Summary

On February 23, 2010, in the case of Hertz Corp. v. Friend, the Supreme Court resolved a longrunning dispute regarding the definition of a corporation’s “principal place of business” for diversity jurisdiction in the federal courts. Diversity jurisdiction exists by statute for civil actions between citizens of different states, where the matter in controversy exceeds $75,000. Under the statute, a corporation is “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.” The Supreme Court in Hertz held that a corporation’s “principal place of business” means “the place where a corporation’s officers direct, control, and coordinate the corporation’s activities,” which is frequently described as the corporation’s “nerve center.” Typically, this “nerve center” will be found at a corporation’s headquarters. The Court’s holding in Hertz is likely to have a significant impact on eligibility for diversity jurisdiction and should bring greater clarity and predictability to subject matter jurisdiction disputes.

Background

Portions of the diversity jurisdiction statute have generated confusion for years, as courts have struggled to develop complex, multifactor tests to identify a corporation's "principal place of business." Some courts sought to identify a corporation’s "nerve center,” while others focused on a corporation’s “locus of operations” or its “center of corporate activities.” As the Court in Hertz explained, “different circuits (and sometimes different courts within a single circuit) . . . applied these highly general multifactor tests in different ways.”

The Hertz Analysis

In Hertz, the Supreme Court resolved the confusion by holding that a corporation’s “principal place of business” refers to “the place where a corporation's officers direct, control, and coordinate the corporation's activities.” This location, often described as the corporation’s “nerve center,” “should normally be the place where the corporation maintains its headquarters” – “provided that the headquarters is the actual center of direction, control, and coordination . . . and not simply an office where the corporation holds its board meetings (for example, attended by directors and officers who have traveled there for the occasion).” In reaching this conclusion, the Court considered the language and legislative history of the diversity jurisdiction statute, and it acknowledged the virtues of adopting a relatively straightforward approach for testing jurisdiction: “[c]omplex jurisdictional tests complicate a case, eating up time and money as the parties litigate, not the merits of their claims, but which court is the right court to decide those claims.” By contrast, a simplified approach promotes greater efficiency and predictability.

The Court emphasized that the party asserting diversity jurisdiction bears the burden of persuasion, and “[w]hen challenged on allegations of jurisdictional facts, the parties must support their allegations by competent proof.” As the Court made clear, “the mere filing of a form like the Securities and Exchange Commission's Form 10-K listing a corporation’s ‘principal executive offices’” will not, without more, constitute “competent proof” to establish a corporation’s nerve center. The Court also signaled its intent to guard against attempts at “jurisdictional manipulation,” explaining that if, for example, a corporation’s purported “nerve center” turns out to be “nothing more than a mail drop box, a bare office with a computer, or the location of an annual executive retreat,” courts should seek to determine the place of actual “direction, control, and coordination.”

The Court acknowledged that the Hertz test occasionally may lead to counterintuitive results, at odds with the basic rationale for diversity jurisdiction:

For example, if the bulk of a company's business activities visible to the public take place in New Jersey, while its top officers direct those activities just across the river in New York, the “principal place of business” is New York. One could argue that members of the public in New Jersey would be less likely to be prejudiced against the corporation than persons in New York – yet the corporation will still be entitled to remove a New Jersey state case to federal court.

Nevertheless, the Court found that these “seeming anomalies” are the inevitable cost of adopting a clear, relatively straightforward rule. As a result, the Hertz decision should serve to promote greater efficiency and predictability on matters of subject matter jurisdiction in the federal courts.