On February 23, 2010, the United States Supreme Court adopted a "nerve center" test for courts to use when determining a corporation's principal place of business for purposes of diversity jurisdiction. Specifically, the Court held that under 28 U.S.C. Section 1332(c)(1), a corporation's principal place of business will normally be the place where the corporation maintains its headquarters.
For purposes of diversity jurisdiction, a corporation is 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). In Hertz Corp. v. Friend, two California citizens sued Hertz Corporation ("Hertz") in a California state court for alleged state-law violations. Hertz sought to remove the case to the U.S. District Court, Northern District of California on diversity jurisdiction grounds. Plaintiffs, however, claimed that Hertz was a California corporation, and thus, diversity jurisdiction was lacking. Hertz submitted a declaration seeking to show that its "principal place of business" was in New Jersey. The declaration provided that while a portion of its business operations were conducted in California, the core executive and administrative functions of Hertz were carried out at its corporate headquarters in New Jersey.
The District Court, applying Ninth Circuit precedent, remanded the case to state court, finding that Hertz was a California citizen because its business activity was "significantly larger" or substantially predominated in California. The Ninth Circuit affirmed.
In light of the different, and often conflicting, tests for corporate citizenship among the Circuits, the U.S. Supreme Court granted Hertz's petition for certiorari. The Court adopted a version of the "nerve center" test used by several Circuits, and specifically held:
We conclude that 'principal place of business' is best read as referring to the place where a corporation's officers direct, control, and coordinate the corporation's activities.... [i]n 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 meetings?.
In reaching its decision, the Court confirmed that the burden of persuasion for establishing diversity jurisdiction continues to remain on the party asserting it. The Court also acknowledged that the "nerve center" test adopted could be subject to jurisdictional manipulation, and cautioned that if the record revealed that the alleged "nerve center" of a corporation is, for example, "nothing more than a mail drop box, a bare office with a computer, or the location of an annual executive retreat," that courts should instead find the "nerve center" as being the place of the corporation's actual direction, control, and coordination.
For corporations doing business in multiple states, the Court's ruling establishes a single, streamlined method for determining a corporation's principal place of business. Consequently, corporate defendants now have a clearer set of guidelines to consider when removing state court actions to federal court based on diversity jurisdiction.
Click here to read the Court's opinion.