US Supreme Court Decides “Principal Place of Business” Test for Corporate Diversity Jurisdiction

In Hertz Corp. v. Friend, the US Supreme Court adopted the “nerve center” approach to determining a corporation’s “principal place of business” for diversity jurisdiction under 28 USC in §1332(c)(1).

The Court explained the phrase “principal place of business” refers to the place where a corporation’s high level officers direct, control, and coordinate the corporation’s activities, i.e., its “nerve center,” which will “typically be found at its corporate headquarters.”

The decision resolved a split in authority among the Circuit Courts of Appeal. Some Circuit Courts of Appeal had applied the “nerve center” test– other courts, including the Ninth Circuit Court, had applied a “business activity” test.

Under the discredited “business activity” test, courts decided a corporation’s principal place of business by analyzing the amount of its business activity, state by state. If the amount of activity was “significantly larger” or “substantially predominates” in one state, then that state was the corporation’s “principal place of business.”

The US Supreme Court rejected the “business activity” test in favor of the “nerve center” test:

“[P]rincipal 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.

The present case involved a suit by two California citizens again Hertz Corporation, originally filed in a California state court.

Plaintiffs sought damages for what they claimed were violations of California’s wage and hour laws, and further requested class certification in behalf of all California citizens who allegedly suffered similar harms. Hertz filed a notice seeking removal to a federal court. Hertz claimed that the plaintiffs and the defendant were citizens of different States.

A Hertz declaration stated, among other things, that Hertz operated facilities in 44 States; and that California—which had about 12% of the Nation’s population—accounted for 273 of Hertz’s 1,606 car rental locations; about 2,300 of its 11,230 fulltime employees; about $811 million of its $4.371 billion in annual revenue; and about 3.8 million of its approximately 21 million annual transactions, i.e., rentals.

The Hertz declaration also stated that the “leadership of Hertz and its domestic subsidiaries” is located at Hertz’s “corporate headquarters” in Park Ridge, New Jersey; that its “core executive and administrative functions . . . are carried out” there and “to a lesser extent” in Oklahoma City, Oklahoma; and that its “major administrative operations . . . are found” at those two locations.

In the case below, the California Central District Court applied the Ninth Circuit Court’s “business activity” test, recognizing Hertz’s principal place of business as New Jersey.

In rejecting the Ninth Circuit test and remanding for further evaluation, US Supreme Court explained:

Administrative simplicity is a major virtue in a jurisdictional statute. Sisson v. Ruby, 497 U. S. 358, 375. A “nerve center” approach, which ordinarily equates that “center” with a corporation’s headquarters, is simple to apply comparatively speaking.

While there may be no perfect test that satisfies all administrative and purposive criteria, and there will be hard cases under the “nerve center” test adopted today, this test is relatively easier to apply and does not require courts to weigh corporate functions, assets or revenues different in kind, one from the other. And though this test may produce results that seem to cut against the basic rationale of diversity jurisdiction, accepting occasionally counterintuitive results is the price the legal system must pay to avoid overly complex jurisdictional administration while producing the benefits that accompany a more uniform legal system.

The opinion was authored by Mr. Justice Stephen Breyer for a unanimous Court.