SCOTUS Adopts The "Nerve Center" Test to Determine a Corporation's Principal Place of Business
Yesterday in a unanimous opinion (Hertz Corp. v. Friend et al.) the U.S. Supreme Court held that the “nerve center” test will determine the location of a corporation’s “principal place of business” for ascertaining whether a federal court can exercise diversity jurisdiction.
The Supreme Court noted that since Congress codified that a corporation is a resident of the State in which it was incorporated and the State of its “principal place of business” appellate courts have adopted numerous approaches in determining the location of a corporation’s principal place of business. Some courts applied the “nerve center” test for corporations with “far-flung” business activities which focused on the location of the corporation’s decision-makers. Other courts focused more heavily on where a corporation’s actual business activities were located. The number of factors grew as courts combined aspects of the “nerve center” and “business activity” tests to look to a corporation’s “total activities,” sometimes to try to determine what has been described as the corporation’s “center of gravity.”
To resolve the confusion the Supreme Court held that “principal place of business” refers “to the place where a corporation’s officers direct, control, and coordinate the corporation’s activities” which appellate courts have called the corporation’s “nerve center.” The approach, the Court muses, results in administrative simplicity which is major virtue of a jurisdictional statute and will avoid “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, a simple jurisdictional rule will promote greater predictability and the Court cited the legislative history of the statute which suggested a simplicity-related interpretative benchmark similar in nature to the “nerve center” test.
Although the Court admits there will be difficult cases as no perfect test exists, the approach adopted provides a sensible solution that is relatively easy to apply.
