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May 7, 2010

Principal Places of Business

In Hertz Corporation v. Friend, issued in February, the United States Supreme Court resolved a longstanding question of federal subject matter jurisdiction: for diversity purposes, where is a corporation’s principal place of business? 28 U.S.C. § 1332(c) provides that “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.” Over the years since the rule was codified, the Courts of Appeals developed differing views as to where, exactly, to find a corporation’s principal place of business—whether in the place where the business conducted most of its activity, or the place where the corporation directed and controlled its various activities. A unanimous opinion by Justice Stephen Breyer settled on the latter.

There were several reasons for this. The Hertz Corporation Court concluded, first, that the statute’s text supported the so-called “nerve center” approach, because a corporation’s nerve center is usually its main headquarters and a single place. Second, the Court discussed administrative simplicity: “Complex jurisdiction tests,” Breyer wrote, “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.” In addition to simplifying jurisdictional inquiries, the nerve center test approach will promote predictability. Finally, the statute’s legislative history (“for those who accept it,” Breyer noted), “offers a simplicity-related interpretive benchmark” by suggesting “that the words ‘principal place of business’ should be interpreted to be no more complex than the [initially proposed] ‘half of gross income’ test. A ‘nerve center’ test offers such a possibility. A general business test does not.”

The decision in Hertz Corporation clarifies an area of law in which the different tests employed by the Courts of Appeals had engendered no small amount of confusion in trying to tease out when, for jurisdictional purposes, to favor general business activities over command and direction of those activities. Justice Breyer’s reliance upon text and legislative history is skillful, but it is really the second of the Court’s stated reasons for adopting the nerve center approach that stands out—that the nerve center test will reduce litigation over jurisdictional issues, simplify the trial court’s work, and create more predictability in the law.

Simplicity is a virtue, but simplicity does not necessarily “diminish the likelihood that results and settlements will reflect a claim’s legal and factual merits.” There are many ways to litigate a case and many ways to credit an outcome as favorable, and not all of those ways necessarily relate to the merits of a claim. An effort to reduce gamesmanship, to focus judicial and lawyerly attention on the merits, is all to the good, of course; but here experience will likely trump hope. This is so because, while the courts are rightly concerned with efficiency, litigators may not be; inefficiency—and the financial and temporal costs of delay—can be used to push a case toward settlement.

In a sense, inefficiency may be a natural by-product of an attorney’s zealous advocacy. Lawyers trained in the methodology of the common law eventually will wear away at the bright line rule announced in Hertz Corporation, as water does stone. It will start with litigation over what the Court sees as outlier cases—those in which “corporations … divide their command and coordinating functions among officers who work at several different locations, perhaps communicating over the Internet.” Even if the Court’s new bright-line rule does not encourage corporations to structure themselves in precisely this way, it is likely that, over time, we will see more and more corporations develop nerve centers that are networked throughout different states, increasing the potential for litigation over the very question Hertz Corporation endeavored to resolve: where should the courts locate such a corporation’s principal place of business?

Still, the decision in Hertz Corporation recognizes that, in matters of procedure, there are benefits to be gained by bright lines. And the decision acknowledges that some lines are indeed brighter than others; while the nerve center approach may not “automatically generate a result,” it “is relatively easier to apply.” That is something—at least for so long as it remains true to how the majority of corporations operate in our increasingly interconnected digital world.

Lawrence Friedman

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