In a case handed down today, the United States Supreme Court clarified and simplified the judicial test to determine where a corporation has its principal place of business for diversity jurisdiction purposes. In Hertz Corp. v. Friend, No. 08-1107 (U.S. Feb. 23, 2010), Justice Breyer, writing for a unanimous court, noted that the “Court of Appeals’ divergent and increasingly complex interpretations” of the principal-place-of-business provision has grown unworkable. To simplify the inquiry and provide greater certainty as to jurisdiction for both potential plaintiffs and defendants, the Court adopted the “nerve center” test as the proper inquiry to determine a corporation’s principal place of business.

Under the federal diversity jurisdiction statute, “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.” 28 U.S.C. § 1332(c)(1). Federal courts had developed myriad tests to determine the location of a corporation’s “principal place of business.” Some courts focused heavily on where the corporation’s actual business activities took place. Others looked to location of the corporate headquarters from which those business activities were controlled or directed, i.e., the “nerve center” of the corporation. Still other courts employed a “total activities” test to determine the “center of gravity” of the corporation. The multiplicity of tests applied by different courts resulted in differing, sometimes conflicting, conclusions regarding the location of a corporation’s principal place of business.

Explaining that “[p]redictability is valuable to corporations making business and investment decisions,” the Supreme Court cleared the underbrush and adopted the nerve center test, holding that “‘principal place of business’ is best read as referring to the place where a corporation’s officers direct, control, and coordinate the corporation’s activities.” The Court emphasized that the nerve center of a corporation is “not simply an office where the corporation holds its board meetings.” A simple “mail drop box, a bare office with a computer, or the location of an annual executive retreat” does not constitute the nerve center of a corporation.

The Court recognized that “there may be no perfect test,” particularly “in this era of telecommuting,” where corporate officers “may work at several different locations, perhaps communicating over the Internet.” The Court also recognized the possibility of attempts at jurisdictional manipulation. But while acknowledging the potential imperfections of even a nerve center test, the Court found that “in the view of the necessity of having a clearer rule, we must accept them.” Parties deciding where to file or remove a case to federal court should now be able to make that initial determination easily without resorting to statistical analyses of constantly changing and often non-public data on corporate operations.

This article was prepared by Jonathan S. Franklin (jfranklin@fulbright.com or 202 662 0466), Anne M. Rodgers (arodgers@fulbright.com or 713 651 3797) and Benjamin Vetter (bvetter@fulbright.com or 303 801 2720) from Fulbright’s Litigation Practice Group.

Note: Jonathan Franklin, a partner in Fulbright’s Washington, D.C., office was counsel of record for a group of amici curiae who filed a brief in the Supreme Court urging that the Court adopt the nerve center test.