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Finding the Nerve Center: Supreme Court Answers Where Is the “Principal Place of Business” for Diversity Jurisdiction

Appellate Litigation Law Update E. King Poor

Though diversity jurisdiction for disputes between citizens of different states has been around since the beginning of the federal judiciary in 1789, the question of where a corporation is a "citizen" has not been easy. The statute creating diversity jurisdiction states that a corporation has "dual citizenship" - both where it is incorporated and also its "principal place of business." The state of incorporation is obviously not hard to find, but it's the second part of the test, determining the principal place of business, that has at times proved difficult to answer. Over the years, the lower federal courts have interpreted "principal place of business" to mean many different things, ranging from the corporation's "nerve center" to the location of corporate assets to the percentage of business activity conducted in a given state to some combination of the three.

No longer. In Hertz Corp. v. Friend, decided February 23, 2010, the Supreme Court endorsed what has been referred to as the nerve center test. Expanding on an earlier Seventh Circuit rule, Justice Breyer, writing for a unanimous Court, announced that a corporation's principal place of business is the place from which the corporation's officers direct, control and coordinate the corporation's activities, which will usually, but not always, coincide with the corporate headquarters.

The Court gave three reasons for selecting the nerve center test. First, it noted that the plain language of the statute requires principal place of business to be a single, identifiable place within a state. Second, the nerve center test is easily applied and administratively simple, "a major virtue in a jurisdictional statute." In most cases, jurisdiction can be decided spending only minimal time and expense. Finally, the statute's legislative history indicates that principal place of business would be easier to determine than weighing something like a corporation's gross income. The nerve center test, of all those that had been applied before, is the only one that satisfied that benchmark.

The Court also noted that though the nerve center test is "imperfect" and will occasionally yield counterintuitive results, that is "the price a legal system must pay to avoid overly complex jurisdictional administration." Thus, with the Hertz decision, there is now a uniform standard to determine corporate citizenship in every state.

For more information, please contact E. King Poor at (312) 715-5143 / or your Quarles & Brady attorney.