Feb 26, 2010
Author: Joseph E. Laska
Originally published as an E-News Flash from the Defense Research Institute's Life, Health and Disability Committee
The U.S. Supreme Court has brought much-needed clarity to the question of how to determine, for purposes of diversity jurisdiction, a corporation’s “principal place of business.” In Hertz Corp. v. Friend, 559 U.S. __ (February 23, 2010), the Court unanimously overruled the Ninth Circuit and held that a corporation’s principal place of business is “the place where the corporation’s high level officers direct, control, and coordinate the corporation’s activities”—commonly referred to as the corporation’s “nerve center.”
In Hertz, the plaintiffs, California citizens, filed a putative wage and hour class action against Hertz in California state court. Hertz removed the case to the U.S. District Court for the Northern District of California on diversity jurisdiction grounds. Hertz alleged that it is not a California citizen because its principal place of business is in New Jersey. In support, Hertz submitted evidence that its leadership is located at its corporate headquarters in Park Ridge, New Jersey, and that its core executive and administrative functions are carried out there.
But the district court found that Hertz is a California citizen based on evidence that a plurality of Hertz’s business is conducted in California (the nation’s most populous state). As a result, the district court determined that diversity jurisdiction was lacking and remanded the case to state court. Hertz appealed, but the Ninth Circuit affirmed. The U.S. Supreme Court granted certiorari.
In Hertz, the Court began by reviewing the history of diversity jurisdiction as it applies to corporations. Perhaps the most interesting moment in this history occurred in 1951, when a Committee on Jurisdiction and Venue was convened to study the apparent overload of diversity cases in federal courts. The committee initially considered proposing a statutory amendment that would make a corporation a citizen both of its state of incorporation and of “any State from which it received more than half of its gross income.” After further study, however, the proposal was amended to make a corporation a citizen of both its state of incorporation and of the “state where it has its principal place of business.” This proposal ultimately formed the basis of the current diversity jurisdiction statute, 28 U.S.C. § 1332(c)(1).
The Court went on to observe that courts have struggled with how to apply the “principal place of business” test in practice. Some courts, such as those within the Second Circuit, created a “nerve center” test, under which the corporation’s principal place of business was the “office from which its business was directed and controlled.” Scot Typewriter Co. v. Underwood Corp., 170 F. Supp. 862, 865 (S.D.N.Y. 1959). Other courts, such as the Ninth Circuit, examined a corporation’s business activities state by state. If the corporation’s activity was “significantly larger” or “substantially predominate[d]” in one state, then that state was the corporation’s principal place of business. See, e.g., Tosco Corp. v. Communities for a Better Environment, 236 F.3d 495, 500-02 (9th Cir. 2001) (per curiam). This latter test was the one applied by the district court, and affirmed by the Ninth Circuit, when it determined that Hertz was a citizen of California.
In Hertz, the U.S. Supreme Court rejected the Ninth Circuit’s state-by-state activities approach and expressly adopted the “nerve center” test from Scot: “We conclude that ‘principal 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 . . . .”
The Court cited three reasons why the nerve center test, though imperfect, is superior to the other tests. First, the language of Section 1332(c)(1) supports the nerve center test because, read closely, the statute suggests that the “principal place of business” is not a state, but a place within a state. Second, the nerve center test results in administrative simplicity and predictability. Third, Section 1332(c)(1)’s legislative history—in which the committee considered a test involving a corporation’s gross sales, and rejected it as too complex and impractical—supports the simpler nerve center approach.
In the end, the Court acknowledged that the nerve center test could nonetheless produce “hard cases,” and that “anomalies will arise.” But the Court found that “in view of the necessity of having a clearer rule, we must accept them.” The Court also reiterated that the burden of persuasion for establishing diversity jurisdiction remains on the party asserting it. Finally, the Court gave lower courts instruction on how to address possible manipulation by litigants: “if the record reveals attempts at manipulation—for example, that the alleged ‘nerve center’ is nothing more than a mail drop box, a bare office with a computer, or the location of an annual retreat—the courts should instead take as the ‘nerve center’ the place of actual direction, control, and coordination, in the absence of such manipulation.”
The Hertz decision is sure to be cheered by corporations that have been thwarted in their attempts to remove diversity cases to federal court—particularly in the populous state of California. But the decision is equally sure to be bemoaned by busy district court judges with overcrowded dockets.
Joseph E. Laska Mr. Laska’s practice focuses on all aspects of general business and commercial litigation in both state and federal courts. He has experience in various areas such as contractual disputes, labor and employment, intellectual property, unfair competition and class actions. Mr. Laska also specializes in defending life and health insurance companies in "bad faith" and ERISA litigation.
Joseph E. LaskaPartner
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