Supreme Court Clarifies Definition of "Principal Place of Business"

Our readers know a crucial early decision for defendants in cases brought in state court is whether to seek to remove the case to federal court.   In a decision that will impact when corporations can remove litigation to federal court based on diversity, the Supreme Court this week adopted a new test of corporate citizenship. Hertz Corp. v. Melinda Friend, et al., No. 08-1107 (S.Ct. 2/23/10).

Plaintiffs, California citizens, sued Hertz Corporation in a California state court.  Hertz sought removal to the federal district court, claiming that because it and plaintiffs were citizens of different states, the federal court had diversity jurisdiction. Plaintiffs, however, claimed that Hertz was a California citizen, like themselves, and that, hence, diversity jurisdiction was lacking under §1332(c)(1), which provides that “a corporation shall be deemed to be a citizen of any State by which it has been incorporated and of the State where it has its principal place of business.”

To show that its “principal place of business” was in New Jersey, not California, Hertz submitted a declaration stating, among other things, that it operated facilities in 44 States, that California accounted for only a portion of its business activity, that its leadership is at its corporate headquarters in New Jersey, and that its core executive and administrative functions are primarily carried out there. The district court concluded that it lacked diversity jurisdiction because Hertz was a California citizen under Ninth Circuit precedent, which asked, instead, whether the amount of the corporation’s business activity is “significantly larger” or “substantially predominates” in one state.

The Supreme Court acknowledged that the phrase “principal place of business” has proven difficult to apply.  Lower courts were at times uncertain as to where to look to determine a corporation’s “principal place of business” for diversity purposes. If a corporation’s headquarters and executive offices were in the same state in which it did most of its business, the test seemed straightforward. But if those corporate headquarters, including executive offices, were in one state, while the corporation’s plants or other centers of business activity were located in other states, the answer was less obvious. In particular, courts have had difficulty when a corporation’s operations are not far-flung but rather limited to only a few states. When faced with this question, various federal courts have focused more heavily on where a corporation’s actual business activities are located, adopting divergent and increasingly complex tests to interpret the statute.

In an effort to find a single, more uniform interpretation of the statutory phrase, the Supreme Court returned to the “nerve center” approach under which a “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. 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.

Among the considerations that convinced the Court that the “nerve center” approach, while admittedly imperfect, was superior to other possibilities:  first was the statutory language which uses the word “place” in the singular, not plural, and refers to a place within a state, not the state itself.  This rules out those lower court tests that look not at a particular place within a state, but incorrectly at the state itself, measuring the total amount of business activities that the corporation conducts there and determining whether they are significantly larger than in the next-ranking state.

Second, administrative simplicity is a major virtue in a jurisdictional statute. A “nerve center” approach is simple to apply, comparatively speaking. MassTortDefense agrees that a clear rule -- predictability -- is something the business community has been looking for.  Greater predictability may assist businesses in making investment and other financial decisions.  The new rule may also reduce the need for extensive and expensive jurisdictional discovery.

The Court admitted that while there may be no perfect test that satisfies all administrative and policy criteria, this test is relatively easier to apply. The Court warned that if the record reveals attempts at jurisdictional 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 executive retreat -- the courts should instead take as the “nerve center” the place of actual direction, control, and coordination, in the absence of such manipulation.