(February 24, 2010, Supreme Court Watch)
Supreme
Court
Watch
The Supreme Court held yesterday in
Hertz Corp. v. Friend that a corporation’s “principal place of business” for purposes of federal diversity jurisdiction is its “nerve center,” which is the “place where the corporation’s high level officers direct, control, and coordinate the corporation’s activities.” Typically, the Court explained, the corporation’s nerve center will be found at its headquarters.
The issue arose in
Hertz after two California citizens sued the rental-car company in California state court, alleging violations of the state’s wage and hour laws and requesting relief on behalf of a potential class of Californians who allegedly suffered similar harms. Hertz sought to remove the case to federal court based on diversity jurisdiction, 28 U.S.C. §1332, asserting that its “principal place of business” under the statute was New Jersey, where its headquarters was located. The district court found instead that Hertz’s principal place of business was California, because it conducted significantly more business activities in California than in any other state. The Ninth Circuit affirmed, and the district court remanded the case to state court for lack of diversity of citizenship.
Writing for the Supreme Court in a unanimous reversal, Justice Breyer observed that the federal courts of appeals have adopted “divergent and increasingly complex interpretations” of the phrase “principal place of business” when determining diversity jurisdiction. Some circuits look to a corporation’s “center of gravity” or “center of corporate activities.” Others emphasize “the total activity of the company considered as a whole.” Still others focus on the corporation’s “locus of operations” or “nerve center.” And several, including the Ninth Circuit in
Hertz, apply multifactor tests, including consideration of the state in which a corporation’s activity “substantially predominates.”
In its effort “to find a single, more uniform interpretation of the statutory phrase,” the Supreme Court determined that “principal place of business” is best understood as the “place where the corporation’s high level officers direct, control, and coordinate the corporation’s activities”—what courts of appeals frequently labeled as the “nerve center.” Importantly, the nerve center is a single place within a state and not a measure of corporate activity statewide. In the Court’s view, this aspect of the nerve-center test makes it relatively simple to administer, will promote greater predictability, and is consistent with legislative history suggesting that determining corporate citizenship should not be a complex and impractical task.
The Court emphasized that the party seeking to invoke federal jurisdiction continues to bear the burden of establishing the location of its nerve center with “competent proof.” For example, the Court noted that a mere reference to an SEC filing that lists a corporation’s “principal executive offices” would be insufficient proof of the company’s nerve center. Instead, a corporation, if challenged, must actually establish that its activities are directed, controlled, and coordinated from the nerve center it asserts.
Although, as the Court acknowledged, “there will be hard cases” under the nerve-center approach,
Hertz should promote predictability and uniformity in determining corporate citizenship, particularly in circuits that previously applied multifactor tests or compared corporate activity within multiple states to determine a company’s principal place of business.
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