Key Supreme Court Adopts “Nerve Center” Test for Corporate Citizenship

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U.S. and foreign companies with U.S. subsidiaries with multiple locations should now have a better understanding of their corporate citizenship when U.S. litigation arises.

Last month, the U.S. Supreme Court unanimously adopted the “nerve center” test to determine where a company’s principal place of business is for purposes of determining its citizenship. Companies with operations in multiple states will benefit from this decision.

The federal court diversity jurisdiction statute, 28 U.S.C. § 1332, creates the possibility for corporate citizenship in two (2) different states – where the company is incorporated and where it has its principal place of business. Since federal court jurisdiction often relies on diversity of citizenship between the parties, when a corporation is found to be a citizen of the same state as the plaintiff(s) the corporation may need to defend an action in a potentially less favorable state court forum because there is no diversity of the parties.

The case decided by the Supreme Court, Hertz v. Friend, was an action filed in a California state court that was removed to federal court. The lower federal courts found that Hertz, the rental car company, was a citizen of California because it had significant operations in the state, many employees there, and generated significant revenue there. The citizenship determination was made by the lower courts despite Hertz being incorporated in Delaware and having its headquarters in New Jersey. The result was that Hertz could not successfully remove the lawsuit to the federal court as it desired because there was a lack of diversity with the plaintiffs, who were also California citizens.

The Supreme Court has now simplified the test for determining corporate citizenship. The “nerve center” approach provides these companies with more predictability and the potential to remove cases to federal courts in jurisdictions like California that used a different test for citizenship. Under the “nerve center” test, a corporation’s principal place of business is now the place where its “high level officers direct, control and coordinate the corporation’s activities.”

The “nerve center” approach will replace a myriad of approaches that had been taken by federal courts throughout the U.S. For instance, the Sixth Circuit Court of Appeals’s “total activites” test will no longer be applied. That approach was used by a number of other federal courts of appeals and required a case-by-case analysis to determine corporate citizenship, taking into account factors such as the company’s character, its purposes, the kind of business involved, and the locations of its operations. Other courts of appeals used a variation on this test. Only the Seventh Circuit Court of Appeals used the more predictable “nerve center” test now to be used across the U.S.

With the Hertz decision comes the potential for companies to remove cases to federal courts when they could not do so previously. Companies are reminded that, in general, removal of a lawsuit filed in a state court must be removed within 30 days of learning of the action.

 

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