U.S. SUPREME COURT CLARIFIES "PRINCIPAL PLACE OF BUSINESS" New Ruling Helps Defendants Avoid Forum Shopping by Plaintiffs

The U.S. Supreme Court issued a recent decision that clarifies the "principal place of business" rules relating to diversity jurisdiction, and which should help corporations avoid long jurisdictional disputes after removal to federal court.  The long needed decision provides a clear rule as to the "citizenship" of a corporation that does business in multiple states.

Determining the citizenship of a corporate entity for the purpose of deciding whether the corporation can remove a case from state to federal court has been analyzed using a variety of different factors and tests developed by the different Federal Circuit Courts of Appeal across the country.  The Supreme Court's recent unanimous opinion in Hertz v. Friend reduces the rule to the "nerve center" test, which usually will mean that the corporation will be considered a citizen of the state where its headquarters is located.  For a variety of reasons, but most particularly, ease of application and uniformity, the Supreme Court determined that the "nerve center" test is proper, and describes the "nerve center" as that place where the officers, direct, control and coordinate the corporation's activities.  However, the "nerve center" cannot simply be a single room in a building where board meetings are held annually or a post office box or something of that nature, but must in fact be a place within a state where major decisions are made.

Hertz was a class action wage and hour dispute brought by employees of Hertz under a California statute, as opposed to federal law.  Hertz attempted to remove the case to federal district court in California.  That federal district court determined that it did not have diversity jurisdiction and remanded the case to the state court in California. Using the "place of operation test," which is factually intensive and turns on factors such as revenue, locations, and employees within a particular state, the California federal district court remanded the case to California state court for trial and the 9^th Circuit Court of Appeals upheld that ruling.  Hertz then took the case up on appeal to the United States Supreme Court under the provisions of the Class Action Fairness Act, claiming that it was a citizen of New Jersey and not California.  The Court held that Hertz was a citizen of New Jersey, the location of its headquarters, rather than California, where it does the most business compared to other states.  The Plaintiffs claimed that Hertz should be considered a citizen of California because it had 18-20% of its overall business in California. 

The February 23, 2010 decision sets out the factors that determine citizenship of a corporation for the purpose of determining whether diversity jurisdiction exists so that the corporation can remove a state court case to the appropriate federal district court.  The decision turns on the court's interpretation of the phrase "principal place of business" within the context of United States Code Section 1332 (c) (1) which 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."  In order to reach its decision, the Court reviewed the legislative history of the diversity jurisdiction statute, the intent of Congress, the history behind the Court's various interpretations of diversity jurisdiction, ease of applicability of a rule and, for lack of a better term "common sense."

The Court took the case due to the disparities among the Circuit courts in applying the test for citizenship.  For example, the Ninth Circuit which includes California, a particularly plaintiff-friendly venue, used a "place of operation test" while the Fifth, Sixth, Eighth, Tenth and Eleventh Circuits considered the totality of the corporation's activities.   The Seventh Circuit used the "nerve center" test adopted by the Court, and the Third Circuit used a "center of activity" test.  All of these involved different factual determinations and some were particularly arduous and costly.  The Court called these varying tests "divergent and increasingly complex interpretations," which resulted in uncertainty for corporate defendants.  The Court resolved this issue by adopting the "nerve center" test.

This ruling is expected to increase the number of removals from state courts in larger states and plaintiff-friendly venues. This case is significant because to a considerable degree it will prevent plaintiffs from forum shopping in states where removal to federal courts based upon diversity jurisdiction previously was difficult in venues particularly unfavorable to corporate defendants.  The ruling is also expected to reduce the cost of litigation because the fact-specific inquiry as to where the nerve center of a corporate entity is located under the test adopted by the Court should be significantly less time consuming.