February 23, 2010

Supreme Court Decides Hertz Corp. v. Friend

On February 23, the Supreme Court decided Hertz Corp. v. Friend, No. 08-1107, holding that a corporation's "principal place of business" for purposes of determining federal diversity jurisdiction is the place where the corporations' high-level officers direct, control and coordinate the corporation's activities—what courts have referred to as the corporation's "nerve center." Usually that place will be its corporate headquarters.

The governing statute providing federal jurisdiction over suits between citizens of diverse states provides that "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." 28 U.S.C. §1332(c)(1) (emphasis added). In the decades after this language was added to the statute in 1958, federal courts adopted a variety of not entirely consistent tests for identifying a corporation's "principal place of business." Some courts applied variations of the nerve center test. Others applied variations of a test seeking to locate the "center of gravity" of the corporation's actual business operations.

In this case, the trial court determined that, although Hertz Corporation's corporate headquarters were in New Jersey and its core executive and administrative functions were conducted either there or in Oklahoma, the company's principal place of business was in California because the volume of business that it conducted in that state was "significantly larger" than the business done in any other state. The U.S. Court of Appeals for the Ninth Circuit affirmed.

The Supreme Court reversed, holding that a corporation's "principal place of business" is the place where a corporation's officers direct, control and coordinate the corporation's activities—the "nerve center" test "as applied in the Seventh Circuit." This place will normally be the place where the corporation maintains its headquarters, unless the headquarters are simply an office where occasional board meetings are held or a mail drop box. Measuring principal place of business by the corporation's nerve center is supported by the language of the statute itself, which seeks one place within a state, not a balancing of activities across multiple states. It is also supported by "administrative simplicity," which is "a major virtue in a jurisdictional statute." Finally, "for those who accept it," the statute's legislative history prefers a simpler rule over a more complex one.

Justice Breyer delivered the opinion for a unanimous Court.

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