The U.S. Supreme Court said a corporation's principal place of business is where its top executives work, typically at the corporate headquarters, rather than where its products or services are sold.
Tuesday's 9-0 ruling in favor of Hertz Global Holdings Inc may limit the ability of parties to pick and choose among courts, including in their own states, to find one with particularly favorable laws or conditions under which to sue.
It is also intended to resolve confusion among lower courts that had adopted many standards to assess where corporations did business in deciding whether to exercise jurisdiction.
In the Hertz case, two California citizens sued the car rental company in California state court for alleged violations of that state's wage and hour laws.
The plaintiffs said Hertz was a California citizen, subject to the jurisdiction of state courts, because of the business it conducted there. They sought class-action status.
Hertz sought to move the case to federal court. It said its core executive functions were at its Park Ridge, New Jersey, headquarters, that it operated in 44 U.S. states and that it did less than 20 percent of its business in California.
A federal district court ruled against Hertz, finding that California was its principal place of business because it did significantly more business there than anywhere else. The U.S. Ninth Circuit Court of Appeals affirmed.
Justice Stephen Breyer, writing for the Supreme Court, disagreed, saying the 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.
This, he said, is known as the corporation's nerve center and is typically its headquarters.
Breyer said federal courts had adopted a range of increasingly complex tests for where corporations conducted business. He said this task seemed doomed to failure given that corporations come in many forms, and do business in many ways and in many regions.
Courts do not have to try to weigh corporate functions, assets, or revenues different in kind, one from the other, Breyer wrote. Our approach provides a sensible test that is relatively easier to apply.
The Supreme Court vacated the Ninth Circuit ruling and returned the case to lower courts for further proceedings.
The case is Hertz Corp v. Friend, U.S. Supreme Court, No. 08-1107.
(Reporting by Jonathan Stempel; editing by Andre Grenon)