Supreme Court Rules That A Corporation’s “Nerve Center” Is Its “Principal Place Of Business”

When a lawsuit is filed in state court, employers often wish to remove the case to federal court. Thus, it is important to determine whether the corporation is a “citizen” for purposes of determining whether the federal court has diversity jurisdiction.  Federal law provides that a corporation is a citizen of the state in which it is incorporated and of the state where it has its “principal place of business.”  Courts have disagreed on the method of determining where a corporation has its “principal place of business.”

On February 23, 2010, in Hertz Corporation v. Friend, the Supreme Court resolved that disagreement, ruling that “principal place of business” means “the place where the corporation’s high-level officers direct, control and coordinate the corporation’s activities,” commonly referred to as the corporation’s “nerve center.”

Background

Hertz operates its rental-car facilities in over 40 states, with California accounting for the largest percentage of transactions as compared to other states. However, most of Hertz’s executive and administrative functions occur in its corporate headquarters located in New Jersey.

California plaintiffs brought a class action lawsuit in California state court, accusing Hertz of failing to pay overtime to location and branch managers. Hertz removed the case to federal court, claiming it was not a citizen of California, as it was incorporated in Delaware and had its principal place of business in New Jersey.  The plaintiffs moved to remand the case back to the California state court, claiming the federal court lacked diversity jurisdiction because (they asserted) Hertz’s principal place of business was California, the state in which Hertz did the most business.

The federal district court in California agreed with the plaintiffs and remanded the case. Hertz took an appeal, which it was entitled to do under the Class Action Fairness Act, but the Ninth Circuit affirmed.  The Ninth Circuit held that to determine a corporation’s “principal place of business,” a court must first determine the amount of business the corporation does in each state.  If the amount is “significantly larger” or “substantially predominates” in one state, then that state is the principal place of business.  If no such state exists, then the corporation’s “nerve center” is the principal place of business.  Under this framework, the lower courts determined that Hertz’s principal place of business was California, rather than New Jersey.

The Supreme Court’s Decision

The Supreme Court rejected the Ninth Circuit’s framework.  After analyzing the legislative history, the various tests used by other courts, and other considerations, the Court held that considering the “nerve center” to be the principal place of business was the best option and would best achieve consistency.  The Court concluded that this test is relatively easy to apply and does not require courts to weigh corporate functions, assets or revenues. The Court cautioned that should the record reveal attempts at jurisdictional manipulation—such as the “nerve center” being nothing more than a mailbox, a bare office, or the location of the annual executive retreat—the courts should consider the “nerve center” the place of actual direction, control, and coordination of the corporation’s business.

What Hertz Means for Employers

Plaintiffs often sue in state court, while defendant employers usually prefer federal court.  The Court’s decision clarifies the test for determining the “citizenship” of corporations so that defendants now can more confidently determine whether the case can be removed to federal court.  Now, if an employer is sued in a state other than its state of incorporation or the location of its “nerve center,” the Hertz decision makes federal court a viable option, even if the employer does a substantial amount of business in the state where the lawsuit was filed (provided that no other defendant is a forum-state citizen and that the amount in controversy exceeds $75,000 in controversy or $5 million for a class action).

For more information, please contact the Seyfarth attorney with whom you work, or any Labor & Employment attorney on our website.