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Corporate Citizenship after Hertz v. Friend
Posted 4/22/10Corporate Citizenship after Hertz v. Friend
By: Inchan Kwon1
On February 23, 2010, the U.S. Supreme Court, in the case Hertz Corporation v. Friend, No. 08-1107, 559 U.S. ___ (2010), resolving a long-standing circuit split, unanimously decided that a corporation's "principal place of business" for purposes of determining its citizenship for federal diversity jurisdiction is ordinarily its corporate headquarters, or the location where the corporation's activities are directed, controlled, or coordinated (the corporate "nerve center"). Previously, circuit courts had used various approaches to evaluate a corporation's business activities in order determine its "principal place of business" under 28 U.S.C. § 1332(c)(1).
Section 1332(c)(1) states that a "corporation shall be deemed to be citizen of any State by which it has been incorporated and of the State where it has its principal place of business . . . ." In Hertz, the defendant Hertz Corp. had initially been sued in California state court by California plaintiffs for violations of California state wage and hour laws.2 Hertz sought to remove the case to federal court on diversity grounds under 28 U.S.C. §§ 1332(a)(1) and 1441(a), alleging it was not a citizen of California.3 In addition to being incorporated in Delaware, Hertz alleged that its "core executive and administrative functions" were largely carried out at its "corporate headquarters" in New Jersey, and therefore that New Jersey was its "principal place of business" under § 1332(c)(1).4 Hertz also submitted a declaration to the district court regarding its business activities, stating that it operated in 44 states and that approximately 17% of its rental facilities were located in California.5
The district court, applying Ninth Circuit precedent, found that because a "plurality of each of [Hertz's] relevant business activities" was in California, and that the "differential between the amount of those activities" in California versus the next closest state was "significant," Hertz's business activity was "significantly larger" or "substantially predominate[d]" in California.6 Therefore California was Hertz's "principal place of business," and diversity jurisdiction was lacking.7 The Ninth Circuit affirmed.8
The Supreme Court reversed and remanded, adopting the Seventh Circuit's "nerve center" test and holding that "'principal place of business' is best read as referring to the place where a corporation's officers direct, control, and coordinate the corporation's activities," which is ordinarily the corporate headquarters.9 The Supreme Court noted that several different approaches have been used in various circuits to determine where a corporation's "principal place of business" is located (including the "nerve center" test, various tests looking at where a corporation's business activities are primarily conducted, and tests involving some combination of these factors).10 However, the "nerve center" test is "superior to other possibilities" because 1) it is the most consistent with the statutory language of § 1332(c)(1) which indicates that "principal place of business" is meant to refer to a singular place within a particular state, and not the combined activities within a state as a whole11; 2) it is comparatively easy to apply from a factual standpoint and thus is most conducive to the goal of administrative simplicity12; and 3) the legislative history of § 1332 suggests that simplicity was also the goal of the legislature when the statute was enacted.13 The Court also noted that a test based on the distribution of a corporation's business activities, such as applied in the Ninth Circuit, was likely to render every national corporation a citizen of California for diversity purposes, given California's disproportionately large population, which would be an absurd result.14
The Court did note that "there will be hard cases" even under a "nerve center" test.15 For example, there may be situations where a corporation divides command and coordinating activities in several locations.16 The Court does not provide any specific guidance for such a situation, but simply suggests that the "nerve center" test "points courts . . . towards the center of overall direction, control, and coordination."17 In addition, the "basic rationale" of diversity jurisdiction is to "[open] the federal courts' doors to those who might otherwise suffer from local prejudice against out-of-state parties."18 However, under the Supreme Court's rule, a corporation might conduct the bulk of its activities "visible to the public" in a state other than the corporate headquarters, and be less subject to prejudice in that state, yet still be entitled to remove cases to federal court in that state.19 Finally, the Court refrained from strictly equating the corporate headquarters with the "principal place of business," noting that a hard rule would permit jurisidictional manipulation where a "headquarters" is identified at a location other than where the corporation's activities are actually controlled.20 To guard against this last possibility, the Court reaffirmed that the "burden of persuasion for establishing diversity jurisdiction . . . remains on the party asserting it," and suggested that the mere filing of a form identifying a corporate headquarters with the Securities and Exchange Commission would not be sufficient to carry that burden, though the Court declined to state what would be sufficient.21 The Court downplayed these anomalies, however, holding them to be "the price the legal system must pay" for a clearer and more uniform jurisdictional rule.22
The Supreme Court's holding provides for greater uniformity and predictability with respect to corporations' access to federal courts for litigating disputes, and may be a factor worth considering for those corporations that have not already established a clear corporate headquarters.
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1 Mr. Kwon is an associate in the Intellectual Property Section of Haynes and Boone, LLP. The opinions expressed herein are not those of Haynes and Boone or its clients.
2 Hertz, 559 U.S. at 2.
3 Id.
4 Id.
5 Id.
6 Id. at 3.
7 Id.
8 Id.
9 Id. at 14.
10 Id. at 10-13.
11 Id. at 14.
12 Id. at 15-16.
13 Id. at 16-17.
14 Id. at 15.
15 Id. at 17.
16 Id.
17 Id.
18 Id. at 6.
19 Id. at 17.
20 Id. at 18.
21 Id.
22 Id.
Inchan Kwon, Haynes and Boone, LLP