Identifying corporate “nerve centers”

By Anna Christensen
on Feb 24, 2010 at 6:15 pm

Here, Sina Kian of Stanford Law School recaps yesterday’s opinion in Hertz Corp. v. Friend.  Sina previewed and recapped the oral arguments in the case for SCOTUSblog in November. Additional materials are available on the Hertz Corp. v. Friend (08-1107) SCOTUSwiki page.

Although the jurisdictional question posed by 28 U.S.C. § 1332(c)(1) seems simple – where is a corporation’s principal place of business – answering the question was not, an inconsonance that gave rise to the Court’s decision in Hertz Corp. v. Friend. Prior to yesterday’s holding, the courts of appeals had adduced at least three different tests to answer this question, and even those employing the same test applied it differently. Today, the Court resolved the issue, unanimously holding that for purposes of federal diversity jurisdiction, a corporation’s principal place of business is where its “high level officers direct, control, and coordinate the corporation’s activities.”

The Court adopted this approach for three reasons. First, the text leans in that direction. The word “place” is singular, implying a single place where the “principal”—i.e., main, prominent, or leading—business is occurring. Moreover, the phrase “the State where it has its principal place of business” implies that courts should look for a place within a state, rather than activities taking place throughout the state. These textual cues all point to a headquarters test, which turns on the location of the corporation’s “brain” rather than on identifying the state that hosts the largest share of the corporation’s activities. This reasoning, alongside the Court’s third rationale—that the legislative history offers support for an approach sensitive to simplicity—allowed the Court to default to its second rationale, which comes across as its greatest concern: “administrative simplicity is a major virtue in a jurisdictional statute,” mainly because it will help enhance predictability and avoid costly procedural determinations.

The sparse media attention afforded to the decision should not obscure its significance. As a practical matter, Hertz v. Friend fundamentally changes how lower courts will determine corporate citizenship in diversity cases in every circuit but the Seventh, the only circuit that was already employing a nerve center test.  For example, before this ruling, many corporations had their largest operations in California by virtue of the state’s size. As a result, they were deemed citizens of the Golden State and thus potentially subject to California’s laws and regulations, as applied by California’s state courts. Yesterday’s decision alters that dynamic.

The Court’s opinion, authored by Justice Breyer, reflects on five decades of judicial experience with the principal place of business clause. The story began in 1958, when Congress amended the diversity statute to include that “a corporation shall be deemed to be a citizen . . . of the State where it has its principal place of business.” 28 U.S.C. §1332(c)(1). The approaches subsequently taken by the courts of appeals fell into roughly three camps: the “nerve center” test (Seventh Circuit), the “center of activity” test (Third Circuit), and the “totality of corporate activity” test (the Fifth, Sixth, Eighth, Ninth, Tenth, and Eleventh Circuits). In other words, as Justice Breyer wrote, “the phrase . . . has proved more difficult to apply than its originators likely expected.”

In this thicket of options, Hertz offered the simpler test: the corporation’s principal place of business is in the state that hosts its headquarters. But if Hertz agreed with Frédéric Chopin that “[s]implicity is the final achievement,” the respondents preferred H.L. Mencken’s philosophy, that “[f]or every problem there is a solution which is simple, clean and wrong.” They argued for a totality test that would better accommodate the history and policies underlying diversity jurisdiction.

In siding with Hertz, the Court rejected “an unmediated judicial effort to apply the statutory phrase . . . in light of the general purpose of diversity jurisdiction.” Such a quixotic effort, Justice Breyer wrote, “seems doomed to failure,” as courts will never be able to determine with certainty whether and to what extent a specific corporation will be subject to local prejudice.

At the same time, the Court did not abandon that effort entirely, and thus declined to adopt a test that would rely solely on the location of the headquarters.  As Justice Breyer explained, the nerve center will in practice “normally be the place where the corporation maintains its headquarters,” but the sine qua non of a nerve center is that it is “actual center of direction, control and coordination.” (emphasis added). Thus, empty headquarter buildings will not suffice if the opposing party can show that decisions are made elsewhere.  This compromise indicates that in the world of aphorisms about simplicity, the Court in Hertz v. Friend agreed with Albert Einstein: “Everything should be made as simple as possible, but not simpler.”