Diversity Jurisdiction: Federal Courts Struggle To Determine Corporate Citizenship
This week the U.S. Supreme Court heard oral argument in Hertz Corporation v. Friend. The case presents a significant issue of conflict between the various Federal Circuits. At issue -- Where is a corporation's principal place of business for purposes of establishing diversity jurisdiction in Federal Court.
For purposes of diversity jurisdiction, corporations are considered citizens of both the state of their incorporation and the state of their "principal place of business." Since Federal Courts can generally have diversity jurisdiction of typical state law claims where:
(1) the amount in controversy exceeds $75,000
(2) the parties are completely diverse in their citizenship, the attorney who handles claims involving significant damages should thoroughly understand the basis and procedures related to this jurisdiction.
In the last couple of years, our 11th Circuit has decided a number of cases in an effort to define and determine the issues surrounding the amount in controversy element. The implications of those decisions should be considered by the attorney from his very first act of representation. However, the amount in controversy element was not an issue in Hertz.
The Hertz case arises out of an appeal from a 9th Circuit decision determining a party's "principal place of business." How divided are the various Federal Circuit Courts on this issue? In general, the following tests are employed by each Circuit:
- NERVE CENTER TEST. This test, used by the 7th Circuit, generally finds a corporation's principal place of business to be located where the corporation has its executive headquarters.
- CENTER OF CORPORATE ACTIVITIES TEST. This test, used by the 3rd Circuit, looks for the corporation's "headquarters of day-to-day corporate activity and management." Kelly v. U.S. Steel Corp., 284 F.2d 850, 854 (3rd Cir. 1960).
- PLACE OF OPERATIONS TEST. This test is used by the 9th Circuit. It involves a focus on the corporation's business operations such as plants, employees, and assets. Under this test, the court generally does not consider the corporate nerve center or headquarters unless no single state contains a predominance of business activities.
- TOTAL ACTIVITIES TEST. This test is employed by the 5th, 6th, 8th, 10th, and 11th Circuits. Here, the court considers the total activity of the company as a whole. Although more comprehensive, this test can also be more subjective and lead to varying opinions.
Why is this issue important? First, the ultimate issue of corporate citizenship is important in determining whether a controversy should be heard in Federal Court pursuant to diversity jurisdiction or in a local state court. Second, the conflict in analysis between the various Federal Circuits can lead to different conclusions and applications as to corporate citizenship in different courts.
