Hertz Corp. v. Friend - U.S. Supreme Court Adopts "Nerve Center" Test For Determining A Corporation's "Principal Place Of Business"

Wednesday, June 2, 2010 - 00:00

On February 23, 2010, 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 originators likely expected, leading to a variety of different interpretations among the circuit courts. Slip Op. at 10. When a corporation's headquarter and executive offices were in the same state in which it did most of its business, the test was easy to apply. Id. 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. Id. at 11. 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." Id. at 13.

To find a "single, more uniform interpretation" of the statutory phrase "principal place of business," the Court expanded the Seventh Circuit approach and concluded that "principal place of business" refers "to the place where a corporation's officers direct, control, and coordinate the corporation's activities." Id. at 13-14. This place has been called the corporation's "nerve center" and in practice is normally the place where the corporation maintains its headquarters. Id. at 14. The Court noted that the headquarters should be the "actual center of direction, control, and coordination,not simply an office where the corporation holds it board meetings." Id .

The Court cited three considerations why the "nerve center" test provides the best approach. First, the statutory language supports such an approach. Id. At 14-15. The language of U.S.C. § 1332(c)(1) deems a corporation a citizen of the "State where it has its principal place of business." Id. at 14. "Place" is singular, and "principal" requires picking out the "main, prominent" or "leading" place. Id . The fact that the word "place" follows "State where" means "place" is a place within a State and not the State itself. Id . A corporation's "nerve center" is usually in a single place and it is a place within a State. Id. A more general "business activities" test led some courts to look at the State itself, rather than a particular place within a State, leading to "strange results." Id. at 14-15.

The second consideration is "administrative simplicity." Id. at 15-17. "Complex tests produce appeals and reversals, encourage gamesmanship, and, again, diminish the likelihood that results and settlements will reflect a claim's legal and factual merits." Id. at 15. Straightforward rules benefit the court and promote greater predictability. Id. at 16. Predictability benefits corporations making business and investment decisions and benefits plaintiffs in deciding whether to file suit in state or federal court. Id.

Third, the statute's legislative history offers another consideration for application of the "nerve center" test. Id . at 16-17. The Judicial Conference initially provided a proposal suggesting a numerical test where the corporation would be a citizen of the state that accounted for more than half its gross income but then changed its mind in light of criticism that the test would be "too complex and impractical to apply." Id . at 16. The history suggests that "principal place of business" should be no more complex than the "half of gross income" test, and the "nerve center" test offers that possibility. Id . at 16-17.

The Court concluded that there may be no "perfect" test that satisfies all criteria and that under the "nerve center" test there would be "hard cases." Id . at 17. Nonetheless, the test points courts in a single direction and provides a sensible test that is relatively easy to apply. Additionally, the test may produce some anomalies but "counterintuitive results is the price the legal system must pay to avoid overly complex jurisdictional administration while producing the benefits that accompany a more uniform legal system." Id . at 18.

Finally, the Court noted the burden for establishing diversity jurisdiction remains on the party asserting it, and when challenged, the parties must support their allegations by "competent proof." Id. at 18. Thus, the mere filing of a form like the SEC's Form 10-K listing a corporation's "principal executive offices" would, without more, be sufficient to establish a corporation's "nerve center." Id. The corporation, if challenged, would need to establish that its activities are directed, controlled, and coordinated from the nerve center.

Kimberly D. Baker is a Member of the Firm in the Seattle office. She provides risk management and guidance to business owners to help prevent or minimize the likelihood of litigation. In her litigation practice she defends companies and individuals who are being sued for malpractice, alleged employment and workplace misconduct and/or complaints of negligently manufactured products. Arissa M. Peterson is an Associate in the Seattle office, concentrating her practice on commercial and civil litigation in such areas as product liability, including the defense of pharmaceutical and medical device manufacturers, health care and insurance defense.

Please email the authors at kbaker@williamskastner.com or apeterson@williamskastner.com with questions about this article.