Supreme Court Ruling Streamlines Diversity of Citizenship Determinations and Gives Corporate Litigants a New Tool for Removal in the Sixth Circuit
Kegler Brown Litigation Newsletter August 1, 2010
The United States Supreme Court recently clarified the diversity jurisdiction doctrine by doing away with the variety of tests applied within the different circuit courts. In the decision Hertz Corp. v. Friend1, the Court held that a corporation’s “principal place of business” is located in the state that contains its “nerve center,” or headquarters. This recent holding by the Court will streamline federal litigation and could give corporate defendants a potent new tool for removal.
Under the diversity of citizenship statute2, federal courts have jurisdiction over actions between “citizens of different States.” Corporations are considered citizens of any state in which they are incorporated, as well as the “State where it has its principal place of business.” Over time, the circuits have embraced a variety of tests to determine what constitutes a principal place of business, among them the “nerve center” test, the “business activity” test, and the “total activities” test.
Before the Hertz decision, the Sixth Circuit utilized the “total activities” test as articulated in Gafford v. General Electric Co.3 In Gafford, a former employee of General Electric ("GE") brought a claim against the company for a violation of Kentucky civil rights law, in Kentucky state court. When GE—incorporated in New York—attempted to remove to federal court, the former employee claimed that GE’s 9,000-person facility in Kentucky was sufficient to constitute its principal place of business. To resolve the dispute, the circuit court crafted a test that considered both the corporation’s “nerve center,” as well as the location of its “business activities.” Thus, if the corporation’s activities were “far flung” across several states, the company’s headquarters would serve as the principal place of business. However, if the corporation’s headquarters were in one state, and the majority of its operations were in another, the former state would contain the corporation’s principal place of business. Several courts and commentators have referred to this “total activities” approach as determining the corporation’s “center of gravity.”
In Hertz, the Supreme Court eliminated the need for this varying, fact-intensive inquiry by narrowing the determination of a principal place of business to the corporation’s “nerve center:” the place where the corporation’s high level officers direct, control, and coordinate the corporation’s activities. According to the Court, this “nerve center” will “typically be found at a corporation’s headquarters.”
Two primary consequences are likely as a result of the Court’s invalidation of the Sixth Circuit’s “total activities” test. First, litigating diversity of citizenship will be significantly more efficient. For example, in a recent decision within the Sixth Circuit, Comerica Bank v. Meriweather Road, Ltd.4, the court noted that under the Hertz approach, determination of the plaintiff-bank’s principal place of business was controlled by the simple fact that its headquarters was located in Texas. However, the posture of the litigation required retroactive application of the total activities test, so the court engaged in a detailed, fact-intensive inquiry, considering the extent of the bank’s branch activity within Michigan and throughout the entire Midwest. After looking at various corporate statements, SEC reports, Federal Reserve records, State Comptroller records, and documents involved in previous litigation, the court’s conclusion remained the same: the plaintiff was a citizen of Texas for the purposes of diversity jurisdiction.
Second, a corporation that has the majority of its operations in one state, but its headquarters in another, now has a powerful tool for removal when an individual brings a state law claim in the state court where those operations are located. For example, a corporation whose majority of operations are located in Virginia, but whose headquarters is located in Michigan, will now be considered to have complete diversity of citizenship with a Virginia plaintiff.5 This corporate defendant can now remove to a more “business-friendly” federal court with little controversy.
Courts have, however, recognized that the uniformity and simplification of the principal place of business test could open the door for manipulation and abuse. A corporate defendant could maintain a pro forma “headquarters” in one state while maintaining actual administrative control in another. As the U.S. District Court for the Western District of Michigan has indicated, this scenario may compel a court to look beyond self-serving corporate representations and determine “the place of actual direction, control and coordination in the absence of such manipulation.”6
- 559 U.S. ___, 130 S. Ct. 1181 (2010).
- 28 U.S.C. § 1332.
- 997 F.2d 150 (6th Cir. 1993).
- No. 09-13497, 2010 U.S. Dist. LEXIS 49285 (E.D. Mich. May 19, 2010).
- This factual scenario was at issue in Harshaw v. Bethany Christian Servs., No. 1:08-cv-104, 2010 U.S. Dist. LEXIS 41322 (W.D. Mich. April 26, 2010).