Supreme Court Rules ‘Nerve Center’ Test Determines a Company’s Real Headquarters

This story appears in the March 8 print edition of Transport Topics.

A unanimous ruling by the Supreme Court clarifies how companies with “far-flung” business operations should establish a home base for litigation purposes, and will probably move some civil suits to federal venues rather than state courts in the future, said lawyers familiar with the case.

American Trucking Associations filed a brief in favor of petitioner Hertz Corp. and endorsed the high court’s Feb. 23 ruling as written by Justice Stephen Breyer in the case of Hertz v. Friend, which was resolved in Hertz’s favor.

The court’s opinion endorses a “nerve center” test for determining a corporate home; it’s where a company’s top officers generally meet in order to direct daily operations. The case went through courts in California, including the 9th U.S. Circuit Court of Appeals.

“This settles the law and creates a level playing field. It’s a very good opinion for business, in my opinion,” said James Hanson, a name partner in Scopelitis, Garvin, Light, Hanson & Feary of Indianapolis.

A veteran litigator for trucking companies, Hanson said he generally prefers to try cases in federal courts rather than state ones.

“As an example, I’ve got class-action cases in California that have federal issues that are unique to transportation, and I want them decided by a federal court,” Hanson said. “The application of laws in federal courts is generally more even-handed. Not all state courts and state judges are bad, certainly not, but as a general rule, the quality of federal judges is better,” he said.

Hanson added that federal judges also are usually much more experienced with the federal laws and rules related to interstate commerce that form the foundation of laws related to trucking.

Choosing between federal and state courts can have practical importance to a trucking company, said ATA Chief Counsel Robert Digges.

“This allows greater access to federal courts, where a company is probably more likely to receive an unbiased hearing as an out-of-state business,” he said.

“This circles back to the notion of tort reform, which is universally an issue in state courts. You don’t want to have to litigate as a foreign corporation in a state court,” Digges said.

The case started in September 2007 when Hertz, based in Park Ridge, N.J., was sued by employee Melinda Friend in California, alleging the company violated the state’s wage-and-hour laws. The case expanded into a class-action suit.

The opinion’s summary said the case started in California state court, but Hertz “sought removal to the Federal District Court . . . claiming that because it and respondents were citizens of different states, the federal court possessed diversity of citizenship jurisdiction.”

Friend’s attorneys argued that Hertz should be considered a California citizen, for the purposes of litigation, because Hertz did more business in California than in any other single state, according to the summary.

Breyer’s opinion traced the history of corporate citizenship and state and federal courts back to 1789, the year the federal government started. The opinion listed and analyzed competing theories over time on how the issue should be judged, but settled on the nerve-center standard, in part because it is simple and direct.

“We conclude that ‘principal place of business’ is best read as referring to the place where a corporation’s officers direct, control and coordinate the corporation’s activities,” the opinion said.

“Simple jurisdictional rules also promote greater predictability. Predictability is valuable to corporations making business and investment decisions,” the opinion continued. “Predictability also benefits plaintiffs deciding whether to file suit in a state or federal court.”

“Hertz is gratified by the Supreme Court’s decision. We applaud . . . the common-sense approach in determining where major business litigation affecting multistate businesses should be handled,” said Hertz Chairman and CEO Mark Frissora in a prepared statement.

“The opinion impacts every corporation doing business on a nationwide basis, allowing legal disputes between citizens of different states to be decided in a federal court, rather than state court,” Frissora added.

While Hanson of Scopelitis praised the opinion’s clarity and directness, he said there was at least one issue left to be decided: the notion of whether a headquarters refers to a holding company’s main office or an operating company’s main office when the two are in different cities.

For example, Con-way Inc. is based in San Mateo, Calif., whereas less-than-truckload carrier Con-way Freight is based in Ann Arbor, Mich., and Con-way Truckload is based in Joplin, Mo. That would leave an open question, Hanson said, as to where the nerve center really is.