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U.S. Supreme Court Defines a Corporations Nerve Center as its Principal Place of Business

Posted by: on Thu, Nov 08, 2012

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The U.S. Supreme Court Defines a Corporations “Nerve Center”

as its Principal Place of Business

For many years, the federal courts in America have disagreed about when federal district courts may hear cases involving corporations in which federal jurisdiction is predicated solely upon the parties’ differing state citizenship, i.e., diversity jurisdiction. A federal district court may exercise jurisdiction if there is complete diversity of citizenship between the parties. But the court must first determine each party’s state citizenship. Until the Supreme Court’s recent decision in Hertz Corp. v. Friend, the resolution of this basic question varied depending upon where the corporate parties were involved in litigation.

For diversity jurisdiction purposes, “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). The first prong of this statute is uncontroversial. As for the second prong regarding principal place of business, the federal courts and circuits have employed a variety of conflicting approaches to determine the state in which a corporation has its principal place of business.

Some courts adopted the “nerve center” approach, wherein a corporation has a single principal place of business where its executive headquarters are located. Others focused on the corporation’s “place of operations” rather than its headquarters. Still others first determined whether the corporation’s activities were centralized or decentralized, before applying either the “nerve center” or “place of operations” tests. Several other circuits adopted a “total activities” test, whereby the trial courts were directed to consider both the location of the corporation’s “nerve center” and the locations of its business operations. Finally, the Ninth Circuit looked to the “state which contains a substantial predominance of corporate operations” first, and only considered the “nerve center” afterwards if and when the initial inquiry did not resolve the issue.

In Hertz v. Friend, the high court unanimously sided with Hertz Corp., agreeing that the rental car company’s principal place of business was not in California, as the plaintiffs had argued below. Rather the U.S. Supreme Court identified Park Ridge, N.J., where the company’s leadership is located, as the company’s principal place of business. In doing so it cleared up an issue that had remained unsettled up to that point.

“[I]n practice [a company’s principal place of business] 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,’” Justice Stephen Breyer wrote in the Court’s opinion.

With that clarification, the Supreme Court has done away with the patchwork of different tests previously applied across the country to determine a company’s citizenship and established a single, streamlined method or rule. With the precedent in place, counsel will now have more certainty.

The Supreme Court announced its decision in Hertz Corporation v. Friend, et al., 559 U.S. ___, 130 S. Ct. 1181 (2010). The Court held that a corporation’s “principal place of business” for determining federal diversity jurisdiction under 28 U.S.C. § 1332 is its “nerve center,” or the “place where the corporation’s high-level officers direct, control, and coordinate the corporation’s activities.” Typically, this will be found at the corporate headquarters. In a unanimous decision authored by Justice Breyer, the Court settled a long-standing split in the circuit courts as to what test to apply in determining a corporation’s principal place of business and adopted a uniform standard that offers a straightforward approach.

This issue arose out of a California wage and hour lawsuit filed in state court against Hertz Corporation by two California citizens requesting relief on behalf of a potential class of Californians who allegedly suffered similar harms. Hertz removed the case to federal district court pursuant to the Class Action Fairness Act, which provides that class actions may be removed to federal court when there is diversity among the parties and the amount in controversy is over $5 million. Rental car company Hertz Corporation has its headquarters in New Jersey and is incorporated in Delaware. Respondents moved to remand the case to state court by arguing that Hertz was a citizen of California and not diverse from any of the plaintiffs in the lawsuit. The California district court applied the Ninth Circuit’s “place of operations” or “total activity” test. Under this test, a number of factors are considered, such as the location of employees, tangible property, production activities, sources of income and where sales take place. If a corporation’s business in one state is significantly larger than in any other state, that state is the principal place of business. If the inquiry cannot identify one particular state, then the corporation’s principal place of business is where the majority of a corporation’s executive and administrative functions are performed. The district court concluded that California was Hertz’s principal place of business because Hertz had more business in California than in any other state.

The Supreme Court noted that the phrase “principal place of business” was more difficult to apply than its drafters probably expected, leading to a variety of different interpretations among the various circuit courts. When a corporation’s headquarters and executive offices were in the same state in which it did most of its business, the test was easy to apply. However, where the corporate headquarters and executive offices are in one state and the corporation’s plants and other centers of business activity are located in other states, courts often focused more on where a corporation’s actual business activities are located, yielding a “business activities” test, which was often difficult to apply. In trying to determine where a corporation is least likely to suffer out-of-state prejudice when sued in local court, the Court noted, “that task seems doomed to failure.”

Recognizing the disagreement between the circuits on the issue and the need for clarity, the Supreme Court rejected the Ninth Circuit’s interpretation of the diversity jurisdiction statute and designated the “nerve center” approach for all federal diversity cases. Adopting and expanding on an approach articulated by the late District Judge Weinfeld in Scot Typewriter Co. v. Underwood Corp., 170 F. Supp. 862 (D.C.N.Y. 1959), and applied in the Seventh Circuit, the Court held 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. 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.” The Court cautioned that the corporate headquarters will not be considered the principal place of business if it is not the actual center of direction, control, and coordination, such as if it were “simply an office where the corporation holds its board meetings.”

About the Authors: The law firm of Albright, Stoddard, Warnick & Albright is an A-V Rated Nevada-based full-service law firm having attorneys licensed in Nevada, California and Utah. Our firm’s practice includes a strong emphasis on real estate, secured finance and litigation.

Note: This article, and any other information you obtain at this website, is not offered as legal advice, nor should it be relied upon as such, nor is it a solicitation for legal services. Only a licensed attorney can advise you with respect to your specific legal needs. We welcome your contacting our firm to discuss such representation. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.

About the Authors: The law firm of Albright, Stoddard, Warnick & Albright is an A-V Rated Nevada-based full-service law firm having attorneys licensed in Nevada, California and Utah. Our firm’s practice includes a strong emphasis on personal injury accidents. Call us at 702-384-7111.

Note: This article, and any other information you obtain at this website, is not offered as legal advice, nor should it be relied upon as such, nor is it a solicitation for legal services. Only a licensed attorney can advise you with respect to your specific legal needs. We welcome your contacting our firm to discuss such representation. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.