The United States Supreme Court unanimously resolved a Circuit split, holding that a corporation’s principal place of business for purposes of federal diversity jurisdiction is the corporation’s “nerve center,” that is, the state in which its officers direct, control, and coordinate the corporation’s activities. The Court’s ruling in Hertz Corp. v. Friend, No. 08–1107, __S. Ct. __ (Feb. 23, 2010), rejected the Ninth Circuit’s “substantial business activity” test in favor of the “nerve center” test employed by the Seventh Circuit. To satisfy the “nerve center” test, the party invoking federal jurisdiction must provide “competent proof” of the corporation’s “nerve center.” Id. at 18.i Litigants now will have a better sense of a corporation’s state or states of citizenship for diversity jurisdiction purposes, and will therefore be able to more reliably determine when they have access to or may be sued in federal courts (click here to view opinion).

The Hertz Facts

Two California citizens sued Hertz Corporation in California state court alleging that Hertz had violated state wage and hour laws. Id. at 2. Hertz removed the case to federal district court arguing that the court had diversity jurisdiction because Hertz was not a citizen of California. Id. To support this argument, Hertz submitted a declaration detailing the extent of its operations in California and elsewhere, as well as a summary of the geographic location of its executive structure.

Id. The declaration provided figures on Hertz’s rental facilities, full-time employees, revenue, and annual transactions. Id. The declaration stated, among other things, that Hertz operated in 44 states and that California accounted for only 273 of Hertz’s 1,606 car rental locations, 2,300 of its 11,230 full-time employees, and $811 million of its $4.371 billion in annual revenue. Id. The declaration also stated that Hertz’s “leadership” was located at its “corporate headquarters” in New Jersey and its “core executive and administrative functions . . . [we]re carried out” in New Jersey. Id. In contrast, plaintiffs argued that California accounted for 17% of Hertz’s rental facilities, which was the largest concentration of Hertz facilities in the United States. They noted that Florida, which had the second largest concentration of Hertz rental facilities, accounted for only 10% of Hertz’s facilities.

The District Court and Circuit Court Decisions

The Constitution gives Congress the authority to define the jurisdiction of federal courts. Id. at 5 (citing U.S. Const. art. III., § 2). Congress has vested federal courts with jurisdiction over cases “involving citizens of different states.” 28 U.S.C. § 1332(a)(1). For purposes of diversity jurisdiction, a corporation is “deemed” a citizen of the State of its incorporation and “the State where it has its principal place of business.” 28 U.S.C. § 1332(c) (1).

Before Hertz, federal courts had developed “divergent and increasingly complex interpretations” of the phrase “principal place of business” without settling upon a uniform definition. Hertz, No. 08–1107 at 12–14. This lack of uniformity meant that federal jurisdiction might vary depending upon the geographic federal circuit in which a corporation sued or was being sued.

Here, following Hertz’s removal from state court, the district court applied the Ninth Circuit test to determine Hertz’s principal place of business. Under that test, a corporation’s principal place of business was where it conducted a substantial amount of its business activity. Id. at 3. Only if there was no one state where the corporation’s activities were substantial would the court look to the corporation’s “nerve center,” that is, the place where the majority of its executive and administrative functions were performed. Id. Applying this test to the Hertz facts, the district court found that Hertz conducted a substantial amount of its business activity in California and, therefore, Hertz was a citizen of California for diversity purposes. Id. The Ninth Circuit affirmed the district court’s ruling and Hertz petitioned for certiorari, which the Supreme Court granted.

Why the “Nerve Center” Test

The Supreme Court rejected the Ninth Circuit’s “substantial business activities” test, holding that the “superior” approach to determining a corporation’s principal place of business for diversity purposes is to determine “where a corporation’s officers direct, control, and coordinate the corporation’s activities.” Id. at 14. The Supreme Court referred to this test as the “nerve center” test applied by the Seventh Circuit. Id. at 14. According to the Supreme Court, a nerve center “should normally be the place where a corporation maintains its headquarters,” 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).” Id. at 14.

In holding that the “nerve center” approach was preferable to other approaches adopted by the various circuits, the Supreme Court relied upon three considerations: (1) the text of the diversity statute, 28 U.S.C. § 1332, supported the approach; (2) the approach furthered the goal of “administrative simplicity”; and (3) the legislative history of 28 U.S.C. § 1332 supported the approach. Id. at 14-16. Although relying upon all three considerations to reach its decision, the Supreme Court emphasized the importance of “having a clearer rule.” Id. at 18.

The Supreme Court noted that the “nerve center” test may create some “anomalies” that “seem to cut against the basic rationale” of the diversity statute.ii Id. at 17. Nonetheless, “[a]ccepting occasionally counterintuitive results is the price the legal system must pay to avoid overly complex jurisdiction administration while producing the benefits that accompany a more uniform legal system.” Id. at 18.

Going Forward: Hard Cases and Jurisdictional Manipulation

Despite the fact that the “nerve center” test provides a clearer determination of a corporation’s principal place of business, the Court noted that the test will not, “in all instances, automatically generate a result.” Id. at 17. The Supreme Court identified two potential problems in applying the “nerve center” test. First, the Court noted that the location of a corporate nerve center will not always be clear given the increasing pervasiveness of new forms of communication: “[f]or example, in this era of telecommuting, some corporations may divide their command and coordinating functions among officers who work at several different locations, perhaps communicating over the Internet.” Id.

Second, the Court noted the possibility of “jurisdictional manipulation.” Id. at 18-19. The Court stated that “a mail drop box, a bare office with a computer, or the location of an annual executive retreat” will not satisfy the nerve center test. Id. Rather, “the courts should instead take as the ‘nerve center’ the places of actual direction, control, and coordination, in the absence of such manipulation.” Id.

If either of these two fact-intensive issues is present in a given matter, the nerve center of the corporation will need to be resolved by the lower courts on a case-by-case basis. Despite these potential weaknesses, Hertz brings welcome clarity to the determination of a corporation’s principal place of business and will allow litigants to better predict when they have access to or may be sued in federal courts.