Where does a corporation “do business”?

In Hertz Corporation v. Friend, 130 S.Ct. 1181 (2010), the United States Supreme Court adopted the “nerve center” approach to determine a corporation’s principal place of business for the purposes of diversity jurisdiction. Id. at 1185-86, 1192. The High Court held that a “principal place of business” is “the place where the corporation’s high level officers direct, control, and coordinate the corporation’s activities.” Id. at 1186.

Plaintiffs Melinda Friend (“Friend”) and John Nhieu (“Nhieu”) sued Hertz Corporation on behalf of a putative class of California citizens who allegedly suffered violations of California’s wage and hour laws at the hands of defendant Hertz Corporation (“Hertz”). Id. Friend and Nhieu sued Hertz in California state court. Id. Hertz filed a petition for removal to federal court pursuant to 28 U.S.C. § 1441(a), claiming that Hertz was not a citizen of California. Id. According to Hertz, with plaintiffs and defendant as citizens of different states, diversity of citizenship for jurisdictional purposes would be satisfied pursuant to 28 U.S.C. §§ 1332(a)(1), (c)(1). Id.1

In support of its proposition, Hertz provided a declaration from an employee relations manager. Id. This declaration showed that Hertz had facilities in 44 states, and that its California facilities accounted for 273 of the company’s 1,606 total locations. Id. Further, the declaration stated that 2,300 of Hertz’s 11,230 full-time employees worked in the California facilities. Id. Per the declaration, the Hertz facilities in California generated approximately $811 million of the company’s $4.371 billion in annual revenue and about $3.8 million of the $21 million annual rentals. Id. Finally, the declaration specified that Hertz’s “leadership” and “corporate headquarters” are located in Park Ridge, New Jersey and that “its core executive and administrative functions” were carried out in New Jersey and Oklahoma City. Id.

In remanding the case to California state court, the district court utilized the Ninth Circuit Court of Appeals’ approach to determining a corporation’s principal place of business: the general business activities test Id. This approach instructed courts to determine a corporation’s amount of business activity on a state by state basis. Id. If one state’s amount was “significantly larger” or “substantially predominated” over other states, then that state would act as the corporation’s principal place of business. Id. If a predominant state was lacking, then the corporation’s principal place of business would be the corporation’s “nerve center,” or “the place where a majority of its [the corporation’s] executive and administrative functions are performed.” Id.

Using the first approach, the district court found that a “plurality of each of the relevant business activities” of Hertz was in California and that the difference between the amount of activities in California and the next closest state was “significant.” Id. at 1187. Accordingly, the district court found Hertz’s principal place of business to be in California, eliminating diversity jurisdiction. Id.

The district court’s decision was appealed to the Ninth Circuit, with that Court of Appeals affirming the decision. Id. Hertz filed a petition for certiorari, acknowledging the difference amongst the Circuits in their approaches to determining corporate citizenship. Id.2 One approach is the “nerve center” test that has been applied by several lower courts including the Seventh Circuit Court of Appeals in Wisconsin Knife Works v. National Metal Crafters, 781 F.2d 1280, 1287 (7th Cir. 1986); also see, Scot Typewriter CO. v. Underwood Corp, 170 F.Supp. 862, 865 (S.D.N.Y. 1959).

The High Court’s analysis begins by presenting a detailed discussion of the relevant history of the principal place of business standard and the difficulties in its application. Id. at 1187-88.3 After reviewing the various standards, the Court adopted and expanded the “nerve center” approach in Wisconsin Knife and Scot to conclude that:

“principal place of business” [as used in the diversity statute] is best read as referring to the place where a corporation’s officers direct, control, and coordinate the corporation’s activities. It is the place that Courts of Appeals have called the corporation’s “nerve center.” And, in practice, it should normally be the place where the corporation maintains its headquarters – provided that the headquarters is the actual center of direction, control, and coordination, i.e. the “nerve center,” and not simply an office where the corporation holds board meetings. Id. at 1192.

In concluding this was the best approach, the Court made three considerations. First, the language of 28 U.S.C. § 1332(c)(1), i.e. “a corporation is a citizen of a State where it has its principal place of business,” refers to the “main, prominent, or leading” singular place within a State. Id. at 1193. The Court further explained that a corporation’s “nerve center” is “its main headquarters,” or a single place. Id. “The public often (though not always) considers it a corporation’s main place of business.” Id. When the nerve center test is compared to the general business activities test that was used by the Ninth Circuit, the Court noted the error in application of the latter, as that test focuses on the state itself, rather than a place within a state. Id. (emphasis added).

Second, the Court reasoned that “administrative simplicity is a major virtue in a jurisdictional statute.” Id. Accordingly, courts will benefit from “straightforward rules under which they can readily assure themselves of their power to hear a case.” Id. Moreover, the “predictability” that stems from straightforward jurisdictional rules benefits corporations when making business decisions and plaintiffs when deciding where to file a lawsuit. Id. As the Court metaphorically explained, a “nerve center” connotes a “corporate brain” that suggests a single location. Id. at 1193-94 In contrast, the general business activities test lends itself to a lack of a single, principal location. In other words, that test acknowledges several different plants or locations. Id. at 1194.

Third, past legislative history indicates a desire for simplicity in determining “principal place of business” for purposes of diversity. Accordingly, the Judicial Conference specifically rejected looking to the place where a corporation generated more than half of its gross income to the phrase “principal place of business.” The Court concluded that the “nerve center” approach allowed for this simplicity whereas using a corporation’s “general business activities” approach as the benchmark did not. Id.

In conclusion, the Court recognized that there will be difficult applications of the nerve center test given the telecommunications era and the Internet. Id. Nevertheless, it commented that the nerve center test “points courts in a single direction, towards the center of overall direction, control, and coordination.” Id. While anomalies will arise, the Court agreed to accept them “in view of the necessity of having a clearer rule.” Id. With this approach at hand and the unchallenged declaration by Hertz pointing to a principal place of business in New Jersey, the Court vacated the Ninth Circuit’s opinion and remanded the case to the district court for further proceedings consistent with its opinion. Id. ■

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1. A corporation’s citizenship is determined by the state where it is incorporated and its principal place of business. Id. at 1190.

2. This article will not address the jurisdictional objection posed pursuant to 28 U.S.C. § 1453(c).

3. Please see Sections III and IV of the opinion, pages 1187-1192 for greater detail.