U.S. Supreme Court clarifies test for determining a corporation’s principal place of business



February 24, 2010

Employment Law Alert

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In a unanimous opinion, the U.S. Supreme Court has held that, absent unusual circumstances, a corporation’s principal place of business is its nerve center, i.e., the place where its officers direct, control, and coordinate the corporation’s activities. In doing so, the Court has eliminated a split among the circuits on the subject of diversity of citizenship jurisdiction, and has eliminated the need for many corporations to litigate over where a case should be litigated.

In Hertz Corp. v. Friend, 2010 WL 605601 (2010), a wage and hour class action in which Nixon Peabody LLP serves as counsel for Hertz, the U.S. Supreme Court yesterday reversed the Ninth Circuit and established a clear rule for determining a corporation’s principal place of business. In a unanimous opinion, the Court held that, absent unusual circumstances, a corporation’s principal place of business is “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.’”

The test for determining corporate citizenship has been muddled since 1958, when Congress revised the federal diversity statute to make a corporation a citizen of its state of incorporation and the state where it has its “principal place of business.” Although the Seventh Circuit adopted the “nerve center test,” every other circuit adopted some form of a “business activities” test that considered a variety of factors (such as number of employees, facilities, revenues, and sales in a state). The other circuits deferred to the nerve center only when a corporation’s business operations were not predominant in one particular state.

In Hertz, the Ninth Circuit took the “business activities” test to the extreme. The record reflected that Hertz did business in 44 states, had only 18 to 20 percent of its business activities in California, had 10 to 12 percent of its business in Florida, and conducted significant (but less) business in the remaining 42 states. Despite Hertz’s far-flung business operations, the Ninth Circuit concluded that Hertz’s significantly greater business volume in California—notwithstanding California’s correspondingly greater population—rendered California Hertz’s principal place of business. Accordingly, the Ninth Circuit affirmed the district court’s remand of the action because diversity jurisdiction purportedly did not exist.

The Supreme Court’s opinion is significant and undoubtedly will become required reading in any treatise on federal civil procedure. The Court has for the first time articulated a bright line test that locates a corporation’s “principal place of business” at the place of its headquarters or nerve center. A corporation now will be deemed a citizen of that state and its state of incorporation. The Hertz opinion should result in far fewer disputes over where a case should be litigated. In addition, the opinion should enable corporations sued in California State Court but headquartered in another state to more easily seek removal to federal court based upon diversity jurisdiction.

The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

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