The U.S. Supreme Court has ruled that a corporation’s principal place of business is wherever senior management shows up for work to direct company operations, a notable victory in Corporate America’s endless fights with unhappy litigants.
In a unanimous decision handed down last month, Hertz Corp. v. Friend, the Supreme Court delivered much-wanted clarity about how to define a corporation’s so-called “nerve center”—which it defined as the “the place where the corporation’s high-level officers direct, control, and coordinate the corporation’s activities.”
The case involved employees of auto rental giant Hertz who claimed that the company violated California’s wage-and-hour laws. Hertz had the case moved to federal court, claiming that the plaintiffs and Hertz—which is headquartered in New Jersey—were citizens of different states. The plaintiffs then argued that Hertz’s principal place of business was California, since that is where the largest amount of its business takes place.
The Ninth Circuit Court of Appeals agreed, reasoning that jurisdiction should favor the largest state where the most employees are likely located, and remanded the case back to state court. Hertz appealed to the Supreme Court, which agreed with the company.
Where a lawsuit gets heard can be a crucial question for a company. Mississippi, for example, was notorious in the 1990s for awarding huge damages in class-action lawsuits against tobacco companies. Earlier this month, a small army of plaintiff lawyers convened in Chicago to fight over who will get to sue Toyota Motor Co. for its defective cars. A special judicial panel in San Diego will try to answer that question at a hearing next week; California is the early favorite.
Coberly
“It’s an important decision for any corporation that does business on a national level,” says Linda Coberly, a partner at the law firm Winston & Strawn. In particular, the decision gives companies the upper hand by limiting plaintiffs’ ability to pick and choose between state and federal court. “The test that the Supreme Court adopted is a very easy test to administer,” she says.
“I think it remains to be seen what would happen in the case of a corporation that truly did not have a geographic nerve center.”
—Linda Coberly,
Partner,
Winston & Strawn
But in a loophole that may cause some confusion, the Hertz decision adds that the nerve center “typically” would be found at the corporation’s headquarters.
“This is where … corporations will seek to continue to manipulate where their ‘nerve center’ is,” says Karla Palmer, a partner and trial lawyer at the law firm McDermott Will & Emery. “The use of the word ‘typically’ may cause lawyers and their corporate clients to look for creative ways to alter where their principal place of business is, based on a dispersal of their nerve center, through several states.”
Daly
Theoretically, that could be done—say, by assigning various executives to various locations, storing much of the company’s data in “the cloud” of rented computer servers, and reaching decisions by tele-conference. “Where would the company’s principal place of business be? Does it even have one?” says Michael Daly, a partner at the law firm at Drinker Biddle. Right now, frankly, nobody knows.
“I think it remains to be seen what would happen in the case of a corporation that truly did not have a geographic nerve center,” Coberly says. She predicts such an issue will be litigated more in the future.
In most situations, however, corporate headquarters can be identified as the place where most of a company’s business functions are conducted, Coberly says. And as a rule of thumb, “it’s easier to identify a single state if you look at where the headquarters are located than it would be to do an assessment every time there is a lawsuit of which state has the most employees at that time,” she says.
Palmer
NERVE CENTER
Below is an excerpt from the Hertz v. Friend decision, defining a company’s “nerve center” as its principal place of business:
2. The phrase “principal place of business” in §1332(c)(1) refers to
the place where a corporation’s high level officers direct, control, and
coordinate the corporation’s activities, i.e., its “nerve center,” which
will typically be found at its corporate headquarters.
(a) A brief review of the legislative history of diversity jurisdiction demonstrates that Congress added §1332(c)(1)’s “principal place
of business” language to the traditional state-of-incorporation test in
order to prevent corporations from manipulating federal-court jurisdiction as well as to reduce the number of diversity cases.
(b) However, the phrase “principal place of business” has proved
more difficult to apply than its originators likely expected. After
Congress’ amendment, courts were uncertain as to where to look to
determine a corporation’s “principal place of business” for diversity
purposes. If a corporation’s headquarters and executive offices were
in the same State in which it did most of its business, the test seemed
straightforward. The “principal place of business” was in that State.
But if those corporate headquarters, including executive offices, were
in one State, while the corporation’s plants or other centers of business activity were located in other States, the answer was less obvious. Under these circumstances, for corporations with “far-flung”
business activities, numerous Circuits have looked to a corporation’s
“nerve center,” from which the corporation radiates out to its constituent parts and from which its officers direct, control, and coordinate the corporation’s activities.
However, this test did not go far
enough, for it did not answer what courts should do when a corporation’s operations are not far-flung but rather limited to only a few
States. When faced with this question, various courts have focused
more heavily on where a corporation’s actual business activities are
located, adopting divergent and increasingly complex tests to interpret the statute.
(c) In an effort to find a single, more uniform interpretation of
the statutory phrase, this Court returns to the “nerve center” approach: “[P]rincipal place of business” is best read as referring to the place where a corporation’s officers direct, control, and coordinate the
corporation’s activities. In practice it should normally be the place
where the corporation maintains its headquarters—provided that the
headquarters is the actual center of direction, control, and coordination, i.e., the “nerve center,” and not simply an office where the corporation holds its board meetings.
Source
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align="left">Opinion in Hertz v. Friend (Feb. 23, 2010).
Prior to the Hertz ruling, “corporations could play a bit fast and loose” in defining where decisions were made versus where the company was incorporated, Palmer says. That, in turn, created considerable confusion among the lower courts, which had been applying a variety of tests to determine a corporation’s principal place of business. The Third Circuit, for instance, looked to the corporation’s center of activity, while the Fifth, Sixth, Eighth, 10th, and 11th Circuits considered the totality of the corporation’s activities.
The Chicago-based Seventh Circuit has been the only one to apply the “nerve center” test, looking at where the corporation has its headquarters, prior to the Hertz decision. That could prompt other appellate courts to look to the Seventh Circuit for guidance as they begin to wade through the issue, Daly says.
Next Steps
Employers currently facing litigation in state courts should assess how the decision might affect their own lawsuits and whether a relocation to a more favorable jurisdiction is possible. “I imagine we’re going to see defendants and plaintiffs’ counsel reviewing their inventory of active cases in coming months and testing those waters,” Daly says.
Palmer says it is “critical” for a company—whether planning a lawsuit or on the receiving end of one—to think long and hard about the strategic implications Hertz might carry for its legal battles.
If a move out of state court is potentially helpful, “the first thing to do would be to retain outside counsel, who’s experienced with removal practice and, in particular, with the Class-Action Fairness Act,” Daly says. He adds that companies should also consider seeking the help to ensure the “uniform presentation of evidence in those cases where the location of the nerve center is contested.”
At the least, the Hertz decision makes it “less difficult and less expensive” for corporate defendants to have to establish where a case belongs, Daly says. Prior to the Hertz decision, proving diversity jurisdiction involved numerous time-consuming and costly legal steps: a briefing, discovery, a hearing, and potentially an appeal. Hertz streamlines that process considerably, “and only in exceptional cases should there be any legitimate dispute about where a corporation’s nerve center is located.”
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