U.S. Supreme Court Establishes “Nerve Center” Test For Determining Corporate Jurisdiction
April, 2010
In Hertz Corp. v. Friend, 130 S.Ct. 1181 (2010), a unanimous United States Supreme Court held that a corporation’s “principal place of business” is its “nerve center”—the “place where a corporation’s high level officers direct, control and coordinate the corporation’s activities.” The decision resolves a long-simmering debate among the circuits regarding how to assess corporate citizenship for the purpose of assessing federal jurisdiction in potential diversity actions.
Facts
The issue arose in Hertz after two California citizens filed a class action lawsuit against Hertz in California state court. The potential class, all Californians, sought damages from the car rental company for its alleged violation of state wage and hours laws. Hertz, whose corporate headquarters are located in New Jersey, sought to remove the case to federal court, asserting diversity-of-citizenship between the parties. The federal district court denied the petition, finding that Hertz’s “principal place of business” was California because it conducted significantly more business activities in California than any other state. The Ninth Circuit affirmed.
Analysis
The Supreme Court vacated and remanded the case back to federal court. Recognizing the need for simplicity, efficiency and predictability, the Court rejected the “business activities” approach utilized by the Ninth Circuit to determine corporate citizenship. Instead, it adopted the Seventh Circuit’s “nerve center” test, holding that a corporation’s “principal place of business” is where its officers “direct, control and coordinate [business] activities,” typically the location of its corporate headquarters. The Court reasoned that the “nerve center” test, while not perfect, is a “clearer rule,” which strives to “avoid overly complex jurisdictional administration while producing the benefits that accompany a more uniform system.”
The Supreme Court reiterated that the burden of persuasion for establishing diversity jurisdiction remains on the party asserting it. When challenged, jurisdictional facts must be supported by competent proof. This means, for example, that the “nerve center” cannot be established by the mere filing of a form like the Securities and Exchange Commission’s Form 10-K listing a corporation’s “principle executive offices.” Rather, evidence of “the place of actual direction, control and coordination” is necessary.
Learning Point
The “nerve center” test is a common sense approach that elevates substance over form. Its adoption is particularly significant in that it strikes down the “business activities” and “center of gravity” tests which have been utilized by almost every circuit other than the Seventh Circuit. In some instances, this will increase a corporation’s access to the federal courts through diversity jurisdiction.
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