In a decision likely to have significant consequences for federal subject-matter jurisdiction, Hertz Corp. v. Friend et al., No. 08-1107 (U.S. February 23, 2010), the United States Supreme Court clarified a jumble of approaches used by the lower federal courts and endorsed the "nerve center" test for determining a corporation's principal place of business for purposes of establishing diversity among litigants. This decision will often affect where a corporation with geographically diverse business activities may be subject to suit in federal court on diversity grounds, and should lead to greater predictability in determining when a federal court will find diversity jurisdiction to be present.
Generally speaking, a party is subject to suit in federal court only if the action implicates a "federal question," or if all the plaintiffs are citizens of different States than all the defendants—they are "diverse"-and the amount in controversy exceeds $75,000. Under 28 U.S.C. § 1332 (c) (1), the federal diversity jurisdiction statute, a corporation is a citizen of the State in which it has been incorporated and where it has its principal place of business. In Hertz, the Court held that "the phrase 'principal place of business' refers to the place where the corporation's high level officers direct, control, and coordinate the corporation's activities." For example, if "the bulk of a company's business activities visible to the public takes place in New Jersey, while its top officers direct those activities just across the river in New York, the 'principal place of business' is New York." Because a corporation's headquarters typically directs, controls and coordinates a corporations' activities, and therefore serves as the corporation's "nerve center," its location may determine one State of which the corporation is a citizen.
If a corporation's headquarters is "simply an office where the corporation holds its board meetings (for example, attended by directors and officers who have traveled there for the occasion)," "a bare office with a computer" or otherwise not actually where the officers and directors direct, control and coordinate the corporation's activities, then it should not be found to be the "nerve center" of the corporation and should not be used to determine the corporation's principal place of business. In addition, the mere filing of a Form 10-K with the U.S. Securities and Exchange Commission, which lists a corporation's principal place of business as a particular State, or other similarly conclusory acts, without more, does not establish the corporation's nerve center. The Hertz Court explained that lower courts should look to the place of actual direction, control, and coordination of the corporation when determining a corporation's principal place of business, and that it remains the burden of the party asserting diversity jurisdiction to establish it.
Prior to the Hertz decision, the various Circuit Courts of Appeals had split on the method of determining a corporation's principal place of business. Hertz should provide a more uniform and simple standard for making that determination and, accordingly, greater predictability regarding whether federal courts have diversity jurisdiction and subject-matter jurisdiction over a particular dispute. In promulgating the "nerve center test," the Court soundly rejected the Ninth Circuit's test, which had looked to the State where a corporation's activities were significantly larger or substantially predominated, as compared to its activities in other States. The Seventh Circuit had applied a test most similar to that outlined by the Hertz Court, and the remaining Circuits had employed varying versions of the "nerve center" test, weighing different considerations in particular instances.
Importantly, the existence of diversity jurisdiction in a particular case should now be re-examined in light of this decision because litigants may challenge subject-matter jurisdiction at any time. Hertz may have particular impact in California and certain other large States in which out-of-state corporations may have substantial business activities. Previously, particularly in the Ninth Circuit, such numerous commercial contacts frequently led courts to conclude that a corporation maintained its principal place of business in that State (even though its "nerve center" was elsewhere), thus precluding a federal court from hearing many controversies between that corporation and a resident of that State. Under Hertz, many of those business activities are now irrelevant, and federal courts may exercise jurisdiction over (and corporations may remove to federal court) a greater array of cases than before.
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