Supreme Court Adopts “Nerve Center” Test for Corporate Citizenship in Diversity Jurisdiction

In the recently decided Hertz Corp. v. Friend, No. 08-1107, the United States Supreme Court unanimously held that, for purposes of federal diversity jurisdiction, a corporation’s “principal place of business” is its “nerve center” - typically, its corporate headquarters. Now, in addition to being citizens of the states where they are incorporated, all corporations will be treated as citizens of the state where their high level officers direct, control and coordinate their business activities. Because several federal procedural statutes, including tax venue statutes, use the phrase “principal place of business,” Hertz will be persuasive, if not controlling, for them as well.

Prior to Hertz, the federal courts of appeals were divided on the proper meaning of “principal place of business.” California federal courts, for example, concluded that a corporation’s “principal place of business” was the state with the largest proportion of the corporation’s business activity. In Hertz, the Supreme Court overturned the business activity test, which rendered many national corporations California citizens simply because of the state’s disproportionately large population. Instead, the Supreme Court adopted the administratively simple and comparatively predictable “nerve center” test, which looks at a corporation’s own structure to determine where its business decisions are made.

Import for Future Cases

The Supreme Court’s ruling creates a uniform test that, on balance, will benefit corporations litigating in federal court. Although the “nerve center” test is imperfect, particularly in the age of telecommuting when a corporation’s command officers may work at several different locations and communicate over the internet, it is better than the less predictable alternatives. Corporate officers, for instance, no longer need to worry that their corporation’s “principal place of business” - and, hence, their citizenship for federal diversity jurisdiction - might fluctuate unpredictably depending on market conditions. Corporate citizenship also will not change from circuit to circuit, since all circuits will now apply the same test. Moreover, the “nerve center” test gives a corporation greater control over its “principal place of business.” Although the “nerve center” must be real and not just an empty office or a mail drop box, under Hertz, a corporation can establish one central “nerve center” ahead of litigation. The Court’s decision therefore should streamline disputes over a corporation’s citizenship for jurisdictional purposes, and in most instances, eliminate them altogether.

Courts will likely apply the “nerve center” test to more than just the diversity jurisdiction statute at issue in Hertz. For instance, the bankruptcy venue statute (28 U.S.C. § 1408) and various statutes prescribing venue in tax cases (28 U.S.C. § 1402;  I.R.C. § 7482) permit venue where corporations maintain their “principal place of business.” To be sure, the Court tied some of its justifications for the Hertz rule - such as its administrative simplicity - to pervasive concerns about jurisdictional rules. But administrative simplicity is a virtue for procedural rules generally, so at the very least, Hertz should be persuasive authority for courts construing similar language in nonjurisdictional procedural statutes.