In what could be hailed as a victory for employers, the U.S. Supreme Court has made it less likely that a company can be sued in state court just because it conducts business in that state. Under federal statute, a corporation is to be considered a citizen of any state in which it has been incorporated and the state where it has its principal place of business. If sued in state court, a corporation can seek to have the case moved to federal court – a move often deemed advantageous for employers – if the parties are from different states.

In Hertz Corporation v. Friend (08-1107), (pdf) the Court unanimously held that a corporation’s “principal place of business” for the purpose of establishing the business’s citizenship is the place where its high-level officers direct, control, and coordinate its activities – often referred to as the company’s “nerve center” – that will typically be its corporate headquarters. The Court rejected the Ninth Circuit Court of Appeal’s test for determining corporate citizenship, which involved first determining the amount of the company’s business activity state by state. If the amount of activity was considered “significantly larger” or “substantially predominant” in one state, then that state was to be the corporation’s principal place of business. The Court explained that the Ninth Circuit and many other courts have focused on where a corporation’s actual business activities are located, and thus have adopted “divergent and increasingly complex tests” to determine citizenship. The Supreme Court reasoned that while imperfect, using the “nerve center” test is the best approach for establishing corporate citizenship. The practical effect of this decision for employers is that it will be harder to be sued in state courts where the company is neither incorporated nor maintains its corporate headquarters.