On February 23, 2010, the Supreme Court settled the question of where a principal place of business is by unanimously ruling in Hertz Corp. v. Melinda Friend, et al., 2010 U.S. LEXIS 1897, that a company's "principal place of business" for purposes of federal diversity jurisdiction is its "nerve center," which typically will be the location of its headquarters.
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On February 23, 2010, the Supreme Court unanimously ruled in Hertz Corp. v. Melinda Friend, et al., No. 08-1107, 2010 U.S. LEXIS 1897, that a company's "principal place of business" for purposes of federal diversity jurisdiction is its "nerve center," which typically will be the location of its headquarters. The term "principal place of business," was added to Section 1332 of the United States Code (28 U.S.C. § 1332) to protect out-of-state corporations from perceived state court biases, but was not defined in the statute. Over the years, federal courts had adopted various, and at times, conflicting interpretations. Some courts applied a "total activities" test (or a variation of this test) that looked at such things as the nature of a company's activities and the site of its operations. The Seventh Circuit applied the "nerve center" test, which means effectively, the location of the company's headquarters (i.e., the location where all corporate decisions are made). The Ninth Circuit attempted to determine where the company has a "substantial predominance" of its operations by comparing the states in which the corporation operates. The Hertz case involved the Ninth Circuit's "substantial predominance" test. Hertz, which was backed by numerous national business organizations, advocated that a company's "principal place of business" is the location of its headquarters. Plaintiffs/respondents argued that the "principal place of business" should be the state in which a substantial predominance of the corporation's business activity occurs. Justice Breyer, writing for the Court, noted that practicality and administrative ease is the key to resolving the issue. He wrote that the "nerve center" test should be followed because it " points courts in a single direction, towards the center of overall direction, control and coordination. Our approach provides a sensible test that is relatively easier to apply, not a test that will, in all instances, automatically generate a result."
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The Court elected to adopt and expand on the Seventh Circuit's approach in Scot Typewriter Co. v. Underwood Corp., 170 F. Supp. 862 (7th Cir. 1959), as advocated by Hertz, which approach it characterized as a single, more uniform interpretation of "principal place of business." Justice Breyer noted that the complexity of the numerous approaches to defining "principal place of business" was attributable to the courts' efforts to find a State where a corporation is least likely to suffer out-of-state prejudice when it is sued in local court. Such a task is "doomed to failure" because courts are ill equipped to measure factors that impact prejudice to out-of-state litigants. Indeed, Justice Breyer observed that "this approach is at war with administrative simplicity. And it has failed to achieve a nationally uniform interpretation of federal law, an unfortunate consequence in a federal legal system." Hertz, 2010 U.S. LEXIS 1897, at *28.The Court concluded that "principal place of business" refers to the place where a corporation's officers direct, control, and coordinate the corporation's activities, i.e., its "nerve center." In practice it should normally be the place where the corporation maintains its headquarters so long as the headquarters is the actual center of direction, control, and coordination 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).
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