By Lindsey D. Saunders. Full text here.
For purposes of federal diversity jurisdiction under 28 U.S.C. § 1332, a corporation is a citizen of both its state of incorporation and the state where it has its principal place of business. In adopting that provision, Congress provided very little guidance to the federal courts as to the method by which they should determine a corporation’s principal place of business. Rather, the federal courts of appeal apply three different tests to make that decision: the nerve center test, the corporate activities test, and the total activity test. This nonuniformity encourages forum-shopping at the federal level, breeds uncertainty, and, in many cases, serves to thwart Congress’s intent to generally limit federal jurisdiction.
The adoption of the Class Action Fairness Act of 2005, which makes it easier for corporate defendants to get into federal court, further complicates the situation. Although Congress intended for this Act to increase federal jurisdiction over class actions, certain of the principal place of business tests defeat that intent. Moreover, there are now increased opportunities for plaintiffs, defendants, and their attorneys to shop around for the best forum, class of plaintiffs, or parties to sue.
In order to address the problems raised by the nonuniform application of § 1332, Congress or the Supreme Court should adopt a uniform test for determining a corporation’s principal place of business. This Note proposes a test based on the total activity test, which balances factors relating to a corporation’s managerial, production, and service activities. This test is well-suited to a modern business environment and will produce results in accordance with congressional intent.