U.S. Supreme Court Defines “Principal Place of Business” For Diversity Jurisdiction

On February 23, 2010, the United States Supreme Court issued a unanimous opinion in Hertz Corp. v. Friend, 559 U.S. ___ (2010) that resolved a conflict among the circuit courts of appeal as to the determination of a corporation's principal place of business for diversity jurisdiction under 28 U.S.C. Section 1332.  The Court granted certiorari to review a decision of the Ninth Circuit Court of Appeals.  That decision held that the district court correctly looked at how much business Hertz did as its 33 California operations.  Because Hertz's revenues were greater than in any other state, Hertz's principal place of business was in California.  The Supreme Court reversed.

In a decision by Justice Breyer, the Court traced this development of the law across the country.  Some circuits, it noted, had applied the "nerve center" approach, deciding principal place of business by where the corporation's "nerve center" was.  Other circuits applied the "business activity" test that looks at the corporation's revenue stream.   Some also applied a modified test, depending on whether the corporation did business in a few states or many.

The Court then closely looked at 28 U.S.C. Section 1332(c)(1) which deems a corporation to be a citizen of "the State where it has its principal place of business." 28 U. S. C. §1332(c)(1).  The Court concluded that the word "place" was singular, meaning a singular place within a state, not an entire state as the court of appeals ruled.  The Court noted that, for any company that did business nationwide like Hertz did, jurisdiction should not turn on its revenues from one large state like California

The Court expressed the rule-adopting the "nerve center" test-as follows:

We conclude that "principal place of business" is best read as referring to the place where a corporation's officers direct, control, and coordinate the corporation's activities. It is the place that Courts of Appeals have called the corporation's "nerve center." And 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 (for example, attended by directors and officers who have traveled there for the occasion).

Slip Op. at 14.  The Court reiterated that the burden of proving diversity exists is on the proponent of it, whether in a complaint or a petition for removal.  If challenged, the corporation must prove diversity by offering proof of its principal place of business.  The opinion is silent on retroactivity, but because the issue of diversity is jurisdictional, it would seem that the decision applies to all pending diversity-based cases.

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