Supreme Court Establishes 'Nerve Center' Test for Corporate Jurisdiction

Marcia Coyle

The National Law Journal

February 24, 2010

Using simplicity and practicality as its touchstones, a unanimous U.S. Supreme Court on Tuesday held that a corporation's "principal place of business" for purposes of federal jurisdiction is its "nerve center," typically where its headquarters is located.

The Court, in an opinion by Justice Stephen Breyer, resolved a long-simmering debate among the federal circuits, which, for the past 51 years, have used a hodgepodge of tests to answer the jurisdictional question.

The ruling in Hertz Corp. v. Friend (pdf) will help to determine the battlefields on which class action and other litigation involving multistate corporations will be fought -- what corporations perceive to be the friendlier forum of the federal courts or state courts seen as more sympathetic to plaintiffs.

Noting that there is no perfect test, Breyer wrote, "Our test nonetheless points courts in a single direction, towards the center of overall direction, control and coordination. Our approach provides a sensible test that is relatively easier to apply, not a test that will, in all instances, automatically generate a result."

The high court ruling stems from a lawsuit brought by two Hertz employees in California who are seeking damages and relief for themselves and a potential class of California citizens for violations of that state's wage-and-hour laws.

The justices rejected the approach taken by the 9th U.S. Circuit Court of Appeals, which looked to where the corporation had the "substantial predominance" of its activities, including facilities, employees and revenue. That approach led the 9th Circuit to hold that Hertz's principal place of business was California, even though the company is incorporated in Delaware and has its headquarters in New Jersey.

The 5th, 6th, 8th, 10th and 11th circuits have used a "total activity" test that examines the company's purposes, type of business and legal site of its operations. The 1st, 2nd and 4th circuits applied a variation of that test, and the 3rd Circuit looked for the "center of corporate activity."

The only circuit to use the "nerve center" approach is the 7th, and that was the test advocated by Hertz's counsel, Sri Srinivasan, a partner in the Washington office of O'Melveny & Myers.

"This opinion brings much needed clarity to an area that was rife with confusion for decades," Srinivasan said. "Instead of having an approach that has caveats in it, the court established a straightforward rule. It was very interesting, too, that the Court said, 'We need clarity so much that we're even willing to accommodate some results that are anomalous on the surface.' "

Before 1958, the federal diversity statute said a corporation was only a citizen of its state of incorporation. But Congress found that some corporations engaging in local business were able to circumvent their local courts and get into federal court by getting out-of-state charters. Its evidence: more cases involving state-law claims and parties having the same citizenship were burdening the federal courts. Congress amended the diversity statute to state that a corporation was a citizen of its state of incorporation and of the state where it had its "principal place of business," but it never defined the new category.

Andrew Tauber, a partner in the Washington office of Mayer Brown, said the Court's rule is predictable in its application; eliminates the need for extensive and costly jurisdictional discovery; and does not have the peculiar result of deeming most national corporations, including, for example, Arkansas-based Wal-Mart Stores Inc., to be citizens of California merely by virtue of the size of the California economy.

The justices remanded the case to the lower court to give the Hertz employees "a fair opportunity" to litigate their case in light of the decision.

The Court's ruling was "what everyone anticipated after the argument," said the employees' counsel, Robert Stein III, a partner in the Santa Ana, Calif., office of Adorno & Yoss, whose co-counsel, Todd Schneider of San Francisco's Schneider Wallace Cottrell Brayton Konecky argued the case. "It appeared they were going to weigh practicality much more heavily than legislative history."