In a unanimous decision, the Supreme Court recently issued a decision clarifying the “principal place of business” clause of the federal diversity jurisdiction statute, which provides that “a corporation shall be deemed to be a citizen of any State by which is has been incorporated and of the State where it has its principal place of business.” (emphasis added). The case involved a wage and hour lawsuit filed by two California citizens in California state court against Hertz Corporation. Hertz sought to remove the case to federal court on the basis of diversity jurisdiction, contending that its principal place of business was in New Jersey, not California. Hertz argued that its leadership, as well as that of its domestic subsidiaries, was based out of Hertz’s Park Ridge, New Jersey corporate headquarters, and that California was just one of approximately 44 states where Hertz had significant business operations.
The California district court, applying the 9th Circuit’s diversity analysis, determined that Hertz was a citizen of California based upon the relative amount of business it does in California. Because the “plurality of each of [Hertz’s] relevant business activities” occurred in California, the court held that California must be Hertz’s principal place of business.
The Supreme Court disagreed. It noted that the statutory language was simply applied if the corporation’s headquarters and executive offices were located in the corporation’s state of incorporation. But with the preponderance of national and international businesses, the question became more complicated because of the “far-flung” business activities of many corporations. The result was that courts eventually began to rely on one of three corporate citizenship tests: (i) the “nerve center” test – which holds that the relevant state is that containing the place where the corporation has an office from which its business is directed and controlled; (ii) the “business activities” test – which focuses on where a corporation’s actual business activities are located; and (iii) the “total activities” or “center of gravity” test – which combines aspects of the nerve center and business activities tests.
Reviewing all three tests, the court held the nerve center test to be the most appropriate. First, it is supported by the statutory language, which calls for citizenship based on whether the corporation’s singular, principal place of business is located within the relevant state. The business activities test, on the other hand, has led courts incorrectly to look at the state itself by analyzing the business activities occurring there. Indeed, the court noted that virtually every large corporation would be held a citizen of California by virtue of its large population if analysis of the corporation’s business activities were determinative.
Further, “administrative simplicity” is a virtue in a jurisdictional statute, according to the court, and promotes greater predictability. Such predictability is of value to corporations in making business decisions and plaintiffs deciding where to file suit. As the court reads the statute’s legislative history, it is clear that the “principal place of business” must be no more complex than necessary. A nerve center test is comparatively simple in relation to the alternatives.
While, as the court acknowledges, the nerve center test is not perfect, “[a]ccepting occasionally counterintuitive results is the price the legal system must pay to avoid overly complex judicial administration.”
Ryan J. Fleming, a member of Stradley Ronon Stevens & Young's employment and labor practice group, focuses on employment litigation including discrimination and wrongful discharge claims and counsels employers on a variety of employment-related issues. He can be contacted at email@example.com or visit www.stradley.com for more information.
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