In the U.S., a party can be sued either in the federal courts or in the courts of one of the fifty states. The federal courts generally have jurisdiction in matters that (1) involve an issue of federal law – called federal question jurisdiction, or (2) if the parties are citizens of different states and the matter in controversy exceeds $75,000 – called diversity jurisdiction. In a recent case decided by the United States Supreme Court – Hertz Corp. v. Friend, the Court finally put an end to a open issue concerning in which state or states a corporation is a citizen.
The federal diversity jurisdiction statute provides 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.” 28 U.S.C. §1332(c)(1). The Supreme Court has now held that a corporation has its principal place of business in the state where its “nerve center” is located.
In this case, two California citizens sued the Hertz Corporation in California state court for what they claimed were violations of California’s wage and hour laws. Hertz sought to remove the case to federal court, claiming that the plaintiffs and the defendant were citizens of different states. To support its position, Hertz submitted a declaration that sought to show that Hertz’s “principal place of business” was in New Jersey, not in California. The declaration stated that the “leadership of Hertz” is located at Hertz’s “corporate headquarters” in New Jersey. The declaration further stated that Hertz’s “core executive and administrative functions” and “major administrative operations” are carried out in New Jersey.
The United States District Court for the Northern District of California accepted Hertz’s declaration as undisputed, but nonetheless concluded that Hertz was a citizen of California. The District Court applied Ninth Circuit precedent, which instructs courts to identify a corporation’s “principal place of business” by first determining the amount of a corporation’s business activity State by State. If the amount of activity is “significantly larger” or “substantially predominates” in one State, then that State is the corporation’s “principal place of business.” If there is no such State, then the “principal place of business” is the corporation’s “nerve center,” i.e., the place where “the majority of its executive and administrative functions are performed.” The District Court found that the “plurality of each of the relevant business activities” was in California, and that “the differential between the amount of those activities” in California and the amount in “the next closest state” was significant. Thus, Hertz’s “principal place of business” was in California, and diversity jurisdiction was lacking. The appellate court affirmed the decision.
The Supreme Court vacated the Ninth Circuit’s judgment and remanded the case for further proceedings. The Court, in an effort to find a single, uniform interpretation of 28 U.S.C. §1332(c)(1), held that the “nerve center” approach to determining diversity jurisdiction is superior to other analyses. The Court concluded 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. 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 meetings. While acknowledging that there is no perfect test that satisfies all criteria, the “nerve center” test is comparatively easier to apply and does not require courts to weigh corporate functions, assets or revenues. Furthermore, although this test may occasionally produce counterintuitive results, such 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. Lastly, the Court held that if the record reveals attempts at jurisdictional manipulation – for example, that the alleged “nerve center” is nothing more than a mail drop box, a bare office with a computer, or the location of an annual executive retreat – the courts should instead take as the “nerve center” the place of actual direction, control, and coordination, in the absence of such manipulation.
Andrew Taylor contributed to this post.