Friday, February 26, 2010

Hertz Corp. v. Friend (U.S. Supreme Ct.)

Filed: February 23, 2010
Opinion by Justice Stephen G. Breyer

Held: In a unanimous decision, the Court held that for purposes of determining whether diversity jurisdiction is present, a corporation’s "principal place of business" is the place where a corporation's high level officers direct, control and coordinate the corporation's activities, which is typically referred to as the "nerve center" of the corporation.

In September of 2007, Melinda Friend and John Nhieu, both citizens of California, filed a class-action suit in California state court against Hertz Corporation seeking damages for alleged violations of California's wage and hour laws. Hertz filed a notice seeking removal of the case from California state court to federal court on the grounds of diversity jurisdiction.

In support of removal to federal court, Hertz submitted a declaration by one of its employee relations managers stating that its "principal place of business" was in New Jersey. Hertz's employee relations manager's declaration went on to allege that the leadership of Hertz and its domestic subsidiaries and the corporate headquarters was located in New Jersey and that Hertz's core executive and administrative functions were carried out mostly from its headquarters in New Jersey. With regard to its operations and revenues, the declaration also stated that out of all of its facilities, which are operated in 44 States, California only accounted for 273 of Hertz's 1,606 car rental locations, 2,300 of its 11,230 full-time employees, $811 million of its $4.371 billion in annual revenue and 3.8 million of its 21 million annual transactions.

The District Court held that Hertz was a citizen of California. In determining Hertz's citizenship for purposes of diversity jurisdiction, the District Court applied the precedent of the Ninth Circuit by using the "business activity" test, which instructed courts to identify a corporation's "principal place of business" by first determining the amount of a corporation's business activity state by state. Under the "business activity" test, if the amount of activity of a corporation in one state was significantly larger or substantially predominant than in other states, then that state was considered the corporation’s "principal place of business." If, however, if the business activity in one state did not predominate over its activities in other states, then the principal place of business for the corporation would be the corporation's "nerve center." Applying this test, the District Court noted that while Hertz's corporate headquarters were in New Jersey, because California led all other states significantly in the amount of Hertz's car rental locations, full-time employees, revenue and transactions, California was Hertz's principal place of business. The District Court's ruling was affirmed by the Ninth Circuit Court.

Analysis: The Supreme Court vacated the ruling and remanded the case back to the District Court for further proceedings consistent with the Supreme Court's conclusion that the proper test to use when determining a corporation's principal place of business required a court to determine the location of the corporation's "nerve center." According to the Supreme Court, a corporation's "principal place of business" is best read as "the place where the 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."

In comparing and contrasting the "business activities" test used by the two courts below and the "nerve center" test, the Supreme Court explained that the "business activities" test had proved "unusually difficult to apply" due to the courts having to weigh the numerous factors, such as location of facilities and service centers, sales, transactions, employee location, payrolls, and revenue generation, while the "nerve center" test was a comparatively simpler jurisdictional rule that would provide easier judicial administration and predictability to corporations and plaintiffs. The Supreme Court also noted that having complex jurisdictional rules, such as the "business activities" test, only served to waste court resources and to "complicate a case, eating up time and money as the parties litigate, not the merits of their claims, but which court is the right court to decide those claims." Acknowledging that the "nerve center" test would not be easily applied in all cases, the Supreme Court stated that the "nerve center" test would serve to point courts in a single direction and provide a sensible test that would be comparatively easier to apply.

The full opinion is available in PDF.

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