Supreme Court Adopts Nerve Center Test for Corporate Citizenship in Diversity
Sedgwick News Flash
A corporation's citizenship for purposes of Federal diversity jurisdiction is governed by 28 U.S.C. 1332(c)(1): a corporation is a citizen of the state of its incorporation, and the state where its principal place of business is found. This morning, in a decision certain to have a major impact on the day-to-day functioning of the Federal courts -- and attorneys' analysis of whether removal is available in a particular case -- a unanimous Supreme Court adopted a bright-line test for determining a corporation's "principal place of business." Friend v. Hertz Corporation, No. 08-1107.
Until today, the circuits had been badly split on the proper test under Section 1332(c)(1). The Ninth Circuit -- which decided Friend -- applied a "place of operations" test, ignoring the corporate headquarters and considering where a company's plants, employees, retail locations and assets are located. Since California is the most populous state in the nation, the Court's test has meant, in practice, that many national retailers -- even corporations strongly identified with other states -- are routinely deemed California citizens, making it impossible for many corporations sued in California state courts to seek removal to Federal court. In contrast, the Third Circuit applied the "center of corporate activities" test, looking to the place where the corporation's day-to-day activity and management is centered. The Seventh Circuit applied the "nerve center" test, asking merely where the "brain" of the corporation is located. Finally, the Fifth, Sixth, Eighth, Tenth and Eleventh Circuits applied a "totality of the circumstances" test, considering the character, business purpose, nerve center, management center and general operations of the corporation. As the Supreme Court noted, Moore's Federal Practice treatise devotes fourteen pages to describing the circuits' various tests.
The Supreme Court adopted a modified version of the Seventh Circuit's nerve center test: "we conclude that the phrase 'principal place of business' refers to the place where the corporation's high level officers direct, control, and coordinate the corporation's activities." This location will typically be the corporation's headquarters. The Court pointed to three sets of considerations justifying its holding. First, the statute refers to a "place" of business, not an entire "state." Second, the Court noted that a bright-line, easily applied test was a "major virtue" with respect to jurisdictional questions. Third, the Court commented that the statute's legislative history supported the view that Congress intended that a simple test should apply.