On February 23, 2010, the United States Supreme Court held in Hertz Corp. v. Friend that in the context of diversity jurisdiction, a corporation's "principal place of business" is deemed to be its "nerve center" -- usually its corporate headquarters -- i.e., the place from where it "radiates out to its constituent parts and from which its officers direct, control and coordinate" corporate activities. Under this rule, the Court rejected the test used by the United States District Court for the Northern District of California, which followed Ninth Circuit precedent holding that if the amount of a corporation's activities in a particular state was "significantly larger" than its activities in other states, that State is considered the principal place of business.
Applying this test, the District Court noted that while Hertz's corporate headquarters was in New Jersey, California led all other states in its amount of Hertz car rental locations, full-time employees, annual revenue, and annual transactions. The District Court observed that not only did California lead each of these categories, but also that "the differential between the amount of th[e] activities" in California and those in the amount in the next closest states was "significant," and that under the Ninth District standard, Hertz's principal place of business was California rather than New Jersey.
The Supreme Court reversed, holding the proper test in determining a corporation's principal place of business entailed finding the corporate "nerve center":
[P]rincipal place of business" is best read as referring to the place where a corporation's officers direct, control, and coordinate the corporation's activities. It is the place that Courts of Appeals have called the corporation's "nerve center." And 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 (for example, attended by directors and officers who have traveled there for the occasion).
The Court explained that a "business activities" test of the type used by the Ninth Circuit and other lower courts "has proved unusually difficult to apply," as courts must whether numerous factors such as plant location, sales or servicing centers, transactions, payrolls, or revenue generation are more important than others. The Court, placing "primary weight upon the need for judicial administration of a jurisdictional statute to remain as simple as possible," expressed a disdain for difficult jurisdictional tests, which it believed served to "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" and "produce appeals and reversals, encourage gamesmanship, and * * * diminish the likelihood that results and settlements will reflect a claim's legal and factual merits."
The Court then acknowledged that the "nerve center" test was not easily applied in all cases, including those involving corporations which, "in this era of telecommuting * * * may divide their command and coordinating functions among officers who work at several different locations, perhaps communicating over the Internet," but stated that test has the advantage of "point[ing] courts in a single direction, towards the center of overall direction, control, and coordination" thus freeing courts from "hav[ing] to try to weigh corporate functions, assets, or revenues different in kind, one from the other."
Finally, the Court did not make a determination as to Hertz's principal place of business. While noting that Hertz's declaration filed in the District Court indicated that its "nerve center" probably was Hertz's corporate headquarters in New Jersey, the Court rem a nded the matter for the District Court to rule on the question using the "nerve center" test.