Tips for In-House Counsel
June 3, 2010
Hertz Corp. v. Friend: A Corporation's Principal Place of Business Is Its “Nerve Center”
The U.S. Supreme Court has resolved the issue of how to determine the “principal place of business” of multistate corporations for the purpose of diversity jurisdiction, defining as the corporation’s “nerve center.” The decision in Hertz Corp. v. Friend, 130 S.Ct. 1181 (2010), ends the “divergent and increasingly complex interpretations” of the phrase “principal place of business” applied by the various federal courts of appeals. The decision fundamentally changes how most lower courts will determine corporate citizenship for diversity purposes, enabling increased predictability and certainty for parties on both sides of litigation.
Plaintiff Melinda Friend and other Hertz Corporation employees filed a purported class action lawsuit against the rental car company in California state court, alleging that violations of California’s wage and hour laws. Hertz sought to remove the case to federal court based on the diversity jurisdiction provisions set forth in 28 U.S.C. section 1332. That statute allows a party to remove a civil case from state to federal court when there is complete diversity of citizenship between the parties and at least $75,000 of damages at issue.
For purposes of diversity jurisdiction, a corporation is a citizen of “any State by which it has been incorporated and of the State where it has its principal place of business.” 28 U.S.C. section 1332(c)(1). When the suit involves a claimed class action, the action is generally removable as long as any member of the plaintiff class is a citizen of a different state than the defendant corporation. See 28 U.S.C. section 1453(b).
Hertz argued that complete diversity existed because the plaintiffs were all California residents and it was a Delaware corporation with its corporate headquarters—its “principal place of business”—in New Jersey. The plaintiffs argued that Hertz’ principal place of business was in California, because it employed more people in and derived more revenue from California than any other state.
The U.S. District Court for the Northern District of California applied the “place of operations test” set forth by the Ninth Circuit Court of Appeals in Tosco Corp. v. Communities for a Better Environment, 236 F.3d 495 (9th Cir. 2001), and determined that because Hertz conducted significantly more business activities in California than any other state, California was the company’s “principal place of business” for diversity jurisdiction purposes. Accordingly, the District Court denied the removal petition and remanded the case back to California state court.
On appeal, the Ninth Circuit Court of Appeals affirmed the District Court decision, holding that Tosco was the correct test and the District Court applied it correctly. Friend v. Hertz Corp., 297 Fed. App’x 690, 690 (9th Cir. 2008).
The Principal Place of Business is a Corporation’s “Nerve Center”
Before the Hertz decision, there was a broad split among federal circuit courts as to the proper statutory interpretation of the phrase “principal place of business.” The Seventh Circuit, for example, applied a bright line “nerve center” test, identifying the physical location of the corporation’s headquarters as its principal place of business. Other circuit courts like the Third Circuit look for the “center of activity” or “center of gravity.” Still others, like the Ninth Circuit, look at multiple factors to find a state where the corporation’s activity “substantially predominates.” Hertz Corp. v. Friend, 130 S.Ct. 1181, 1191-1192 (2010). The result has been a “divergent and increasingly complex” spread of federal circuit interpretations. Id. at 1192.
The Supreme Court sought “to find a single, more uniform interpretation of the statutory phrase.” Id. So the Court determined that the “principal place of business” of a corporation is the “place where the corporation’s high level officers direct, control, and coordinate the corporation’s activities,” frequently labeled by circuit courts as the “nerve center” of the corporation. Id. Writing for the Court, Justice Breyer acknowledged that the nerve center will “normally be the place where the corporation maintains its headquarters,” but the key characteristic of a nerve center is that it is the “actual center of direction, control, and coordination.” Id. Therefore, the mere physical location of a building labeled “headquarters” is meaningless if the real corporate decisions are made elsewhere.
In light of its adoption of the “nerve center” approach, the Supreme Court sided with Hertz and unanimously reversed the Ninth Circuit, remanding the case. Id. at 1195.
The Court adopted the “nerve center” interpretation for several reasons. First, a straightforward reading of the actual statutory text supports this interpretation. The word “place” is singular, suggesting a single place where the “principal,” or main and leading, business decisions take place. Id. at 1192-1193. The phrase “the State where it has its principal place of business” suggests that a court should look for a specific location within a state, rather than measure all of the corporation’s activities within a state. Id. at 1193.
Moreover, the Supreme Court felt that the nerve-center test was relatively simple to administer, promotes greater predictability, minimizes the need for parties to engage in expensive procedural determinations, and comports with legislative history suggesting that the determination of corporate citizenship should not be such a challenging task. Id. at 1193-1194.
The Court did note that the party seeking to remove a case on diversity jurisdiction grounds bears the burden of establishing the location of its nerve center with “competent proof.” Id. at 1194-1195. The Court noted that mere reference to an SEC filing identifying corporate offices may be insufficient; if challenged, a corporation must be able to prove that its business is directed, controlled, and coordinated from that location. Id. at 1195.
Certainly the Hertz decision does alleviate significant confusion among litigants by creating a clear, uniform rule for lower courts to follow. Prior to Hertz, only the Seventh Circuit applied the “nerve center” test, so the majority of federal courts will have to consider the citizenship of multistate corporations in a new way now, which will likely have a significant impact on the ability of such corporations to remove lawsuits to federal court and avoid potential “home court bias” in the local state courts.
This is particularly significant in big states like California, where many corporations had their largest business operations simply by virtue of the state’s size. Prior to Hertz, many of those corporations were considered citizens of California, subject to California laws, regulations, and state courts. But the Hertz decision changes that dramatically, allowing corporations that are incorporated or genuinely headquartered in foreign states to remove cases to federal court regardless of the volume of business activity they conduct in California.
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