Home Isn’t Just Where the Nerve Center Is
January 31, 2023
An opinion last month issued by a Texas appellate court illustrates a tempting but potentially dangerous doctrinal shortcut: applying a test developed for subject matter jurisdiction to the analysis of general personal jurisdiction. The diversity statute (28 U.S.C. § 1332) defines a corporation’s citizenship as its place of incorporation and its “principal place of business” (PPB). In Hertz Corp. v. Friend (2010), the U.S. Supreme Court resolved a split among the lower courts by interpreting PPB in § 1332 to refer to the corporation’s “nerve center.” Separately, in Daimler AG v. Bauman (2014), the Supreme Court clarified that a corporation is only subject to general personal jurisdiction where it is “essentially at home,” which would typically be the business’s place of incorporation and its “principal place of business”—but the Court did not further define what PPB would mean in the personal jurisdiction context.
Not surprisingly, courts and commentators have applied Hertz’s nerve center test to fill in this gap. But that move is not obviously correct, and it carries costs. This post uses the Texas state court decision in Borunda v. State of Chihuahua to show why.
Interpreting Statutes vs. Interpreting the Constitution
At issue in Hertz was the definition of a corporation’s citizenship for purposes of diversity jurisdiction under 28 U.S.C. § 1332. According to § 1332(c)(1), “a corporation shall be deemed to be a citizen of every State and foreign state by which it has been incorporated and of the State or foreign state where it has its principal place of business.” Resolving a circuit split, Hertz interpreted “principal place of business” under § 1332(c)(1) to mean the “nerve center” of the corporation, which “should normally be the place where the corporation maintains its headquarters—provided that the headquarters is the actual center of direction, control, and coordination” of the business. The Supreme Court intended this “nerve center” test to be a bright-line rule, even though it acknowledged that the rule would be underinclusive.
Though the language might be the same, Hertz should not control the interpretation of PPB in the context of personal jurisdiction. The Supreme Court used the PPB language in Daimler when expounding a constitutional limit on state power—a limit that no state or legislature can override without a constitutional amendment. In contrast, Hertz interpreted a statute that Congress could amend if it disagreed with the Supreme Court’s approach. Indeed, the Supreme Court in Hertz was explicitly engaged in statutory interpretation when it adopted the nerve center test, justifying its holding on grounds that depended on the text’s statutory context. As Justice Breyer wrote:
Three sets of considerations, taken together, convince us that this approach, while imperfect, is superior to other possibilities. First, the statute’s language supports the approach. … Second, administrative simplicity is a major virtue in a jurisdictional statute [particularly for subject matter jurisdiction]. … Third, the statute’s legislative history, for those who accept it, offers a simplicity-related interpretive benchmark. (emphasis added)
In short, the statutory context excused the adoption of an underinclusive bright-line rule. While administrative simplicity is certainly appealing, the disadvantages of an underinclusive rule are much greater in the constitutional context. In the constitutional context, an underinclusive bright-line rule curtails state power beyond what the Fourteenth Amendment truly requires. Something more than administrative convenience should be required to justify such an intrusion on state sovereignty.
Borunda v. State of Chihuahua
Nonetheless, the “nerve center” test from Hertz provides an easy-to-apply rule with a Supreme Court imprimatur, making it very tempting to import into the personal jurisdiction context. In a recent Texas appellate decision, the court succumbed to the temptation. In Borunda, the Mexican state of Chihuahua sued Osvaldo Rodriguez Borunda and a media company, Editora Paso Del Norte, for illicitly receiving state funds from Chihuahua’s former governor in exchange for positive press coverage. (The full suit included claims against the former governor himself, who had fled to the United States after being indicted in Mexico, as well as other affiliates.) The Texas trial court determined it had personal jurisdiction over both Rodriguez and Editora, but the court of appeals reversed in part, applying Hertz’s definition of “principal place of business” to hold that personal jurisdiction over Editora was lacking.
Chihuahua alleged that Rodriguez resided and worked in Texas and that Editora was a foreign corporation registered to do business in Texas. In filings with the state of Texas, Editora listed El Paso addresses for its principal office, principal place of business, and its managers’ and officers’ workplace; some of these documents also listed Rodriguez’s mailing address as being in El Paso. Rodriguez did not dispute on appeal that he resided and worked in El Paso, and on that basis, the appellate court concluded he was subject to the general personal jurisdiction of Texas courts.
But the appellate court found the Texas state filings insufficient to establish general jurisdiction over Editora. First, it applied Hertz to hold that “[p]rincipal place of business, for jurisdictional purposes, must be a corporation’s nerve center—where [the] company’s officers direct, control, and coordinate the company’s activities.” While it acknowledged that Hertz was interpreting the diversity statute and not general personal jurisdiction, it noted that other Texas appellate courts had similar extended Hertz’s holding.
Second, the court emphasized that the burden to establish Editora’s “nerve center” was on the plaintiff, and it again invoked Hertz to reject the plaintiff’s reliance on the Texas state filings to do so. In Hertz, it was the corporate defendant that was trying to establish its citizenship to support removal on the basis of diversity jurisdiction. The Supreme Court rejected the defendant’s reliance on its own SEC filings to establish its nerve center because such a self-interested move reeked of jurisdictional manipulation, especially as the defendant had access to better information about its own operations.
The situation was reversed in Borunda, however: it was the plaintiff attempting to establish the defendant’s PPB based on limited public information. The plaintiff didn’t have much to go on other than the Texas state filings, in which Editora listed an El Paso address as its principal office and listed Rodriguez and two others (with the same family name) as the business’s president, treasurer, and secretary, all residing at the same address. That was insufficient, the Texas court explained, to establish “where Editora’s officers regularly meet or exercise control over the company.” But Editora didn’t provide any contrary information about where its officers did regularly meet or exercise control over the company. Instead, all that Rodriguez’s affidavit established was that:
Editora does not maintain a place of business in Texas and has no employees, servants, or agents within the State of Texas. Editora has no substantial connection with Texas arising from any action or conduct of Editora purposefully directed towards Texas. Editora does not own any real estate in Texas.
The court’s skepticism in Borunda that this foreign corporation wasn’t actually based in Texas is understandable. And in general, courts are disinclined to hear disputes that seem too foreign to the forum. But by incorporating the Hertz test into personal jurisdiction, the Texas courts are limiting their own power in future cases—and in a manner that the Texas state legislature cannot override.
Foreign Plaintiffs and Local Defendants
The court further signaled its disinterest in hearing this dispute when it suggested that Rodriguez, who remains in the case, seek dismissal for forum non conveniens. U.S. courts not infrequently use forum non conveniens to get rid of cases brought by foreign plaintiffs against local defendants—even though historically dismissal for forum non conveniens was not available for cases involving in-state defendants (as Bill Dodge, Chris Whytock and I have established).
Perhaps the unease with foreign plaintiff-local defendant suits is heightened when the plaintiff is a foreign government, a phenomenon that Hannah Buxbaum, Zach Clopton, and Diego Zambrano have explored from different perspectives. But when the allegation is corruption, there might be a special need for foreign governments to sue defendants in the defendants’ home jurisdictions, as I have pointed out in the context of suits brought by the Mexican government against U.S. corporations. One would hope that courts in the United States are careful not to allow themselves to be used as a shield by citizens or residents who profit from corruption in other nations, particularly our neighbors.