In a unanimous decision Tuesday in Hertz v. Friend, -- U.S. --, No. 08-1107, 2010 WL 605601 (Feb. 23, 2010), the Supreme Court clarified the test federal courts should apply to determine a corporation’s citizenship for purposes of diversity jurisdiction, holding that corporations are citizens of the state of their “nerve center” – usually their corporate headquarters – not of any state where a plurality of their business activity occurs.

As explained in a recent Kelley Drye client advisory, the Hertz decision resolves years of uncertainty about how to determine a corporation’s “principal place of business” for purposes of diversity jurisdiction. Numerous circuits, including the Ninth Circuit, have applied the so-called “total activity” test, which assessed the amount of the corporation’s activity in each state and deemed the corporation a citizen of any state in which its activity was “significantly larger” or “substantially predominates” over its activity in other states. This test left many national companies, including Hertz, unable to remove state-court class actions to federal court in populous states such as California, where they are not headquartered but do a large amount of business. The Hertz decision rejects the “total activity” test and adopts a simpler test, applied in the Seventh Circuit, known as the “nerve center” test. Under this approach, a corporation’s “principal place of business” is “the place where a corporation’s officers direct, control, and coordinate the corporation’s activities… [which] should normally be the place where the corporation maintains its headquarters.”

The Court’s decision should be welcome news to corporate defendants, as it will provide greater certainty and predictability about where major litigation affecting multi-state businesses will be litigated, and is likely to limit the need for costly jurisdictional discovery in many cases going forward.

Supreme Court Clarifies Diversity Jurisdiction Standard