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Supreme Court Clarifies Definition of a Corporation's "Principal Place of Business"

By Bradley C. Myers
 

The United States Supreme Court recently resolved conflicts among the Circuit Courts about the citizenship of a corporation for determining diversity of citizenship jurisdiction (1). This will allow corporations to analyze with more predictable results whether to remove a case to federal court. In Hertz Corp. v. Friend, et al, No. 08-1107 (February 23, 2010) (a unanimous decision, which is unusual in and of itself), the Court decided that when determining a corporation's citizenship for diversity of citizenship jurisdiction, the 'principal place of business' of the corporation is 'the place where the corporation's high level officers direct, control, and coordinate the corporation's activities'—something that courts have referred to as the 'nerve center' of the corporation.

Melinda Friend and John Nhieu sued Hertz Corporation in California state court alleging violations of California's wage and hour laws. Hertz removed the case to Federal Court asserting that the federal court had jurisdiction based on complete diversity in that the plaintiffs were citizens of California and Hertz was a citizen of New Jersey. Hertz, in support of its removal, submitted a declaration that identified New Jersey as the location of its executive officers and executive and administrative functions. The declaration also identified the location of Hertz's business activities, about 20% of which were in California.

The District Court and Ninth Circuit determined diversity did not exist because they determined that although Hertz did business in 44 states its business activity was 'significantly larger' and 'substantially predominated' over activity in other states. Therefore, Hertz's 'principal place of business' and thus, its citizenship, was in California. The Supreme Court agreed to review the Ninth Circuit's decision.

The Court's decision focused on the meaning of 'principal place of business' in Section 1332(c)(1). It started its analysis with a discussion of the history and rationale for diversity jurisdiction starting with the first diversity jurisdiction statue enacted in 1789 and ending with the current version of 28 U.S.C. §1332(c)(1) which was enacted in 1958. The court then reviewed the various tests used by federal appellate courts to determine the location of a corporation's 'principal place of business.' For example, the First Circuit used a 'nerve center' test (the location from which the corporations activities are directed and controlled); the Second Circuit used a 'business activities' test (where a corporation's actual business activities are located); the Sixth and Tenth circuits used a 'total activities' test (a combination of the 'nerve center' and 'business activities' tests); the Fifth and Eleventh circuits used a two-part test (are corporate activities 'centralize or de-centralized' and then either a 'place of operations' or a 'nerve center' test.

The old 'nerve center' test won out. The Court found that the best way to identify the principal place of business of a corporation as 'the place where a corporation's officers direct, control, and coordinate the corporation's activities.' This conclusion was reached for three reasons: (1) the statutory language supported the approach of identifying a single state as the principal place of business; (2) it leads to 'administrative simplicity' and predictability that will allow courts to focus on the underlying merits of a case rather than jousting over jurisdiction; and (3) the legislative history supported the conclusion.
 

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 (1) The diversity jurisdiction statute, 28 U.S.C. §1332(c)(1) says that '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.'

Full post as published by Louisiana Law Blog on April 29, 2010 (boomark / email).