Federal Diversity of Corporations Under Hertz Corp. v. Friend et al
Posted by: Mark Albright on Mon, Feb 23, 2015Share this post
In a decision likely to have significant consequences for federal subject-matter jurisdiction, Hertz Corp. v. Friend et al., No. 08-1107 (U.S. February 23, 2010), the United States Supreme Court clarified a jumble of approaches used by the lower federal courts and endorsed the “nerve center” test for determining a corporation’s principal place of business for purposes of establishing diversity among litigants.
This decision will often affect where a corporation with geographically diverse business activities may be subject to suit in federal court on diversity grounds, and should lead to greater predictability in determining when a federal court will find diversity jurisdiction to be present. Generally speaking, a party is subject to suit in federal court only if the action implicates a “federal question,” or if all the plaintiffs are citizens of different States than all the defendants—they are “diverse”-and the amount in controversy exceeds $75,000.
Under 28 U.S.C. § 1332 (c) (1), the federal diversity jurisdiction statute, a corporation is a citizen of the State in which it has been incorporated and where it has its principal place of business. In Hertz Corp. v. Friend (No. 08-1107), the Supreme Court unanimously endorsed the “nerve center” approach for determining the state in which a corporation has its principal place of business.
The Court concluded “that the phrase ‘principal place of business’ refers to the place where the corporation’s high level officers direct, control, and coordinate the corporation’s activities,” adding that “the ‘nerve center’ will typically be found at a corporation’s headquarters.” Although the Court’s decision addressed the statute’s text and legislative history, the Court placed particular emphasis on the administrative simplicity of the “nerve center” approach.
It noted that complex jurisdictional rules “encourage gamesmanship” and waste judicial resources. Simple jurisdictional rules, however, promote greater predictability for “corporations making business and investment decisions” and for “plaintiffs deciding whether to file suit in a state or federal court.” Although the Court acknowledged that the “nerve center” test will not always be precise, it is comparatively simpler than tests focusing on a corporation’s operations.
The Court also affirmed that the burden of persuasion remains on the party asserting diversity jurisdiction and emphasized that the “nerve center” approach does not permit jurisdictional manipulation. A party challenged in its assertion of jurisdiction must support its allegations by competent proof. For example, the Court noted that the mere filing of a form like the Securities and Exchange Commission’s Form 10-K listing a corporation’s “principal executive offices” would not, on its own, establish the corporation’s “nerve center.”
Nonetheless, even if the record shows manipulation, courts do not revert to the corporation’s “place of operations.” Rather, the court must identify the place of actual direction, control, and coordination of the corporation, in the absence of such manipulation. The Supreme Court concluded that the phrase “principal place of business” for purposes of federal diversity jurisdiction refers to “the place where the corporation’s high-level officers direct, control, and coordinate the corporation’s activities,” and not – as some circuits have held – a more in-depth state-by-state analysis of such factors as manufacturing and sales office locations.
In establishing a unitary “principal place of business” definition, the Court resolved an unwieldy split in the circuits as to the applicable test, settling on what has often been referred to as the “nerve center” test. “Principal Place Of Business” And Its Importance The phrase “principal place of business” derives from the federal diversity jurisdiction statute: “a corporation shall be deemed to be 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) (emphasis added).
Determining “principal place of business” under the federal diversity statute is important because it is the first step in analyzing whether a corporation can remove a case to federal court based on diversity jurisdiction – a common goal for corporate defendants. A corporation will be foreclosed from removing a state action to federal court if its “principal place of business” (or incorporation) is in a state where any plaintiff is also a “citizen.”
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