The U.S. Supreme Court has brought clarity and predictability to an area of law that seldom can boast either. For more than 50 years, litigants have found it difficult to predict where a corporation’s “principal place of business” was for purposes of 28 U.S.C. § 1332(c)(1), and have been obliged to engage in costly collateral litigation concerning not the merits of the case but where it belonged. That ended Feb. 23, 2010, when Justice Stephen Breyer, delivering the unanimous opinion of the Court, boiled the former grocery list of ingredients that determine a corporation’s principal place of business down to just one – its headquarters. See Hertz Corp. v. Friend, No. 08-1107, slip op. (U.S. Feb. 23, 2010).
“Divergent and Increasingly Complex Interpretations”
Since 1958, corporations have been deemed citizens of their state (or states) of incorporation and the state where they have their “principal place of business.” 28 U.S.C. § 1332(c)(1); see 28 U.S.C. § 1332(d)(10) (applying same test to unincorporated associations under the Class Action Fairness Act). While determining the former had been a relatively straightforward matter, determining the latter had been anything but. Courts applying Section 1332(c)(1) had generally applied one (or a combination) of three tests: (1) the nerve center test; (2) the locus of the operations test; and (3) the center of corporate activities test. See 15 James Wm. Moore et al., Moore’s Federal Practice § 102.54 (3d ed. 2005). The first focused on a corporation’s center of control in a particular location in a state, whereas the second and third focused on a corporation’s aggregate physical presence or production activities throughout an entire state. Most circuits had adopted their own variation or combination of the second and third tests, whereas only the Seventh Circuit had adopted a variation of the nerve center test. Hertz, slip op. at 14. In short, no test was applied uniformly throughout or even within the circuits, causing a lamentable lack of predictability and a real risk of inconsistent judgments depending on where the issue arose. As predicted, Hertz served as the vehicle for the Court to reconcile the “divergent and increasingly complex interpretations” that had been given to Section 1332(c)(1). Id. at 13-14.
“Administrative Simplicity Is A Major Virtue”
The Hertz story is unremarkable. The plaintiffs alleged violations of California state employment law on behalf of a putative class of California citizens. Hertz removed the action to federal court, invoking federal diversity jurisdiction under the Class Action Fairness Act and asserting that diversity existed because it was a citizen of New Jersey or Oklahoma – but not California. The Northern District of California applied the Ninth Circuit test, compared Hertz’s business activities state-by-state, concluded that Hertz had its principal place of business in California because the majority of its business took place there and remanded the action to state court. The Ninth Circuit affirmed and the Supreme Court granted Hertz’s petition for certiorari.
The Court vacated the remand order, finding that the “nerve center” test was the most consistent with the plain language and legislative history of Section 1332(c)(1), and perhaps more importantly was the only rule that was simple, predictable and administrable.
First, the Court found that the nerve center test is consistent with Section 1332(c)(1)’s plain language because it focuses on a single “place of business” (that is, the corporation’s headquarters) as opposed to multiple places of business within an entire state. Because a state as a whole cannot be a principal place of business, any test that aggregates multiple locations is inconsistent with that plain meaning. Id. at 14-15.
Second, the Court found that Section 1332(c)(1)’s legislative history weighed in favor of adopting a “simplicity-related . . . benchmark.” Id. at 16. Until the mid-fifties, corporation were citizens of their places of incorporation. Id. at 8. Because that test was easily manipulated, the Judicial Conference considered various amendments, initially proposing a numerical test based on the quantum of income earned in a given state, specifically the state in which a corporation earned “half its gross of income.” Id. at 16. The Conference eventually abandoned that quantitative approach for a qualitative one that would be easier to apply, namely the “principal place of business” language in the current version of Section 1332(c)(1). Id. at 14. Adopting the nerve center approach was consistent with that decision.
Third, and most importantly, the Court found that the alternatives to the nerve center test are “unusually difficult to apply” and are “at war with administrative simplicity” because “corporations come in many different forms, involve many different kinds of business activities, and locate offices and plants for different reasons. . . .” Id. at 11, 13. In rejecting those alternate approaches, it “place[d] primary weight upon the need for judicial administration of a jurisdictional statute to remain as simple as possible” in order to avoid collateral litigation that wastes time and money on matters unrelated to the merits of a dispute. Id. at 7.
The Court settled on an admittedly imperfect but easily administered bright line rule, defining the principal place of business as “the place where the corporation’s high level officers direct, control and coordinate the corporation’s activities,” more commonly referred to as the corporation’s “nerve center.” The Court left little room for confusion, however, stating that the “nerve center” will be a corporation’s headquarters, absent evidence of jurisdictional gaming such as the maintenance of a sham office. Id. at 1, 14, 18. It also center” test, but found that risk was outweighed by the benefits of an easily administered, “more uniform” rule. Id. at 18.
The Road Ahead
Although the Court noted that a defendant removing an action to federal court still bears the burden of proving that jurisdiction exists through competent evidence, that burden just became lighter. In Hertz, despite remanding the issue for determination by the lower court, the Court acknowledged that Hertz had provided an unchallenged declaration from an employee relations manager regarding the location of its “corporate headquarters,” its “core executive and administrative functions” and its “administrative operations.” Id. at 2. This evidence should, in the absence of affirmative evidence of jurisdictional gaming from a party opposing the exercise of jurisdiction, be sufficient to establish the corporation’s “nerve center.” Given the importance the Court placed on the ease of administration and the avoidance of collateral litigation on jurisdictional issues, corporations defending the propriety of removal may rely on Hertz to argue that the quantity of evidence required to establish the existence of diversity jurisdiction is now greatly reduced
The new nationwide uniformity of the principal place of business test also counsels in favor of adding litigation and risk management to the other factors (such as reducing tax liabilities and finding a jurisdiction with a well-settled body of corporate law) considered when locating (or relocating) corporate headquarters. Because corporations continue to have exposure to state court litigation in their states of incorporation and principal place of business, corporations can and should consider locating their headquarters in states with better and fairer courts, and states with smaller populations, in order to contain and manage that exposure. For corporations not contemplating a change of headquarters, it nonetheless might be prudent to deputize in-house counsel responsible for ensuring a uniform presentation as to the corporation’s “nerve center” in those cases where removal is contested.