Supreme Court Changes Diversity Test

The question of what constitutes “diversity” for purposes of diversity jurisdiction in Federal Court pursuant to under 28 U.S.C. § 1332 has been the topic of some disagreement amongst the Circuit Courts. That’s about to change.

Last week, the U.S. Supreme Court ruled in Hertz Corporation v. Friend that a corporation’s principal place of business is where its “high-level officers direct, control and coordinate the corporation’s activities.” In other words, the location sometimes referred to as the company’s “nerve center.”

28 U.S.C. §1332(c)(1) provides that a corporation is deemed a citizen of any State in which it has been incorporated (that’s the easy one), and anywhere it has its principal place of business. That last provision has given many courts pause, as they try to decipher where a company has its “principal place of business.” For example, the Ninth Circuit, along with the (Fifth, Sixth, Eighth, Tenth and Eleventh) followed a “totality” approach that looked at the location of the corporation’s overall activities, treating the “never center” as only one of several factors.

In Hertz, the District Court used this approach, ruling that Hertz’s principal place of biz was California, notwithstanding the fact that its executives, its headquarters and of course many of its cars were located outside of California. So why the Golden State, the 9th Circuit reasoned that Hertz earned the most money in California, and the majority of its employees were located here.

The Supreme Court took a different approach, chiefly focusing on the meaning and context of §1332’s use of the words “principal” and “place.” First, the Court noted “place” is singular, not plural, meaning that courts should consider if there is a “main, leading or most important” location within a state, not at the company’s activities throughout the state, and then ask whether those activities are “significantly larger” than they are in the next state where the company has a presence. The Court said that the “nerve center” test met the goal of administrative simplicity because it focused on finding the corporation’s “brain,” rather than deciding where the majority of the body parts might lie. The Court explained that it would not be enough for a company to claim that its “headquarters” was the state where it had nothing more than a “mail drop box, a bare office with a computer, or an annual executive retreat.” Rather, the “nerve center” is where “actual direction, control, and coordination” of corporate activities take place.

We’ll have to see how this test works in the Internet age, where the “never center” may be telecommuting from different states.


Jonathan Pink is an intellectual property and commercial litigator. He specializes in trademark, copyright, patent and contract disputes, having litigated such cases in state and federal courts across the nation. He is resident in the Irvine (Orange County) and Los Angeles offices of Bryan Cave, LLP. He can be reached at 949-223-7173 or at jonathan.pink@bryancave.com.