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Tosco Corp. v. Communities for a Better Environment

United States Court of Appeals for the Ninth Circuit · Civil Procedure

Civil ProcedureSubject Matter JurisdictionDiversity JurisdictionPrincipal Place of Business28 U.S.C. § 1332corporate citizenshipprincipal place of businessdiversity jurisdiction

Facts

Tosco, a Nevada corporation, sued a California nonprofit in federal court and alleged diversity jurisdiction on the ground that its principal place of business was Stamford, Connecticut. The defendant argued that Tosco's principal place of business was California, defeating complete diversity. The record showed Tosco had a larger concentration of employees, refineries, lubricant facilities, retail locations, convenience stores, sales, and inventories in California than in any other individual state, even though some executive and administrative offices were located in Connecticut, New Jersey, Arizona, and California. Tosco had also previously claimed California as its principal place of business in earlier litigation, though it argued later restructuring changed that result.

Issue

When a corporation has executive offices in one state but conducts substantially more business activity in another state, which test governs principal place of business for diversity jurisdiction? More specifically, did Tosco show that no single state contained a substantial predominance of its business activity so that the nerve center test should apply rather than the place of operations test?

Rule

In the Ninth Circuit, the place of operations test governs when a corporation conducts a substantial predominance of its business activities in one state, and the nerve center test is used only when no state contains a substantial predominance of the corporation's business activities. Substantial predominance does not require that a state contain a majority of the corporation's total nationwide business activity; it requires that the corporation's business activity in one state be significantly larger than in any other individual state. Relevant factors include the location of employees, tangible property, production activities, sources of income, and where sales occur.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Blue Mesa Fuels, Inc. is incorporated in Delaware and sues a Colorado nonprofit in federal court in Denver. Blue Mesa's executive headquarters are in Illinois, but 34% of its employees, 41% of its refinery capacity, 36% of its sales, and its largest inventory levels are all in Texas; the next-largest state on each measure is Louisiana, ranging from 12% to 18%.

Under the Ninth Circuit approach described in the majority opinion, which test should the court use to determine Blue Mesa's principal place of business, and what result is most likely?

Explanation. The majority opinion states that the place of operations test applies when one state contains a substantial predominance of the corporation's business activities. Substantial predominance exists when operations in one state are significantly larger than in any other individual state; it does not require a nationwide majority. Because Texas clearly exceeds Louisiana and every other single state on the key operational factors, Texas is the principal place of business even though executives are in Illinois.