United States: Supreme Court Decision Alert - February 23, 2010

Originally published February 23, 2010

Keywords: Diversity jurisdiction, principal place of business, federal jurisdiction, Hertz Corp., CAFA, nerve center test, business activities test

Today the Supreme Court issued a decision, described below, of interest to the business community.

Jurisdiction—A Corporation's Principal Place of Business

Hertz Corp. v. Friend, No. 08-1107 (previously discussed in the June 8, 2009 Docket Report).

The Supreme Court held today that a corporation's "principal place of business," for purposes of determining diversity jurisdiction under 28 U.S.C. § 1332(c)(1), "refers to the place where the corporation's high level officers direct, control, and coordinate the corporation's activities," which will "typically be found at a corporation's headquarters." Slip op. 1. The Court's decision resolves an extensive circuit split over the test for determining a corporation's citizenship for purposes of assessing federal jurisdiction in diversity cases. The decision is of particular importance to defendants seeking to remove putative class-action lawsuits under the Class Action Fairness Act (CAFA).

Under the federal diversity jurisdiction statute, a corporation is deemed a citizen both of the state of its incorporation and "the State where it has its principal place of business." Prior to today's decision, the lower courts had adopted a number of "divergent and increasingly complex interpretations" of the provision, leading to many different tests for determining diversity jurisdiction. Id. at 13-14. In this case, the district court held that, because many of Hertz's customers—and thus a substantial part of its business operations—were located in California, Hertz's principal place of business under Ninth Circuit precedent was California, notwithstanding that its headquarters are in New Jersey. The Ninth Circuit affirmed in a brief memorandum opinion.

The Supreme Court vacated and remanded. Justice Breyer's opinion for a unanimous Court adopted the so-called "nerve center" test, which looks to the corporation's "center of direction, control, and coordination." Id. at 14. The Court rejected the Ninth Circuit's "business activities" test, which sought to determine which state has the largest proportion of the corporation's facilities, employees, and revenue. Id. at 14-15. The Court concluded that the "nerve center" test was simpler to administer than the "business activities" test, and would thus promote efficiency and predictability in jurisdictional determinations. Id. at 15-16.

Toward the end of today's decision, the Court reiterated that the burden of establishing diversity jurisdiction remains on the party asserting it. Addressing concerns that corporations might manipulate their headquarters location to obtain litigation advantages, the Court rejected the suggestion that something as simple as the corporation's principal-office designation in a 10-K filing would, standing alone, satisfy that burden. Id. at 18. Thus, "if the record reveals attempts at manipulation—for example, that the alleged 'nerve center' is nothing more than a mail drop box, a bare office with a computer, or the location of an annual executive retreat—the courts should instead take as the 'nerve center' the place of actual direction, control, and coordination, in the absence of such manipulation." Id. at 18-19.

As a prerequisite to reaching the merits of the case, the Court held that it has jurisdiction to review appeals under CAFA from orders remanding cases to state court. CAFA establishes an exception to the general rule (under 28 U.S.C. § 1447(d)) that a district court's order remanding a removed case to state court is unreviewable. CAFA authorizes permissive appeals of such rulings in the class-action context, but generally requires that the court of appeals issue a decision within 60 days after the filing of the appeal. Many plaintiffs—including the respondents in this case—had argued that the 60-day requirement precluded the Supreme Court from exercising jurisdiction. The Court rejected this argument, holding that CAFA's silence regarding Supreme Court review did not implicitly limit the Court's certiorari jurisdiction under 28 U.S.C. § 1254 and that the 60-day limit was a deadline for the court of appeals, not a termination of subsequent Supreme Court jurisdiction. Slip op. 4-5.

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