• Supreme Court Defines "Principal Place of Business" for Diversity Cases
  • March 17, 2010 | Authors: Linda T. Coberly; Steffen Johnson; Gene C. Schaerr
  • Law Firms: Winston & Strawn LLP - Chicago Office ; Winston & Strawn LLP - Washington Office
  • The Supreme Court recently answered a critical question of diversity jurisdiction in a way that should prove very helpful to corporate defendants seeking to keep lawsuits out of plaintiff-friendly state jurisdictions. The case of Hertz Corp. v. Friend, No. 08-1107 (Feb. 23, 2010) concerned how courts should determine a corporation’s “principal place of business.” The Ninth Circuit had adopted an approach that focused on where the corporation had the largest presence--an approach that would inevitably have pointed to the states with the largest populations (like California) as the home of many if not most national corporations. In a unanimous decision, the court rejected that view. It held instead that a corporation’s “principal place of business” is its “nerve center”--the state where its officers direct, control, and coordinate the corporation’s activities.

    A group of California citizens brought suit in California state court, alleging that Hertz had violated the state’s wage and hour laws. Hertz removed the case to federal district court on the basis of diversity jurisdiction, claiming that, as a citizen of New Jersey, the corporation was a citizen of a different state than the plaintiffs. The plaintiff claimed that while Hertz was based in New Jersey, its “principal place of business” was California, because a greater portion of its activities were in California than in any other state. Hertz, on the other hand, submitted evidence that it operated facilities in 44 states, that California accounted for only a portion of its business activities, that its leadership is at its corporate headquarters in New Jersey, and that its core executive and administrative functions are primarily carried out there. The district court concluded that it lacked diversity jurisdiction, and the Ninth Circuit affirmed. Under Ninth Circuit precedent, a corporation is a citizen of the state where it has the most business activities or where its activities “substantially predominate.” Because Hertz had more locations in California than in any other state, the district court and the Ninth Circuit found California citizenship.

    In a unanimous decision, the Supreme Court reversed. Justice Breyer delivered the opinion for the court, stating that a corporation’s “principal place of business” refers to the place where a corporation’s officers direct, control, and coordinate the corporation’s activities. As a practical matter, this will normally be where the corporation maintains its headquarters, as long as the headquarters is the actual center of direction and control and not simply an office where the corporation holds its board meetings.

    Under 28 U.S.C. § 1332(c)(1), “a corporation shall be deemed to be a citizen of any state by which it has been incorporated and of the state where it has its principal place of business.” According to the court, the statute’s plain language, referring to a singular “place” of business within a state, suggests that Congress meant to refer to a single location, not a variety of potential places of business. The alternative “business activities” test takes the court’s analysis away from a single place within a state to the state itself, as it requires the court to aggregate a corporation’s activities throughout an entire state. Moreover, a uniform “nerve center” rule is simpler to interpret and employ. Whereas it can be difficult to determine where a majority of a corporation’s activities actually occur, the corporation’s headquarters or “nerve center” is far simpler to ascertain.

    This new decision offers important clarity for corporations that conduct business on a national level. A corporation can now be assured that even if it conducts a large amount of business in one particular state, it will not be considered a citizen of that state, and thus forced into state court, if it truly maintains its headquarters elsewhere. The decision should also reduce the time and resources litigants and courts spend on threshold jurisdictional issues before considering the merits of a dispute.