February 24, 2010
On February 23, 2010, the United States Supreme Court held that the phrase "principal place of business" in the federal diversity jurisdiction statute refers to a corporation’s "nerve center" or "the place where the corporation’s high level officers direct, control, and coordinate the corporation’s activities." Hertz Corp. v. Friend, Case No. 08-1107, slip op. at 1 (2010). This decision provides much needed clarity to corporations facing litigation in state courts throughout the country by increasing the predictability and consistency of the determination of a corporation’s principal place of business. It will also greatly limit the ability of plaintiffs to concentrate class action and other litigation in larger states where companies transact business but have no corporate offices or other dominant physical presence.
In 2007, Hertz removed this wage and hour class action from California state court under the Class Actions Fairness Act (CAFA). Hertz submitted declarations showing that its "principal place of business"–its leadership team and corporate headquarters–was located in New Jersey. In ordering remand, the district court determined that a plurality of Hertz’s operations were located in California. For example, Hertz operated 273 of its 1,606 car rental locations in California (which accounted for 3.8 million of its 21 million annual rental transactions), and approximately 2,300 of its 11,230 full-time employees were located in California. The Ninth Circuit affirmed. It applied the "place of operations" test for determining corporate citizenship, and it held that "Hertz’s relevant business activities are ‘significantly larger’ in California than in the next largest state." 297 Fed. Appx. 690, 691 (9th Cir. 2008).
The Ninth Circuit’s decision threatened to attract an even greater concentration of class action and other litigation to California state courts. CAFA expanded federal diversity jurisdiction over class actions as long as at least one named class member and at least one defendant are citizens of different states, the complaint places at least $5 million in controversy, and the lawsuit satisfies certain other criteria. See generally 28 U.S.C. § 1332(d). But because California accounts for 12% of the entire population of the United States, most retailers and other businesses with widespread operations would be deemed California "citizens" simply because a "plurality" of their operations occurred there–and even though they were incorporated and headquartered elsewhere. The decision thus had the potential to eliminate the ability of these corporations to remove class actions filed in California state court, a venue that already is a strong magnet for consumer, employment, and other class action litigation.
The United States Supreme Court granted Hertz’s petition for certiorari to resolve a split among the Courts of Appeals regarding the proper test for determining a corporation’s "principal place of business" pursuant to 28 U.S.C. § 1332(c)(1). For example, the Seventh Circuit had applied the "nerve center" test, whereby a "corporation has a single principal place of business where its executive headquarters are located." Metropolitan Life Ins. Co. v. Estate of Cammon, 929 F.2d 1220, 1223 (7th Cir. 1991); see also Mennen Co. v. Atlantic Mut. Ins. Co., 147 F.3d 287, 291 (3d Cir. 1998) (adopting a "center of corporate activities" test, whereby courts must ascertain "the headquarters of day-to-day corporate activity and management"). The Fifth, Sixth, Eighth, Tenth, and Eleventh Circuits applied a "total activities" test, whereby a court must consider a variety of factors, such as the location of the corporation’s nerve center, its administrative offices, its production facilities, and its employees. See, e.g., Teal Energy USA, Inc. v. GT, Inc., 369 F.3d 873, 876 (5th Cir. 2004); Gafford v. General Elec. Co., 997 F.2d 150, 163 (6th Cir. 1993); Capitol Indemnity Corp. v. Russellville Steel Co., Inc., 367 F.3d 831, 836 (8th Cir. 2004); Amoco Rocmount Co. v. Anschutz Corp., 7 F.3d 909, 915 (10th Cir. 1993); MacGinnitie v. Hobbs Group, LLC, 420 F.3d 1234, 1239 (11th Cir. 2005).
The Supreme Court agreed unanimously to adopt the "nerve center" test. Justice Breyer’s opinion traced the legislative history of corporate citizenship under the diversity statute, and the sometimes complex jurisprudence discussing how to determine a corporation’s "principal place of business." Slip op. at 5-13. The Court adopted the following new test of corporate citizenship under Section 1332(c)(1):
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).
Id. at 14.
The Court found support for this test in the statutory language, the legislative history, and the important goals of administrative simplicity and predictability. It concluded that the Ninth Circuit’s test "invites greater litigation and can lead to strange results." Id. at 15. For example, during oral argument, Chief Justice Roberts asked plaintiffs’ counsel where the principal place of business would be for Starbucks Corp. under the Ninth Circuit’s test, and counsel responded that a court already had determined that Starbucks was a California corporation because it has significantly more employees there than in Washington. Justices Ginsburg and Scalia also expressed concern over the Ninth Circuit’s test because, due to California’s size and wealth of business operations, "California is going to be the big winner in this. It’s going to be able to keep all those cases in its State court because so many multi-State corporations … would come out  just the way Hertz does." Justice Breyer’s opinion observed that even the Ninth Circuit lamented just last year that the effect of its "business activities" test is to concentrate class actions in California. Id. at 15; Davis v. HBC Bank Nev., N.A., 557 F.3d 1026, 1029-30 (2009) (noting that if a "corporation may be deemed a citizen of California on th[e] basis" of "activities [that] roughly reflect California’s larger population … nearly every national retailer–no matter how far flung its operations–will be deemed a citizen of California for diversity purposes").
The Court acknowledged that the "nerve center" test is not a "perfect" one, and that "there will be hard cases" in the Internet age, but "[a]ccepting occasionally counterintuitive results is the price the legal system must pay to avoid overly complex jurisdictional administration while producing the benefits that accompany a more uniform legal system." Slip op. at 17-18. Although it endorsed greater clarity in resolving these questions, the Court rejected Hertz’s proposal that a company’s listing of its "principal executive offices" on a Form 10-K filing is alone sufficient to establish corporate citizenship. Id. at 18. While this filing may be evidence of a corporation’s "principal place of business," it is not dispositive of citizenship. The Court also cautioned against efforts to manipulate citizenship. Id. at 18-19 (explaining that "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").
Although there are still close cases under the "nerve center" test, the decision should allow corporations to better predict where they are subject to state court jurisdiction and when they can remove to federal court based on diversity jurisdiction. Perhaps the most significant impact will be on class actions removed under CAFA’s "minimal diversity" provisions, because the opinion limits plaintiffs’ ability to keep corporations in state court class actions in large states like California.
Gibson, Dunn & Crutcher’s Class Action and Complex Litigation Practice Group is available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work or any of the following:
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