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Supreme Court’s Got Nerve (Test)

by Bruce Jobse

While the software and online services industries are holding their breath for the US Supreme Court’s decision in In re Bilski, likely to arrive next week; many businesses and corporations are still smiling from the Supreme Court’s unanimous decision earlier this year in Hertz Corp. v. Friend, in which the Court adopted the so-called “nerve-center” test used to determine a corporation’s principal place of business.

A corporation’s principal place of business is important because it determines whether a litigation originally brought in state court can be removed to a federal court.  In the case at issue, employees of Hertz Corporation brought a class-action suit in California state court for failure to pay overtime.  Hertz attempted to remove the matter to federal court; however, the lower federal district court, and later the Ninth Circuit Court of Appeals, found that because of its large number of rental facilities, employees, assets, etc. in California, Hertz was a citizen of that state.  Consequently, Hertz could not defend the matter in federal court since disputes between two citizens of California (the employees and the Corporation) rightfully belong in California state court. Such analysis was being used by other federal appeals circuits as well.

Upon review, the Supreme Court chose the competing and more popular standard, the nerve-center test, which looks to where a corporation’s officers direct and control business activities, as the simplest indicator of a corporation’s principal place of business.  Justice Stephen Breyer, writing for the Court, stated “Complex jurisdictional tests complicate a case, eating up time and money” and “encourage gamesmanship.”  Justice Breyer further noted that in most instances the nerve-center test promotes predictability, allowing businesses to make better decisions and investments, and enabling would-be litigants to determine whether to sue in state or federal court.  Consequently, the Ninth Circuit’s opinion was vacated and the matter remanded for further consideration.

As you may already know, we’re big fans of decisions that add some clarity to our decision-making processes, so this unanimous decision and the nerve-center test, which we believe will promote greater predictability, get our “two thumbs-up.”


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