The modern corporate entity is a complex web of subsidiaries, divisions, and branches, often stretching its arms into multiple states and countries. Consequently, corporations find themselves involved in litigation in states and cities never contemplated. Fortunately however, the recent Supreme Court decision Hertz v. Friend clarifies this often murky area of federal jurisdictional law and provides multistate entities a better understanding of the locations in which a corporation can be haled in to court.
Among other ways, federal courts can exercise personal jurisdiction over a corporate-defendant if a corporation is a citizen of the state in which the court sits (i.e., the forum state). To establish a corporation’s state citizenship, a plaintiff must demonstrate either of the following: 1) the corporate-defendant was incorporated in the forum state; or 2) the corporation’s “principle place of business” is located in the forum state. For multistate corporations (i.e., corporations incorporated in one state, but physically located elsewhere), these two jurisdictional bases can open the door to litigation in several states. Making matters worse, the past five decades of federal opinions have produced conflicting and competing tests to determine the exact whereabouts of a corporation’s “principle place of business.” While one court may have used the “total activity” test to make this determination, others may have used the “substantial predominance” test, and so forth.
On February 23, 2010, the U.S. Supreme Court issued the opinion Hertz v. Friend and effectively put this issue to rest. In the opinion, the nation’s highest Court endorsed the “nerve center” test for making this “principle place of business” determination. The “nerve center” test establishes that a corporation’s “principle place of business” is the place where the corporation’s high level officers direct, control, and coordinate the corporation’s activities. Most often, this activity takes place at the corporation’s headquarters.
Practitioners have applauded the Court’s endorsement of the “nerve center” test, as it is predictable in its application, eliminates the need for costly jurisdictional discovery, and does not rely on sales numbers or other fiscal statistics. Setting aside any praise or criticism of the test itself, the Hertz opinion brings invited uniformity to an area of federal law previously in disarray.
The Hertz decision is significant to litigants in federal court, as well as to all corporations active in the United States. For plaintiffs, this decision sets clear standards related to forum selection, an extremely important decision made during the early stages of litigation. And, on a broader scale, Hertz puts all domestic corporations on notice of the definite location of their “principle place of business.” This, in turn, allows corporations to be better equipped and prepared when litigation arises.
Prior to Hertz, the “nerve center” test was only adopted in the U.S Seventh Circuit, which is comprised of Illinois, Wisconsin, and Indiana.