Supreme Court Rules That a Corporation’s “Nerve Center” is Its “Principal Place of Business” for Diversity Jurisdiction Purposes
- United States
- 03/15/2010
The U.S. Supreme Court recently issued an opinion that is likely to impact access to federal courts by multi-state insurers and other large business organizations. Hertz Corp. v. Friend et al., 559 U.S. ____ (2010).
At issue in Hertz was whether Hertz Corporation (“Hertz”) could compel a case filed against it to be heard in federal court. In Hertz, the Plaintiffs had filed a state-specific class action against Hertz in a California state court. Hertz removed the case to the District Court for the Northern District of California, but the District Court remanded the case to the state court on the grounds that diversity of citizenship did not exist. 28 U.S.C. § 1332(a)(1). Applying Ninth Circuit precedent, the District Court reasoned that Hertz, whose corporate headquarters was located in New Jersey, was nevertheless a California citizen because a plurality of its business activity occurred in California. The Ninth Circuit agreed, and Hertz appealed. The Supreme Court granted certiorari.
In determining whether diversity jurisdiction exists, the Ninth Circuit applied a “business activity” test, which determines a corporation’s “principal place of business” for diversity purposes by reference to the amount of business activity that a corporation conducts in various States. 28 U.S.C. § 1332©(1). Other circuit courts had adopted this or similar tests. In Hertz, the Supreme Court rejected the “business activities” test and hybrids thereof in favor of a simpler and more predictable test called the “nerve center” test.
The Court formulated the following general rule: “‘[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—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 meeting (for example, attended by directors and officers who have traveled there for the occasion).”
In ruling that the “nerve center” test is the appropriate test to apply in determining a corporation’s “principal place of business” for diversity purposes, the Court recognized that there will still be “hard cases” under the “nerve center” test. For example, the Court pointed out that “in this era of telecommuting, some corporations may divide their command and coordinating functions among officers who work at several different locations, perhaps communicating over the Internet.” However, the Court concluded that the “nerve center” test “nonetheless points courts in a single direction, towards the center of overall direction, control, and coordination.”
This decision is binding on all federal district and circuit courts of appeals.
