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March 5, 2010Client Alert

United States Supreme Court Adopts “Nerve Center” Test To Determine Corporation’s Citizenship for Diversity Jurisdiction

Last week, the United States Supreme Court adopted the “nerve center” test to determine a corporation’s “principal place of business” for purposes of diversity jurisdiction. The Court’s ruling in Hertz Corp. v. Friend established a uniform standard for determining a corporation’s citizenship under the diversity jurisdiction statute. Under the statute, which allows certain state court claims to be removed to a federal district court, a corporation is considered a citizen of the state: (a) in which it is incorporated; and (b) where it has its principal place of business. Under the Court’s ruling in Hertz, a corporation’s principal place of business is where the corporation’s high level officers direct, control, and coordinate the corporation’s activities, i.e., the corporation’s “nerve center.”

Hertz involved California state court claims where the plaintiffs, who were California citizens, tried to block the defendant’s, Hertz Corporation, attempt to remove the case to federal court. The plaintiffs argued that Hertz, though headquartered in New Jersey, was a citizen of California under the diversity jurisdiction statute, because a comparison of Hertz’s sales on a state-by-state basis revealed that the plurality of Hertz’s “relevant business activities” was in California. The Supreme Court ultimately disagreed and noted that using the test applied by the trial court would result in nearly every national retailer being deemed a citizen of California for diversity purposes due to the sheer size and population of the state.

The Hertz decision is significant because it provides a uniform test for corporate citizenship, eliminating needlessly complex, overlapping and varied citizenship tests that had existed among the lower federal courts. In adopting the nerve center test, the Court’s goal was to promote judicial uniformity, simplicity and predictability. In the Court’s view, a simple jurisdictional test reduces the amount of time and money spent litigating jurisdictional issues rather than the substantive merits of the parties’ dispute. A uniform test will also reduce appeals, discourage gamesmanship and increase the likelihood that settlements and verdicts reflect the legal and factual merits of the case.

In most instances, a corporation’s “nerve center” will coincide with its headquarters, assuming that the headquarters is actually where the officers direct, control and coordinate the corporation’s business. There will be circumstances, however, in which the results of this test will be less obvious or even counterintuitive, such as where a corporation relies on telecommuting and its executives are scattered about the country. The nerve center test still applies in such instances, and the court will need to base its determination on the corporation’s center of overall direction, control and coordination.

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