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Litigation
Insights April 29, 2010
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Litigation Practice
Group Leader
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Supreme Court
Adopts "Nerve Center" Test
to Determine Corporate
Citizenship in Diversity Cases
by Kevin A. Fanning
On February 23, 2010, the United
States Supreme Court unanimously decided a case that resolved
differences among the federal courts as to how the citizenship of a
corporation is determined in cases based upon diversity of citizenship.
In Hertz Corp. v. Friend,
the Court unanimously held that a corporation's "principal place
of business" is its "nerve center," which means the
place where high level officers direct, control and coordinate the
business activities of the corporation.
Pursuant to 28 U.S.C.
1332, federal district courts have original jurisdiction of all civil
actions where the matter in controversy exceeds the sum or value of
$75,000, exclusive of interest and costs, and is between (1) citizens
of different States; (2) citizens of a State and citizens or subjects
of a foreign state; (3) citizens of different States and in which
citizens or subjects of a foreign state are additional parties; and
(4) a foreign state. Under 28 U.S.C.
1332 (c)(1), "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."
Prior to Hertz, the determination of a corporation's
citizenship was determined differently across several federal circuits.
Writing for a unanimous Court, Justice Breyer
noted that the determination of a corporation's "principal place
of business" often included examinations of corporate
"functions, assets, or revenues" to determine its state of
citizenship. Is a corporation's "principal place of
business" where most of its franchises are located? Where
most of its sales revenue is earned? Where most of its
employees are located? Where the largest proportion of the
corporation's business activity occurred over the past year?
Going forward, federal courts will
only look to the corporation's internal structure to determine where
the corporation's high level officers direct, control and coordinate
the business activities of the corporation. In doing so, the
Court overturned all other tests, including the "business
activity" test, which rendered many large corporations citizens
of states where a lot of business outlets and activity occurred, but
where the corporation's headquarters was not located (typically states
with large populations such as California).
The Hertz
"nerve center" decision will impact every circuit but the
Seventh, which already utilized the nerve center test. The Hertz ruling will now mean that
large national corporations with active litigation across multiple
federal circuits will have citizenship determined on a consistent
basis according to the "nerve center" test and thereby
avoid the conundrum of being determined a citizen of several
different states, depending on the test applied in that circuit.
The Court's decision should also streamline jurisdictional disputes
over a corporation's citizenship.
If you have questions regarding this
article or topic, please contact the author or your Clark Hill
attorney.
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For further information
about the content of this Litigation Insight Update, please contact
Dan Scully. To find out more about Clark Hill and our Litigation
team, visit clarkhill.com
or call 800.949.3124
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