Tuesday, February 23, 2010

US Supreme Court: “Nerve center” is corporation’s principal place of business

A corporation’s principal place of business is the place where its officers direct, control, and coordinate its activities, a unanimous US Supreme Court ruled on Tuesday, adopting a “nerve center” test for determining corporate citizenship and rejecting a “plurality of business activities” approach for analyzing whether diversity jurisdiction exists (Hertz Corp v Friend, USSCt, Dkt No. 08-1107, February 23, 2010).

In the underlying case, two Hertz Corp employees in California filed a putative class action against the employer for violations of the state’s wage and hour laws. Hertz sought to remove the case to federal court, claiming diversity jurisdiction existed since the plaintiffs were citizens of California while Hertz, headquartered in Park Ridge, New Jersey, was a citizen of that state. The district court found the amount of Hertz’ business activity is “significantly larger” in California than in other states and, as such, the “plurality of each of the relevant business activities” took place there, making California the company’s principal place of business. Concluding it lacked jurisdiction, the district court remanded. The Ninth Circuit affirmed.

In an opinion written by Justice Breyer, the Supreme Court rejected the “plurality of business activities” approach, finding it invites greater litigation and can lead to “strange results.” For example, citing the Ninth Circuit’s own reasoning in a 2009 case, the High Court noted that if a company’s principal place of business were determined based on amount of sales, then by virtue of California’s size and population alone, “`nearly every national retailer—no matter how far flung its operations,’” would be deemed a citizen of California. (Talk about a wave of wage-hour litigation!)

The simpler method—one that does not require courts to weigh corporate functions, assets or revenues—was to follow a “nerve center” approach, the Court held, finding “principal place of business” makes the most sense when read as the place where “a corporation’s high-level officers direct, control, and coordinate the corporation’s activities.” In practice, the nerve center will normally be corporate headquarters, provided that the headquarters is the company's actual center of direction and control “and not simply an office where the corporation holds its board meetings.” The Court rejected an overly simplistic approach, however, dismissing the notion that merely identifying a corporation’s “principal executive offices” on an SEC Form 10–K filing should be enough to establish a corporation’s nerve center. Such a standard “would readily permit jurisdictional manipulation,” it cautioned.

“The metaphor of a corporate `brain,’ while not precise, suggests a single location,” Breyer wrote. “By contrast, a corporation’s general business activities more often lack a single principal place where they take place.” As such, the language of 28 USC 1332(c)(1) supports the nerve center approach as well, since the statute’s word “place” is singular, not plural, and “principal” requires that the main, or most important place be chosen.

There may be no perfect test, the Court conceded, noting there will be “hard cases” under the method adopted today—particularly in an era of telecommuting, where corporate officers may be working at several different locations and communicating over the Internet. “That said, our approach provides a sensible test that is relatively easier to apply, not a test that will, in all instances, automatically generate a result.”

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