Supreme Court Issues Ruling Determining a Corporation’s “Principal Place of Business”
On February 22, 2009, the United States Supreme Court issued its decision in Hertz Corp. v. Friend, holding that a corporation’s “principal place of business” is where a company’s executives work, and not the location of a majority of the company’s operations.
The federal diversity jurisdiction statute provides 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.” 28 U.S.C. § 1332(c)(1) (emphasis added). Hertz Corporation was sued in a class-action lawsuit in California state court by employees seeking unpaid overtime and vacation wages. The company, which maintains its headquarters in New Jersey, removed the case to federal court on the basis of diversity of citizenship. The federal district court overseeing the case, however, remanded the case to state court, stating that because Hertz had more locations and employees in California than any other state, the company’s “principal place of business” was in California, thereby eliminating diversity jurisdiction. The United States Court of Appeals for the Ninth Circuit affirmed the decision of the district court, holding that that a national company’s “principal place of business” should be determined by reference to where the majority of its operations are located.
In a unanimous decision, the United States Supreme Court overturned the decision of the Ninth Circuit. The majority opinion, written by Justice Breyer, begins:
We seek here to resolve different interpretations that the Circuits have given this phrase. In doing so, we place primary weight upon the need for judicial administration of a jurisdictional statute to remain as simple as possible. And we conclude that the phrase “principal place of business” refers to the place where the corporation’s high level officers direct, control, and coordinate the corporation’s activities. Lower federal courts have often metaphorically called that place the corporation’s “nerve center.” We believe that the “nerve center” will typically be found at a corporation’s headquarters.
The Court held that the adoption of a nerve center test “promotes greater predictability . . . [which] is valuable to corporations making business and investment decisions.”
Especially with the passage of the Class Action Fairness Act of 2005, which broadened diversity jurisdiction for class actions in federal courts, the details of diversity jurisdiction have become increasingly important and litigated. Corporate defendants in class actions typically have a strong desire to be in federal court, and plaintiffs often have the converse desire to be in state court. Therefore, the issue addressed by Hertz, while facially technical and of direct application to only a fairly narrow class of cases, is emblematic of the ongoing important struggle over federal court jurisdiction.
Troutman Sanders regularly represents corporate clients in litigating and aggressively invoking federal court jurisdiction. We are constantly monitoring the effect of Hertz and other ongoing developments on federal court jurisdiction and class action litigation.