Procedural Law News: Supreme Court Adopts Nerve Center Test

On February 23, 2010, in Hertz Corp. v. Friend, No. 08-1107 (U.S. Feb. 23, 2010), the United States unanimously adopted a “nerve center” test for purposes of determining 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. S 1332(c)(1). Justice Breyer, writing for the unanimous court, recognized that the circuits have developed different and sometimes conflicting tests for determining a company’s “principal place of business.” For example, there is the “nerve center” test of the Seventh Circuit, the “center of activity” test applied by the Third Circuit and the “totality of corporate activity” test used by the Fifth, Sixth, Eighth, Ninth, Tenth and Eleventh Circuits.

In adopting the nerve center test, the Court recognized that the nerve center would normally be the place where the corporation maintains its headquarters, but the Court declined to adopt a rule that would strictly rely on the location of a company’s headquarters, noting that empty headquarter buildings will not suffice if the opposing party can show that decisions are made elsewhere. Instead, the Court ruled that a court should look where the company’s “high level officers direct, control, and coordinate the corporation’s activities.” As the Seventh Circuit is presently the only circuit applying the “nerve center” test, this decision should fundamentally change the manner in which courts determine a company’s “principal place of business” for purposes of applying the federal diversity jurisdiction statute.