corporation has its "principal place of business." [28 USC §1332(c)(1)]
The problem in the past has been determining exactly where that is. Some courts used the "nerve center" test, looking to the place where the corporation’s executive and administrative functions were located. Others used the "place of operations" test, focusing on where the corporation’s physical operations were located. Lately, the trend seemed to be a merger of the two, with the so-called "total activities" test attempting to take in all of a corporation’s business. The differing tests allowed creative plaintiff’s attorneys to craft their arguments based on what state they wanted a defendant corporation to be a citizen of, and frequently resulted in the same corporation being held to be a citizen of different states from case to case. Such, however, is no longer the case.
On February 23, 2010, the US Supreme Court issued its decision in Hertz Corp. v. Friend, et al (Case No. 08-1107). Hertz was sued in California and sought removal to federal court, arguing that it was not a citizen of California. The District Court concluded that Hertz was a California citizen under Ninth Circuit precedent, which asked whether the amount of the corporation’s business activity was "significantly larger" or "substantially predominates" in one State (the "place of operations" test). Finding that California was Hertz’s "principal place of business" under that test because a plurality of the relevant business activity occurred there, the District Court remanded the case to state court and the Ninth Circuit affirmed on appeal.
The Supreme Court vacated the Ninth Circuit's ruling, finding that "[t]he phrase "principal place of business" in §1332(c)(1) refers to the place where a corporation’s high level officers direct, control, and coordinate the corporation’s activities, i.e., its "nerve center," which will typically be found at its corporate headquarters."
In Hertz, the Supreme Court discussed the various tests that have been used and how courts had moved towards looking more at the location of a business' actual business operation. The Court felt the issue had become overly complex and that a "clearer rule" was needed. It therefore ruled that "[P]rincipal place of business" is best read as referring to the place where a corporation’s officers direct, control, and coordinate the corporation’s activities. 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."
Thus, a corporation’s citizenship will now no longer depend on what test a particular judge chooses to use as the "nerve center" test is the law of the land. This decision will likely result in the ability of corporations to remove more claims to federal court and plaintiff’s counsel have lost one of their most-abused tools for forum shopping.
The decision can be found at http://www.supremecourtus.gov/opinions/09pdf/08-1107.pdf
