The Determination of a Corporation's 'Principal Place of Business'

Every first-year law student learns one of the canonical formulations of federal civil procedure: In order for a federal court to have subject matter jurisdiction over a case or controversy, the matter generally must either arise under the Constitution, laws, or treaties of the United States (“federal question” jurisdiction); or the plaintiffs in an action based on state law must have complete diversity of state citizenship from all of the defendants, and the amount in controversy must exceed $75,000 (“diversity” jurisdiction). 28 U.S.C. ”' 1331; 1332. When the litigants are individuals ─  ”natural persons” ─ determinations of citizenship are simplified by the rule that a person has only one domicile, and by the well-tested standards that have evolved for identifying where that place may be. Where a corporation is a litigant, however, determinations of citizenship are complicated by the so-called “dual citizenship” doctrine, that holds a corporation is a citizen of both its state of incorporation and “of the State where it has its principal place of business[.]” 28 U.S.C. ” 1332(c)(1).

Exactly what this phrase means, however, has never been altogether clear since that second basis of state citizenship was codified in 1958. As the decades have progressed, the evolution of corporate structure and corporate commercial activity has rendered the application of this unarticulated standard a quagmire. What is the “principal place of business” of a multinational corporation that has corporate headquarters in New York, but enjoys relatively few sales in that state, and instead conducts business in all 50 states and 39 other nations? What about a corporation whose leadership team is spread across three offices in three separate states, and does roughly equal amounts of business in each of the states in which those offices are located? Is the proper locus of analysis whether there is a particular place within a state that can be said to be a corporation's “principal place of business,” or should a court look to which state has the greatest aggregate number of business-related contacts to the corporation in determining where the corporation's principal “place of business” lies?

Cacophony of Approaches

In response to these sometimes-vexing factual problems and the silence of the statute itself, the federal Courts of Appeals have developed various standards to assess a corporation's principal place of business. The result has been a cacophony of approaches that often leave a corporation unsure of exactly what state it will be deemed a citizen of for jurisdictional purposes, and exposed to the very real possibility that it will be assigned multiple “principal places of business” by different federal courts across the country.

Finally, earlier this Term, in Hertz Corp. v. Friend et al., No. 08-1107, 2010 U.S. LEXIS 1897 (U.S. Feb. 23, 2010), the Supreme Court clarified the jumble of tests used by the lower federal courts and unanimously endorsed the so-called “nerve center” test for determining a corporation's principal place of business. Now it is clear that “the place where a corporation's officers direct, control, and coordinate the corporation's activities” should be considered its principal place of business.“ Hertz will change and simplify in almost every Circuit ─ sometimes dramatically ─ the analysis used to identify the principal place of business of a corporation, and thus affect when a corporation may be sued in, or may remove a case to, federal court, and should lead to greater predictability in determining when a federal court will find diversity jurisdiction to be present.

What Is 'Business,' Anyway?

Hertz well illustrates the jurisdictional problems in which many large national corporations have found themselves over the past two decades. In Hertz, two California-based employees sued the automobile rental provider in California state court for alleged violations of state wage and hour laws, and sought relief on behalf of a class of similarly situated California citizens. Hertz removed the matter to federal district court, alleging that complete diversity was present ─ the putative class members were limited to citizens of California; Hertz was a Delaware corporation with its principal place of business in New Jersey. Hertz alleged that its “leadership” was located at its “corporate headquarters” in Park Ridge, NJ, and its “core executive and administrative functions” were carried out in New Jersey and, to a lesser extent, in Oklahoma. Hertz further stated that 273 of its 1606 car rental locations were in California; 2300 of its 11,230 full-time employees, and about 3.8 million of its 21 million annual transactions, or approximately 17% to 20% of its total sales-related contacts were in California.

The last set of facts was particularly relevant in the Ninth Circuit, which had adopted a corporate citizenship test that essentially rejected as irrelevant the location of corporation's headquarters and central executive activities. Instead, the Ninth Circuit had instructed the district courts to determine a corporation's business activity on an aggregate, state-by-state basis. If that business activity was “substantially larger” or “substantially predominated” in one state, that state was the corporation's principal place of business. Only if there was no such state would a court look to the corporation's “nerve center” ─ the “place where the majority of its executive and administrative functions are performed.” Accordingly, the district court determined that the “plurality” of these activities in California was “significantly” greater than those activities in Hertz' next-most-active state, Florida, and remanded the class action to state court. The Ninth Circuit subsequently affirmed. In light of a split among the Courts of Appeals in the application of the test for corporate citizenship, the Supreme Court granted certiorari.

Ruling Not Unique

The Ninth Circuit's ruling as to Hertz's principal place of business was not unique to Hertz whatsoever. As the Ninth Circuit itself has realized, because of the size of California's economy ─ it presently accounts for approximately 12% of the nation”s economic activity ─ it is obvious that “nearly every national retailer, no matter how far flung its operations ─ will be deemed a citizen of California for diversity purposes.” Davis v. HSBC Bank Nev., N.A., 557 F.3d 1026, 1029-30 (9th Cir. 2009). Hertz is not the only corporation that has fallen into that trap. For example:

1. In Ghaderi v. United Airlines, Inc., 136 F.Supp.2d 1041, 1044-46 (N.D. Cal. 2001), the Northern District of California applied the “substantial predominance” test and analyzed the following factors to identify the principal place of business of United Airlines, Inc., a Delaware corporation with headquarters in Chicago: the location of its employees; where sales took place; its production activities; its tangible property; its sources of income; the value of land owned and leased; and the replacement cost of assets located in a certain state. The court then gauged United's aggregate contacts with the public in each state and determined that United's contacts with California were significantly deeper than those of United in Illinois.

2. In 2009, the United States District Court for the Central District of California found that Target Corporation's principal place of business was also in California, instead of Minnesota, where its executive and administrative functions are located. Diaz v. Target Corp., No. 09-3477, 2009 U.S.Dist. LEXIS 62000, *5-*6 (C.D. Cal. July 2, 2009). The court found significant that Target employed 15.86% of its workforce in California, as compared with 8.45% of its workforce in Minnesota (the state where the next greatest percentage of employees were found). Similarly, 14.15% of Target's tangible property, and 14.12% of its stores were located in California, whereas 8.59% and 8.6%, respectively, were found in Texas, where its next greatest percentage of property and stores were located. In light of these figures and others, the court determined that Target's activities “substantially predominated” in California as compared with any other State, and deemed it to be a citizen of California for purposes of defeating diversity jurisdiction.

3. That same year, the Central District also concluded that Costco Wholesale Corporation's principal place of business was in California, despite the location of its executive headquarters in Washington State, because 32% of its employees were located in California, as opposed to 11% in Washington; and 34% of Costco's sales occurred in California, as opposed to only 8% in Washington. Castaneda v. Costco Wholesale Corp., No. 08-7599, 2009 U.S. Dist. LEXIS 3595, *7 (C. D. Cal. Jan. 9, 2009). Regardless of the fact that Costco's headquarters were in Washington, the court held that “California is the state where [Costco] 'conducts the most activity that is visible and impacts the public' and where there is the 'greatest potential for litigation.'”

Other Diverse Tests

Other of the Courts of Appeals had adopted other diverse tests to determine a corporation's principal place of business. In circumstances where a corporation's activities were “far flung,” some courts had adopted a test that looked at the “nerve center” or corporate activity. But whether activities were not “far flung,” but instead concentrated in only a few locales, an analysis that focused on a corporation's actual business activities was often used. In practice, these tests devolved into long checklists of various fact-specific inquiries to which the appellate courts directed the district courts. The section of Moore's Federal Practice that details these tests runs to 14 pages. In sum, the Fifth, Sixth, Eighth, Tenth, and Eleventh Circuits had adopted some form of the “substantial predominance” or “total activity” test. Complexity, indeed, had run amok.

The 'Nerve Center' Test

As Justice Breyer's opinion for the unanimous Court makes clear, the Court sought to adopt a single, uniform standard that would apply throughout the United States. Moreover, it was important that the rule be as simple as possible, as “[s]imple jurisdictional rules ' promote greater predictability.” Finally, the Court recognized that the “substantial predominance” approach used in the Ninth Circuit and elsewhere distorted the language of section 1332 ' the statute does not deem a corporation a citizen of the state where it has the most aggregate business activities. It instead contemplates a single, identifiable place, the “principal place of business,” within a state. In other words, how many employees Hertz has in California instead of New Jersey, Illinois, or elsewhere is wholly irrelevant.

Accordingly, in Hertz, the Court stated that “the phrase 'principal place of business' “refers to the place where the corporation's high level officers direct, control, and coordinate the corporation's activities.” For example, if “the bulk of a company's business activities visible to the public takes place in New Jersey, while its top officers direct those activities just across the river in New York, the 'principal place of business' is New York.” Because a corporation's headquarters typically directs, controls and coordinates a corporations' activities, and therefore serves as the corporation's “nerve center,” its location may determine one state of which the corporation is a citizen.

But this is not necessarily dispositive. If a corporation's headquarters is “simply an office where the corporation holds its board meetings (for example, attended by directors and officers who have traveled there for the occasion),” “a bare office with a computer” or otherwise not actually where the officers and directors direct, control and coordinate the corporation's activities, then it should not be found to be the “nerve center” of the corporation, and should not be used to determine the corporation's principal place of business. In addition, the mere filing of a Form 10-K with the U.S. Securities and Exchange Commission (SEC), which lists a corporation's principal place of business as a particular state, or other similarly conclusory acts, without more, does not establish the corporation's nerve center. The totality of the circumstances concerning the direction of the corporation's strategic activities must be examined.

Consequences of Hertz

The Supreme Court intended Hertz to provide a more simple, predictable, and uniform method of determining a corporation's principal place of business. Surely in most cases it will bring commonality to the old tests, but not necessary clarity to how to apply the new test. For example, where is the corporate “brain,” to use the Supreme Court's term, of a corporation in which critical corporate functions are fulfilled by a number of officers, each of whom spends substantial time in multiple 'and different ' offices? How does the increasing electronification and portability of corporate communications and records factor into the analysis? Are there certain corporations ' small companies, with mostly online activities ' that cannot truly be said to have a single “principal place of business” at all? Although the new inquiry is likely cleaner than that which it often replaces, one cannot assume that no difficult interpretative questions remain to be resolved.

Second, in all but possibly the Seventh Circuit (which had already substantially proceeded under the “nerve test” adopted in Hertz), corporations will need to change their standard ways of thinking about jurisdictional arguments. Although most of the other Courts of Appeals had not progressed so far down the “substantial predominance” analysis as had the Ninth Circuit, all except the Seventh Circuit appeared to use it for cases involving diffuse, but not “far-flung,” business activities, and many courts looked to the totality of business connections to a given state as at least a factor in the jurisdictional analysis. Accordingly, at a minimum, all corporations should revisit at this time any “stock” or “boilerplate” facts and arguments they customarily utilize in support of, or to defend against, the appropriateness of diversity jurisdiction. This may also provide the occasion for developing more detailed, formalized internal statements or policies of where a corporation believes its “principal place of business” to be, or where the “nerve center” of the corporation truly lies.

Third, the existence of diversity jurisdiction in any particular pending case should now be re-examined immediately in light of Hertz. In some circumstances, the time to challenge the existence of diversity jurisdiction in federal court, or to seek removal of an action from state court to federal court, may not have yet expired, and the shifting of the jurisdictional sands may provide a corporation a tool to remove to federal court a case that was previously mired in state court, or to dismiss or remand from federal court other matters.

Conclusion

The most significant, long-term impact of Hertz may be that it reopens the federal courts in California and certain other large states to out-of-state corporations that happen to conduct substantial commercial affairs there. No longer will the economic inevitability of those activities ' what corporation would not wish to conduct business in the world's seventh-largest economy? ' preclude a corporation from enjoying any benefits associated with litigating in federal court. The new jurisdictional focus may also allow the greater fulfillment of the spirit of the Class Action Fairness Act of 2005, which contemplated more class actions being heard in federal court instead of state court ' a safeguard the “substantial predominance” test often frustrated. In short, Hertz, if properly applied, has the potential to substantially restructure many aspects of corporate litigation today, if politics and resistance from the lower courts do not interfere.

Jeremy A. Rist is a partner, and Catherine A. Armentano is an associate in the Corporate Litigation Group of Blank Rome LLP, resident in the firm's Philadelphia and New York offices, respectively. Their practices are focused on the resolution of business disputes, antitrust litigation, and securities matters. Rist can be contacted at 215-569-5361, or [email protected]. Armentano can be contacted at 212-885-5461, or [email protected].

Every first-year law student learns one of the canonical formulations of federal civil procedure: In order for a federal court to have subject matter jurisdiction over a case or controversy, the matter generally must either arise under the Constitution, laws, or treaties of the United States (“federal question” jurisdiction); or the plaintiffs in an action based on state law must have complete diversity of state citizenship from all of the defendants, and the amount in controversy must exceed $75,000 (“diversity” jurisdiction). 28 U.S.C. ”' 1331; 1332. When the litigants are individuals ─  ”natural persons” ─ determinations of citizenship are simplified by the rule that a person has only one domicile, and by the well-tested standards that have evolved for identifying where that place may be. Where a corporation is a litigant, however, determinations of citizenship are complicated by the so-called “dual citizenship” doctrine, that holds a corporation is a citizen of both its state of incorporation and “of the State where it has its principal place of business[.]” 28 U.S.C. ” 1332(c)(1).

Exactly what this phrase means, however, has never been altogether clear since that second basis of state citizenship was codified in 1958. As the decades have progressed, the evolution of corporate structure and corporate commercial activity has rendered the application of this unarticulated standard a quagmire. What is the “principal place of business” of a multinational corporation that has corporate headquarters in New York, but enjoys relatively few sales in that state, and instead conducts business in all 50 states and 39 other nations? What about a corporation whose leadership team is spread across three offices in three separate states, and does roughly equal amounts of business in each of the states in which those offices are located? Is the proper locus of analysis whether there is a particular place within a state that can be said to be a corporation's “principal place of business,” or should a court look to which state has the greatest aggregate number of business-related contacts to the corporation in determining where the corporation's principal “place of business” lies?

Cacophony of Approaches

In response to these sometimes-vexing factual problems and the silence of the statute itself, the federal Courts of Appeals have developed various standards to assess a corporation's principal place of business. The result has been a cacophony of approaches that often leave a corporation unsure of exactly what state it will be deemed a citizen of for jurisdictional purposes, and exposed to the very real possibility that it will be assigned multiple “principal places of business” by different federal courts across the country.

Finally, earlier this Term, in Hertz Corp. v. Friend et al., No. 08-1107, 2010 U.S. LEXIS 1897 (U.S. Feb. 23, 2010), the Supreme Court clarified the jumble of tests used by the lower federal courts and unanimously endorsed the so-called “nerve center” test for determining a corporation's principal place of business. Now it is clear that “the place where a corporation's officers direct, control, and coordinate the corporation's activities” should be considered its principal place of business.“ Hertz will change and simplify in almost every Circuit ─ sometimes dramatically ─ the analysis used to identify the principal place of business of a corporation, and thus affect when a corporation may be sued in, or may remove a case to, federal court, and should lead to greater predictability in determining when a federal court will find diversity jurisdiction to be present.

What Is 'Business,' Anyway?

Hertz well illustrates the jurisdictional problems in which many large national corporations have found themselves over the past two decades. In Hertz, two California-based employees sued the automobile rental provider in California state court for alleged violations of state wage and hour laws, and sought relief on behalf of a class of similarly situated California citizens. Hertz removed the matter to federal district court, alleging that complete diversity was present ─ the putative class members were limited to citizens of California; Hertz was a Delaware corporation with its principal place of business in New Jersey. Hertz alleged that its “leadership” was located at its “corporate headquarters” in Park Ridge, NJ, and its “core executive and administrative functions” were carried out in New Jersey and, to a lesser extent, in Oklahoma. Hertz further stated that 273 of its 1606 car rental locations were in California; 2300 of its 11,230 full-time employees, and about 3.8 million of its 21 million annual transactions, or approximately 17% to 20% of its total sales-related contacts were in California.

The last set of facts was particularly relevant in the Ninth Circuit, which had adopted a corporate citizenship test that essentially rejected as irrelevant the location of corporation's headquarters and central executive activities. Instead, the Ninth Circuit had instructed the district courts to determine a corporation's business activity on an aggregate, state-by-state basis. If that business activity was “substantially larger” or “substantially predominated” in one state, that state was the corporation's principal place of business. Only if there was no such state would a court look to the corporation's “nerve center” ─ the “place where the majority of its executive and administrative functions are performed.” Accordingly, the district court determined that the “plurality” of these activities in California was “significantly” greater than those activities in Hertz' next-most-active state, Florida, and remanded the class action to state court. The Ninth Circuit subsequently affirmed. In light of a split among the Courts of Appeals in the application of the test for corporate citizenship, the Supreme Court granted certiorari.

Ruling Not Unique

The Ninth Circuit's ruling as to Hertz's principal place of business was not unique to Hertz whatsoever. As the Ninth Circuit itself has realized, because of the size of California's economy ─ it presently accounts for approximately 12% of the nation”s economic activity ─ it is obvious that “nearly every national retailer, no matter how far flung its operations ─ will be deemed a citizen of California for diversity purposes.” Davis v. HSBC Bank Nev., N.A. , 557 F.3d 1026, 1029-30 (9th Cir. 2009). Hertz is not the only corporation that has fallen into that trap. For example:

1. In Ghaderi v. United Airlines, Inc. , 136 F.Supp.2d 1041, 1044-46 (N.D. Cal. 2001), the Northern District of California applied the “substantial predominance” test and analyzed the following factors to identify the principal place of business of United Airlines, Inc., a Delaware corporation with headquarters in Chicago: the location of its employees; where sales took place; its production activities; its tangible property; its sources of income; the value of land owned and leased; and the replacement cost of assets located in a certain state. The court then gauged United's aggregate contacts with the public in each state and determined that United's contacts with California were significantly deeper than those of United in Illinois.

2. In 2009, the United States District Court for the Central District of California found that Target Corporation's principal place of business was also in California, instead of Minnesota, where its executive and administrative functions are located. Diaz v. Target Corp., No. 09-3477, 2009 U.S.Dist. LEXIS 62000, *5-*6 (C.D. Cal. July 2, 2009). The court found significant that Target employed 15.86% of its workforce in California, as compared with 8.45% of its workforce in Minnesota (the state where the next greatest percentage of employees were found). Similarly, 14.15% of Target's tangible property, and 14.12% of its stores were located in California, whereas 8.59% and 8.6%, respectively, were found in Texas, where its next greatest percentage of property and stores were located. In light of these figures and others, the court determined that Target's activities “substantially predominated” in California as compared with any other State, and deemed it to be a citizen of California for purposes of defeating diversity jurisdiction.

3. That same year, the Central District also concluded that Costco Wholesale Corporation's principal place of business was in California, despite the location of its executive headquarters in Washington State, because 32% of its employees were located in California, as opposed to 11% in Washington; and 34% of Costco's sales occurred in California, as opposed to only 8% in Washington. Castaneda v. Costco Wholesale Corp., No. 08-7599, 2009 U.S. Dist. LEXIS 3595, *7 (C. D. Cal. Jan. 9, 2009). Regardless of the fact that Costco's headquarters were in Washington, the court held that “California is the state where [Costco] 'conducts the most activity that is visible and impacts the public' and where there is the 'greatest potential for litigation.'”

Other Diverse Tests

Other of the Courts of Appeals had adopted other diverse tests to determine a corporation's principal place of business. In circumstances where a corporation's activities were “far flung,” some courts had adopted a test that looked at the “nerve center” or corporate activity. But whether activities were not “far flung,” but instead concentrated in only a few locales, an analysis that focused on a corporation's actual business activities was often used. In practice, these tests devolved into long checklists of various fact-specific inquiries to which the appellate courts directed the district courts. The section of Moore's Federal Practice that details these tests runs to 14 pages. In sum, the Fifth, Sixth, Eighth, Tenth, and Eleventh Circuits had adopted some form of the “substantial predominance” or “total activity” test. Complexity, indeed, had run amok.

The 'Nerve Center' Test

As Justice Breyer's opinion for the unanimous Court makes clear, the Court sought to adopt a single, uniform standard that would apply throughout the United States. Moreover, it was important that the rule be as simple as possible, as “[s]imple jurisdictional rules ' promote greater predictability.” Finally, the Court recognized that the “substantial predominance” approach used in the Ninth Circuit and elsewhere distorted the language of section 1332 ' the statute does not deem a corporation a citizen of the state where it has the most aggregate business activities. It instead contemplates a single, identifiable place, the “principal place of business,” within a state. In other words, how many employees Hertz has in California instead of New Jersey, Illinois, or elsewhere is wholly irrelevant.

Accordingly, in Hertz, the Court stated that “the phrase 'principal place of business' “refers to the place where the corporation's high level officers direct, control, and coordinate the corporation's activities.” For example, if “the bulk of a company's business activities visible to the public takes place in New Jersey, while its top officers direct those activities just across the river in New York, the 'principal place of business' is New York.” Because a corporation's headquarters typically directs, controls and coordinates a corporations' activities, and therefore serves as the corporation's “nerve center,” its location may determine one state of which the corporation is a citizen.

But this is not necessarily dispositive. If a corporation's headquarters is “simply an office where the corporation holds its board meetings (for example, attended by directors and officers who have traveled there for the occasion),” “a bare office with a computer” or otherwise not actually where the officers and directors direct, control and coordinate the corporation's activities, then it should not be found to be the “nerve center” of the corporation, and should not be used to determine the corporation's principal place of business. In addition, the mere filing of a Form 10-K with the U.S. Securities and Exchange Commission (SEC), which lists a corporation's principal place of business as a particular state, or other similarly conclusory acts, without more, does not establish the corporation's nerve center. The totality of the circumstances concerning the direction of the corporation's strategic activities must be examined.

Consequences of Hertz

The Supreme Court intended Hertz to provide a more simple, predictable, and uniform method of determining a corporation's principal place of business. Surely in most cases it will bring commonality to the old tests, but not necessary clarity to how to apply the new test. For example, where is the corporate “brain,” to use the Supreme Court's term, of a corporation in which critical corporate functions are fulfilled by a number of officers, each of whom spends substantial time in multiple 'and different ' offices? How does the increasing electronification and portability of corporate communications and records factor into the analysis? Are there certain corporations ' small companies, with mostly online activities ' that cannot truly be said to have a single “principal place of business” at all? Although the new inquiry is likely cleaner than that which it often replaces, one cannot assume that no difficult interpretative questions remain to be resolved.

Second, in all but possibly the Seventh Circuit (which had already substantially proceeded under the “nerve test” adopted in Hertz), corporations will need to change their standard ways of thinking about jurisdictional arguments. Although most of the other Courts of Appeals had not progressed so far down the “substantial predominance” analysis as had the Ninth Circuit, all except the Seventh Circuit appeared to use it for cases involving diffuse, but not “far-flung,” business activities, and many courts looked to the totality of business connections to a given state as at least a factor in the jurisdictional analysis. Accordingly, at a minimum, all corporations should revisit at this time any “stock” or “boilerplate” facts and arguments they customarily utilize in support of, or to defend against, the appropriateness of diversity jurisdiction. This may also provide the occasion for developing more detailed, formalized internal statements or policies of where a corporation believes its “principal place of business” to be, or where the “nerve center” of the corporation truly lies.

Third, the existence of diversity jurisdiction in any particular pending case should now be re-examined immediately in light of Hertz. In some circumstances, the time to challenge the existence of diversity jurisdiction in federal court, or to seek removal of an action from state court to federal court, may not have yet expired, and the shifting of the jurisdictional sands may provide a corporation a tool to remove to federal court a case that was previously mired in state court, or to dismiss or remand from federal court other matters.

Conclusion

The most significant, long-term impact of Hertz may be that it reopens the federal courts in California and certain other large states to out-of-state corporations that happen to conduct substantial commercial affairs there. No longer will the economic inevitability of those activities ' what corporation would not wish to conduct business in the world's seventh-largest economy? ' preclude a corporation from enjoying any benefits associated with litigating in federal court. The new jurisdictional focus may also allow the greater fulfillment of the spirit of the Class Action Fairness Act of 2005, which contemplated more class actions being heard in federal court instead of state court ' a safeguard the “substantial predominance” test often frustrated. In short, Hertz, if properly applied, has the potential to substantially restructure many aspects of corporate litigation today, if politics and resistance from the lower courts do not interfere.

Jeremy A. Rist is a partner, and Catherine A. Armentano is an associate in the Corporate Litigation Group of Blank Rome LLP, resident in the firm's Philadelphia and New York offices, respectively. Their practices are focused on the resolution of business disputes, antitrust litigation, and securities matters. Rist can be contacted at 215-569-5361, or [email protected]. Armentano can be contacted at 212-885-5461, or [email protected].