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Federal District Court Applies Supreme Court's 'Nerve Center' Test

By Robert S. Reder, David S. Schwartz and Brian P. Murphy

Last year, the U.S. Supreme Court resolved a conflict among the federal circuits by establishing a uniform interpretation of the phrase “principal place of business” for determining corporate citizenship under 28 U.S.C. ' 1332(a), the federal diversity jurisdiction statute (the “Diversity Statute”). In Hertz Corp. v. Friend (130 S.Ct. 1181 (Feb. 23, 2010)), the Supreme Court ruled that corporate citizenship should be determined on the basis of the specific location of a corporation's “center of direction, control, and coordination” ' usually, but not always, the state in which its principal headquarters is located. This methodology is aptly labeled the “nerve center” test. To avoid potential “attempts at manipulation,” the Hertz Court explained that a nominal principal office consisting of “nothing more than a mail drop box, a bare office with a computer, or the location of an annual executive retreat” will not suffice to establish a corporation's nerve center.

Recently, in Brewer et al. v. SmithKline Beacham Corporation d/b/a GlaxoSmithKline (Civ. Action No. 10-4443 et seq. (E.D. Pa., March 24, 2011)), the United States District Court for the Eastern District of Pennsylvania applied Hertz in deciding the citizenship, for purposes of the Diversity Statute, of an operating entity organized as a limited liability company (“LLC”) within a corporate holding company structure. In a fact-specific ruling, the district court found that “for purposes of determining the citizenship of a limited liability company whose sole member is a holding company that does not direct or control the operations of the limited liability company, we look to the 'nerve center' of the limited liability company to which the holding company has delegated the operational decision-making.”

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