O'Melveny Secures Unanimous US Supreme Court Victory for Hertz; Court Adopts "Nerve Center" Test for Corporate Citizenship

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On February 23, 2010, the Supreme Court of the United States issued a unanimous decision defining corporate citizenship under the federal diversity statute, 28 U.S.C. § 1332(c)(1). That statute, which controls the States in which corporations may sue and be sued in federal court, provides that "a corporation shall be deemed to be a citizen of any State by which it has been incorporated and of the State where it has its principal place of business." In Hertz Corporation v. Friend, No. 08-1107, the Court held 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"—the location lower federal courts "have often metaphorically called... the corporation's 'nerve center'" and that "will typically be found at a corporation's headquarters." Slip. Op. at 1 (citing Wisconsin Knife Works v. National Metal Crafters, 781 F.2d 1280 (7th Cir. 1986)). O'Melveny & Myers represented Hertz, the victorious party in the case, and O'Melveny partner Sri Srinivasan presented oral argument to the Court in November.

Prior to the Court's decision in Hertz, the courts of appeals had applied several different tests to determine where a corporation's "principal place of business" was located for purposes of § 1332(c). Several courts focused on what they called the corporation's "total activities," holding that a corporation was a citizen of—and thus could not obtain federal diversity jurisdiction in—the State in which the corporation had the most "activity," such as the most plants, employees, or sales. In this case, the Ninth Circuit had applied its own test that looked to whether the business activities in any one State "substantially predominate" over other States. Only the Seventh Circuit had applied the straightforward "nerve center" approach that O'Melveny advocated.

The "nerve center," the Court clarified, is "normally the place where the corporation maintains its headquarters—provided that the headquarters is the actual center of direction, control, and coordination" for the corporation, and not something like "a mail drop box, a bare office with a computer, or the location of an annual executive retreat." Slip Op. at 14, 18. Under the Court's decision in Hertz, therefore, a corporation may invoke federal diversity jurisdiction, and remove state court cases filed against it, in any State in which the corporation (1) is not incorporated, and (2) is not truly headquartered.

The Court pointed to three "sets of considerations," Slip Op. at 14, in deciding on the "nerve center" test. First, it explained that the diversity statute's text looked to a single place within a State, rather than an aggregation of the total amount of activities conducted across the state. Slip. Op. at 14-15. Second, the Court observed that "administrative simplicity is a major virtue in a jurisdictional statute"—both to preserve judicial resources and to promote greater predictability—and concluded that the "nerve center" test is the easiest to apply. Slip. Op. at 15-16. Third, the Court reasoned that the legislative history behind the statute supported a simple test. Slip Op. at 16-17.

The Court's decision may provide significant benefits to businesses. As the Court noted, the "nerve center" test promotes greater predictability, and "[p]redictability is valuable to corporations making business and investment decisions." Slip. Op. at 16. In addition, by simply establishing a uniform national rule the Court's decision avoids scenarios in which corporations could be deemed to have their principal place of business in different States depending on which circuit's test applied. Under the "nerve center" test, every corporation will have one and only one principal place of business, and it should be clear to all parties where this is. For these reasons, the Chamber of Commerce and other business groups supported Hertz's position before the Court.

The Court's decision in Hertz also resolved the question whether litigants may obtain Supreme Court review of a decision rendered pursuant to the Class Action Fairness Act provision that permits courts of appeals to review district court orders that remand covered class actions to state court. See 28 U.S.C. § 1453(c). The Court held that CAFA's requirement that a court of appeals issue a decision within 60 days of agreeing to review such an order does "not... deprive th[e] [Supreme] Court of subsequent jurisdiction to review the case." Hertz, Slip. Op. at 5.