Supreme Court decision on federal court jurisdiction

Last week, in a unanimous decision, the U.S. Supreme Court found that for the purpose of federal court jurisdiction, a corporation’s “principal place of business” is limited to where its “nerve center” is located (typically, at its corporate headquarters).

In Hertz Corp. v. Friend, No. 08–1107, the Court considered an appeal that stemmed from a case filed against Hertz Corp. in a California state court, alleging violation of state labor laws. The plaintiffs sought to represent a larger class of persons that they claimed were similarly situated. Hertz sought to remove the case to a federal district court under the federal diversity of citizenship statute, and the plaintiffs objected. The federal district court concluded that under the diversity of citizenship statute, Hertz could be considered a California citizen due to the volume of business that it conducted in the state. That decision was affirmed by the US Court of Appeals, and Hertz asked the Supreme Court to review the case.

The Supreme Court agreed to hear the case, noting that there were different standards among the federal courts and that it could helpfully resolve that conflict. In a unanimous decision, the Court reached a practical and straight-forward conclusion. In a decision written by Justice Breyer, the Court concluded that for under the diversity statute, a corporation’s principal place of business is the “nerve center” – or the place where the corporation’s high level officers direct, control, and coordinate the corporation’s activities.” Id. at 1, 16-17. The court specifically noted that it was borrowing a standard that lower federal courts had called the “nerve center” test – that is, that a company’s principal place of business was found at its nerve center, where the corporate executives– and noted that they were adopting the test that several lower federal courts called the “nerve center” standard – that is, where a company’s nerve center is found, that is the “principal place of business.”

The new Hertz “nerve center” test provides a significantly easier standard to apply, and discourages forum shopping among plaintiffs’ counsel seeking favorable state and county courts in which to have claims heard against companies, for example, in class action cases.

For companies seeking to take advantage of federal court jurisdiction, the new Hertz decision provides important guidance and clarity. To establish diversity, a corporation can be found to be a citizen of at least two jurisdictions: (1) where it was incorporated (or organized, if an LLC); and (2) where its “nerve center” is found.