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Supreme Court Hands Corporations a Powerful Weapon for Avoiding Plaintiff-Friendly State Courts – the Nerve Center Jurisdictional Test

The Commercial Law Section

Spring 2010

Authors: Robert R. Simpson, Latonia C. Williams

For decades, corporate litigants have been forced to defend themselves in many state courts where they simply did not belong. This is because the definition of a corporationʼs “principal place of business” has been diluted by many federal courts, paving the way for corporations to unjustifiably battle in plaintiff-friendly state courts. Fortunately, the United States Supreme Court has finally provided some clarity and relief on the issue of a companyʼs “principal place of business.” This article will focus on the positive impact of the February 23, 2010, Supreme Court decision of Hertz Corp. v. Friend. It will also address some unresolved issues for corporate defendants.

In Hertz, the Supreme Court took a major leap towards clarifying the test by which a corporationʼs citizenship is determined for diversity jurisdiction. In a unanimous decision, the Supreme Court held that for the purposes of diversity jurisdiction under 28 U.S.C. § 1332(c)(1) (“Section 1332”), a corporationʼs “principal place of business” is best interpreted as “the place where a corporationʼs officers direct, control, and coordinate the corporationʼs activities. . . the corporationʼs ʻnerve center.ʼ”[1] It is not clear, however, whether Hertz ends a half-century jurisdictional quagmire created by Section 1332.

The story begins with a statutory clause. 28 U.S.C. § 1332(c)(1) gives federal courts jurisdiction to hear cases in which a federal question is presented or where there is complete diversity of state citizenship amongst the litigants. The question of diversity is fairly simple when discussing the citizenship of individuals. The challenges arise when trying to identify the citizenship of a national corporation. This became a major concern after Congressʼs 1958 amendment of Section 1332.

In 1958, Congress amended the federal diversity clause to state 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.”[2] The 1958 amendment resulted in a corporation having the potential to be deemed a citizen of two states: its state of incorporation and the state of its “principal place of business.” This resulted in an influx of confusion in determining what Congress meant by a corporationʼs “principal place of business.”

Prior to Hertz, the circuits were split on the appropriate test to determine a corporationʼs “principal place of business.” The circuits generally applied a variation of one (or a combination) of four tests: (1) the nerve center test; (2) the place of the operations test; (3) the center of corporate activities test; and (4) the totality of the circumstances test.[3] The “nerve center” test, used primarily by the Seventh Circuit, focuses on a corporationʼs brain/headquarters to determine that corporationʼs “principal place of business.” The “place of operations” test, primarily used by the Ninth Circuit, focuses on the location of the majority of a corporationʼs business operations. Next, the “center of corporate activities” test looks at the day to day activity and management of a corporation, while also considering locations of other business activities. The “totality of the circumstances” test has been employed by various circuits. The test does not focus on any particular corporate activity but instead looks at a corporation as a whole to determine its “principal place of business.”

These divergent approaches created quite a bit of confusion and uncertainty for corporations because their “principal place of business” varied by circuit. Plaintiffsʼ attorneys used these different tests to forum shop, placing the corporations in a major disadvantage in several litigations. The Supreme Courtʼs decision in Hertz resolved this ambiguity. Hertz adopted the Seventh Circuitʼs “nerve center” test for determining a corporationʼs principal place of business for purposes of federal diversity jurisdiction. Thus, federal courts must now look to the state in which a corporationʼs officers direct, control, and coordinate the corporationʼs activities.

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