By: Jordan Wood
Christian & Small, LLP
Birmingham, AL
On February 23, the Supreme Court reached a unanimous decision regarding how to determine a corporations principal place of business for purposes of diversity jurisdiction. The opinion of Hertz v. Friend, authored by Justice Stephen G. Breyer, stated a corporation is a citizen of a state where its nerve center is located.[1] Justice Breyer noted that, typically, this nerve center will be a corporations headquarters. The Hertz decision should provide a more streamline and predictable approach in determining corporate citizenship while at the same time restricting tort lawyers ability to keep lawsuits in plaintiff-friendly states courts.
The Hertz ruling came in light of the differences among the Circuits in their application the federal diversity statute 28 U.S.C. 1332, specifically section (c)(1)s principal place of business language. Prior to Hertz, the Federal Circuits had been applying a range of overlapping standards with some courts failing to find a unified approach even within the same Circuit.[2] Aware of this problem, the Supreme Court acknowledge the phrase principal place of business ha[d] proved more difficult to apply than its originators likely expected.
Indeed, the application of one method over another could significantly alter the disposition of a lawsuit. In the instant case, Hertz, who was involved in a wage-and-hour claim brought by two of its employees, sought to remove the suit from California state court based on diversity jurisdiction. However, the lower courts agreed that Hertzs principal place of business (and thus corporate citizenship) was California. Specifically, the courts, applying Ninth Circuit precedent, focused on the fact that a majority of Hertzs business activities took place in California rather than the fact that Hertzs headquarters was located New Jersey.
Seeking a more uniform approach, the Supreme Court vacated and remanded the lower courts decision and held a nerve center approach should be applied in determining a corporations principal place of business:
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.
In support of this decision, Justice Breyer pointed to three considerations which the Court believed made the nerve center the most superior approach: 1) the text of 28 U.S.C. 1332(c)(1); 2) the need for administrative simplicity; and 3) the legislative historys desire for the least complicated approach.
On the business end of the decision, Justice Breyer applied a detail laden form of statutory interpretation to 28 U.S.C. 1332(c)(1)s phrase State where it has its principal place of business.[3] Under Justice Breyers analysis, the principal place of business should be a specific location within a state (i.e. a headquarters located within New Jersey) and not the state itself (i.e. California holds a majority of Hertzs business).
The more common sense argument comes in the need for administrative simplicity. The idea of complex jurisdictional tests not only consumes significant resources of the parties and judicial system, but as Justice Breyer stated, it also diminish[ed] the likelihood that results and settlements will reflect a claims legal and factual merits. In accordance with its simplicity, the nerve center approach should also provide greater predictability to litigants attempting to remove a case to federal court under diversity jurisdiction. Essentially, the Courts association of a nerve center to a headquarters triggers a single location in the minds of both judges and litigants and could potentially reduce the gray area associated with establishing where a majority of a corporations business activity is being conducted. The added benefit of predictability should also extend to counsel as they assess both the possibility and probability of removal to federal court.
Looking ahead, the Supreme Court seemed well aware of the challenges that await courts in their application of the nerve center approach. One such problem area may arise when a corporation does a vast majority of its business in one State but its headquarters is located in another State. For example, even if a corporation conducts nearly all of their business in State A, under the nerve center approach the corporation may remove to federal court provided they have established their headquarters in State B. Conversely, this same corporation may be helpless to seek removal when a lawsuit is filed in State B even though they conduct little to no business activity there. Justice Breyer acknowledged that such results seemed to fly in the face of the 28 U.S.C. 1332 and the idea of a principal place of business.
Another area of concern is the possible decline of the physical headquarters. As business continues to move into telecommunications and corporations increasingly utilize the Internet, the traditional notion of a centralized headquarters may begin to fade into obscurity. As Justice Breyer noted, some corporations may divide their command and coordinating functions among officers who work at several different locations, perhaps communicating over the Internet. Justice Breyer, however, considered these gray areas anomalies rather than emerging trends, stating [a]ccepting occasionally counterintuitive results is the price the legal system must pay to avoid overly complex jurisdiction administration while procuring the benefits that accompany a more uniform legal system.
In the end, the idea of a straightforward approach with easy application appeared to be greatest driving factor behind the Supreme Courts 9-0 decision. The Hertz decision calls for an end to examinations of corporate functions, assets, or revenues, and instead opts for an approach which finds a corporations principal place of business to be the locus of its overall direction, control, and coordination. Theoretically, this never center approach should provide greater transparency to all parties examining corporate citizenship for purposes of diversity removal under 28 U.S.C. 1332. However, theory will soon give way to reality as different Circuits begin to apply the nerve center approach, testing not only the consistency of its application but also revealing the extent and limits of such an approach.
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[1] The full citation for this case is Hertz Corp. v. Friend, No. 08-1107, 2010 WL 605601, at *1 (U.S. Feb. 23, 2010).
[2] See Kelly v. United States Steel Corporation, 284 F.2d 850 (3d Cir. 1960) (holding a corporations principal place of activities or place of operations determined corporate citizenship); Scot Typewriter Co. v. Underwood Corp., 170 F. Supp. 862 (S.D. N.Y. 1959) (applying a never center approach when determining citizenship of a corporation with far-flung activities); See also Bel-Bel Intern. Corp v. Community Bank of Homestead, 162 F.3d 1101 (11th Cir. 1998) (applying a total activites test which applies both a principal place of activities test along with a nerve center test in that order).
[3] Justice Breyer noted that the word place was singular, not plural, and when coupled with the word principal required one to pick a main, prominent, or leading place. Likewise, he found the fact that the position of the word place came after State where required the focus to be on a place within a state.