Supreme Court: A Corporation’s "Principal Place of Business"
is Usually at Its Headquarters
February 23, 2010
On February 23, 2010 the Supreme Court issued an unanimous decision that is anticipated to have a significant impact on litigation against corporate entities. In Hertz v. Friend, Hertz Corp. was sued in California state court by a class of employees who alleged wage & hour violations under California law. Hertz, who maintains its headquarters in New Jersey, sought to remove the case to federal court on the basis of diversity jurisdiction. The federal court denied the removal and sent the case back to state court, holding that because a significantly larger amount of Hertz’s business was done in California than in any other State, California was Hertz’s “principal place of business,” and thus the diversity of citizenship required for removal was not present. The Ninth Circuit affirmed. The Supreme Court overturned the decision, finding Hertz is not a citizen of California for purposes of diversity, and sending the case to federal court.
The federal statute governing diversity jurisdiction provides that a corporation is 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.” 28 U.S.C. 1332(c)(1). Courts have not had a consistent approach to determining where a corporation’s principal place of business is located, and until the Hertz v. Friend decision, the Supreme Court had not addressed the issue. In Hertz, the Supreme Court resolved the split among the courts and ruled that for purposes of determining federal diversity jurisdiction, a company should be treated as a citizen of the state where its corporate “nerve center” is located. A corporation’s “nerve center” is the place where the corporation’s high-level officers direct, control and coordinate the corporation’s activities. “In practice it should normally be the place where the corporation maintains its headquarters,” the court wrote. (Unless the headquarters location is merely a mail drop box or a place where board meetings are held, and not truly the action center of the corporation). In issuing this ruling, the Court explained that the “nerve center” test for determining a corporation’s principal place of business had the virtue of “administrative simplicity” and supported the language of the federal jurisdictional statute in which the word “place” is singular, not plural, thus intending one principal place of business, not a balancing of the total amount of business activities among multiple states.
Legal analysts predict that this decision will make it more difficult for plaintiffs to sue out-of-state corporations in state courts, which are considered friendlier to certain types of litigation, such as class actions, than are federal courts. This decision may make it easier, and the outcome more certain, for corporations who wish to remove to federal court as part of their litigation strategy.
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