DOING BUSINESS OUTSIDE YOUR STATE: FOREIGN QUALIFICATION
What does it mean to qualify to do business in a foreign state, and is it something your company needs to do? What are the legal ramifications if you don’t qualify? If you’re a corporate attorney, are you prepared to advise clients on the matter?LEARN MORE
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Join CSC for a complimentary CLE webinar presented by Matthew J. O’Toole, Michael P. Maxwell, and Alyssa Gerace Frank of Potter Anderson & Corroon LLP, on state foreign qualifications, recent case law, and critical principles of conducting business outside your state.
Disclaimer: Please be advised that this recorded webinar has been edited from its original format, which may have included a product demo. To set up a live demo or to request more information, please complete the form to the right. Or if you are currently not on CSC Global, there is a link to the website in the description of this video. Thank you.
Annie: Hello, everyone, and welcome to today's webinar, "Doing Business Outside Your State: Foreign Qualification." My name is Annie Triboletti, I will be your moderator.
Joining us today are guest speakers Matt O'Toole and Alyssa Frank from Potter Anderson & Corroon and Harry Davis from CSC. Unfortunately our colleague Mike Maxwell is no longer able to join us, but nonetheless I would like to welcome Matt, Alyssa, and Harry and turn things over to them.
Matt: Thank you, Annie. Good morning, everyone. My name is Matt O'Toole. I'm a partner with the Wilmington, Delaware law firm of Potter Anderson & Corroon. As Annie mentioned, joining me today is my Potter Anderson colleague Alyssa Frank, and Harry Davis from CSC is also presenting with us today. Annie mentioned that Mike Maxwell is unable to participate as has been planned, and he does send his regrets.
Today we will be discussing foreign qualification of business entities, and as we progress with the discussion we'll unpack some of the basic top terminology that we're using, including words that I just spoke specifically, "foreign" and "qualification."
So the agenda items for today's presentation are up on the screen now. This, as you might imagine, is the introduction, and we will cover in addition corporate activities that generally do not require "qualification," corporate activities that generally do require qualification, recent case law developments, how corporations qualify, cure failures to qualify, and terminate their qualification, also the consequences of failing to qualify, other regulation of foreign entities, and then at the conclusion of our discussion, depending on the time available, we can address some questions and so forth.
So one thing to keep in mind is that Alyssa and I are Delaware attorneys, and so not surprisingly our experience generally involves and focuses on Delaware law issues. That being the case, we'll use examples from Delaware law to illustrate general concepts that may apply across jurisdictions. But bear in mind that this presentation is intended to provide an overview of the foreign qualification process, including when to qualify, why qualification is required, how an entity goes about qualifying, and what happens if an entity should be qualified but does not do so.
This overview does not relate to any specific state's laws, and each circumstance, each situation must be evaluated based on the particular facts and circumstances of the business entity's situation, including the nature, extent, scope of its business and applicable state law. In other words, each state has its own rules when it comes to foreign qualification, and needless to say it's always important first to check the relevant statutes in any given state.
Fortunately, those laws are conveniently described in the "Qualification Handbook" that is published by CSC. If you are not familiar with the handbook or don't have a copy, you're missing a valuable resource if you address these issues either frequently or even just from time to time. If you have questions about how to obtain a copy of the handbook, someone from CSC will be happy to provide answers.
So with that as preface, the first question we'll consider this morning is why attorneys, paralegals, business decision-makers need to be aware of qualifying to do business in a foreign jurisdiction. Most of us understand that a company, whether it's a corporation, an LLC, a partnership, or some other form of business organization, in many if not most cases is a legal entity, typically created under the laws of one particular state. For purposes of today's discussion, we'll call that its home state.
This is the prototype company on which we'll concentrate today. We're presupposing an entity that is formed under the laws of a U.S. state, such as Delaware. We're not addressing non-U.S. entities or entities that exist under federal law, such as national banks.
So the company exists because the laws of its state of formation grant the privilege of formation and enable the entity to conduct business. As long as the company is properly formed and conducts business wholly within its state of formation, its home state, the company should not be subjected to regulation by other states. In the modern economy however, a company rarely limits its operations to the home state, and therefore, before a company conducts business outside its state of formation, it should determine whether its proposed business activities will require the company to "qualify" under any foreign state's laws.
Now as I said at the outset, we have some basic terminology to unpack here. So as I said, we're addressing business entity qualification in a foreign state. Let's focus now on those last two words, "foreign" and "state."
For purposes of this discussion, "foreign" means other than the business entity's state of incorporation or formation. In other words, "foreign" means not home, not the home state. And the term "state," as used in today's discussion, means one of the 50 states. We are not covering non-U.S. law here, and we're not covering municipal or county laws. So "foreign state," as we use the term today, refers to the 49 states other than the business entity's home state.
Qualification statutes, foreign qualification statutes under the laws of the 50 states stem from a variety of factors, among them each state's desire to subject companies conducting business within that state's borders to the jurisdiction of that state's courts so that those courts can render valid judgments against the company in the event that a lawsuit is initiated against the company in that foreign state. The assessment of foreign qualification requirements involves a 50-state analysis, and determinations whether a company is "doing business" in a particular state requires reference to those varied state laws.
In those laws, "doing business" is often defined in the negative. Some statutes list activities that alone are insufficient to require qualification in a foreign jurisdiction. Those lists are termed as exceptions to doing business. Examples of those types of statutes include Section 373 of the Delaware General Corporation Law, the DGCL and Section 18-912 of the Delaware LLC Act. And we'll touch on those Delaware specific statutes further along in the course of this discussion.
We should note at this point that qualification laws, foreign qualification statutes are not exclusive. They're not the only thing that a business entity needs to focus on when it's doing any sort of business outside of its home state. Other state laws may apply to "foreign entities," licensure statutes, substantive regulatory schemes, tax laws. We are not in this program addressing all aspects of an entity's conducting business outside its home state, and specifically we are not speaking here to licensure, regulatory, or tax issues. We're looking at foreign qualification laws only.
So a business entity is formed or incorporated or otherwise organized under the laws of a single state. Often that is the state of Delaware, not necessarily the case however. But as noted, many entities conduct business, frankly most entities conduct business in multiple states, and regulation of business activity, as I mentioned, varies state by state.
If a business is organized under the laws of the state of Delaware for example and wishes to do business in another state, say the state of Florida, it needs to qualify in that latter state, in this hypothetical, Florida. This is foreign qualification, and "qualification" is the last basic term we should define for purposes of our discussion today.
In this context, qualification largely equates to registration. We're talking about a formal step to place a company on the record. So again, while the term "foreign qualification" might evoke notions of an entity from another country satisfying some set of substantive standards, really what we're referring to here has to do with a domestic company, U.S. company formed under the laws of one of the 50 states conducting business activity in another state beyond its home state and the need for that entity to take required ministerial steps to register in that foreign state, to qualify in that foreign state.
All states have enacted laws requiring foreign entities doing business in that state to "qualify." And Alyssa is going to talk now about why states want entities, require entities to qualify to do business. Alyssa.
Alyssa: Yes. So as Matt already mentioned, one of the reasons why is because the state might want to have jurisdiction over the company that's doing business in its state. But there are many other reasons why a state might want a so-called foreign company to register to do business.
Usually the entity is going to have to file annual or semi-annual reports, and it will also have to hire and engage and maintain a registered agent for service of process within the state in which it's doing business outside of its home state. So this has dual benefits for the "foreign state" in terms of collecting filing fees and providing business to in-state registered agents.
States also want to be able to protect their citizens and their local businesses. By requiring a business to qualify to do business in a foreign state, that state can gather information about the business, the nature of the business, and where it's being operated. It can also provide information for the state to be able to evaluate tax and other reporting or licensing requirements. In particular, the state may want to ensure that a foreign business is subject to the same sorts of licensing requirements that a local business is so as not to provide an unfair advantage to the out-of-state company.
Matt: Thanks, Alyssa, and I'll just note there in regards to the remarks Alyssa just gave that oftentimes there's a question, when a state is qualifying outside its home state, who to choose as the registered agent. And our sponsor today, CSC is a leading provider of registered agent and registered office services and is able to provide those services in all 50 states.
So the factors that Alyssa just mentioned are all legitimate state interests, and there are others that would justify qualification statute, but this doesn't mean that states have unlimited authority when it comes to business regulation. And that's because the United States Constitution insulates interstate commerce from regulation by the 50 states. States are entitled to regulate activity, business activity to the extent it occurs within state boundaries. That's the fundamental distinction that implicates state regulation.
Notably, however, the federal government is not out there actively enforcing the Constitution. There's no dedicated constitutional enforcement department within the federal government. States on the other hand do actively enforce their business laws, and primary reasons for that, generally speaking, come down to a state's interest in protecting its constituents, which Alyssa mentioned, and also and not insignificantly generating revenue.
Alyssa, why don't you take a few minutes now to talk about the types of activity that will require a company to qualify to do business in a foreign state.
Alyssa: Sure. So Matt, as you noted earlier, the first thing a company should do is get a copy of CSC's handbook that we've been referring to because it examines questions just like these and offers case examples to help legal professionals begin to understand whether a particular company needs to qualify to do business in a foreign state.
And next, you should review the qualification statute in each applicable foreign state, which these are also included in the CSC "Qualification Handbook." So we can provide some general advice on these statutes today, but it's not a substitute for reviewing the actual laws of each state.
So with that said, many qualification statutes define "doing business" in the negative. And what that means is that when defining doing business, the statutes provide a list of activities that by themselves are insufficient to require a company to qualify in that foreign jurisdiction. These listed activities are normally referred to as exceptions to doing business.
For example, Delaware, where Matt and I practice law, defines which activities do not constitute doing business in each of its business entity statutes. If a company engages in any activities in Delaware that are not included in Delaware's exceptions to doing business, then the company must generally qualify to do business in Delaware or risk penalties for failing to do.
The potential penalties for failing to qualify will be discussed later in our presentation. But depending on the state, those penalties can include being barred from enforcing contracts or being barred from bringing a lawsuit in the state. It can also include possible monetary penalties. And in some states there is even individual director liability.
You should note that if a company does engage in activities in a particular foreign state that are considered exceptions to doing business and as such does not have to qualify to do business in that state, that doesn't mean that the company is not subject to personal jurisdiction or taxation in the state. A company may be subject to personal jurisdiction or taxation in a state by performing activities that are insufficient to cause the company to need to qualify to do business in that state. As such, it's important to keep in mind the other contexts in which a company's transactions of business have consequences, such as jurisdiction and taxation. We'll talk about some recent case law developments with respect to personal jurisdiction later in this webinar.
One last thing to note on this point, there may be exceptions to the qualification rules for particular types of businesses or industries. For example, in Delaware there is an exception for out-of-state insurance companies. They are not required to qualify to do business in Delaware with the Secretary of State. However, they are subject to separate rules under other roles, such as the State Insurance Code. Therefore, it's important to keep in mind that regardless of whether a company is required to qualify to do business in a foreign state, there can be other licenses, permits, or regulatory issues that the company may need to comply with in order to do business in a particular state.
Matt: Thanks, Alyssa. Let's move on to types of activities that may distinguish between a company being considered to doing business in another state or not. The company may be subjected to negative consequences, including penalties, if it transacts business in a foreign state without first qualifying to do business there. But not all corporate activities require a company to qualify.
The question whether a company is doing business in a particular state for qualification purposes is determined on a case-by-case, state-by-state basis. One generally broadly recognized definition of doing business in a state is "regular, repeated, and continuous business contacts of a local nature." And this is a definition adopted by the Pennsylvania Supreme Court in a 1997 case, American Housing Trust III v. Jones.
Of course, different courts can and do interpret and apply this definition and other applicable definitions differently. For that reason, as I mentioned, a case-specific factual evaluation of the activities of a company need to be made in each situation. The doing business evaluation is highly fact intensive. The first step in the assessment requires identifying the applicable jurisdiction, what state are we talking about, and then the relevant statutory provisions, including the provisions it has about what does not qualify or constitute doing business in the state.
This initial evaluation step also requires an understanding whether there are different statutes to consider, and this will depend on the type of entity at issue. You'll recall earlier I mentioned a couple of different Delaware statutes, one in our General Corporation Law, one in our LLC Act. Those statutes apply to corporate foreign, non-Delaware corporations on the one hand and foreign non-Delaware limited liability companies on the other hand. And in addition, we've got similar types of statutes that apply to different types of entities, for example non-Delaware limited partnerships. So it's important to be aware of the entity type of the company at issue when you're trying to determine which statute, which statutory scheme in a foreign state will apply to the particular case. Section 373 of the General Corporation Law, 18-912 the LLC Act in Delaware are just two examples of those different types of statutes.
So once the governing statutes, including exceptions to doing business provisions have been identified, the next step is to review any relevant case law to understand how the courts in the particular state have interpreted and applied the applicable provisions, including the exceptions. And generally speaking, the judicial decisions involve one of two predominant factual scenarios.
One frequent scenario involves a plaintiff company undertaking to litigate in a foreign state where it has not qualified to do business. In this scenario, the defendant typically attempts to prevent the suit, whether it's by a motion to dismiss or some other means, by arguing that under the applicable law of the foreign state, the forum state, the plaintiff non-home state entity, foreign entity is barred from accessing the foreign state's courts because the plaintiff's activities constitute doing business in that state and the plaintiff has failed to qualify. We'll talk a little bit more about this sort of litigation bar as a consequence for non-qualification, but Alyssa mentioned it a few minutes ago as one of the possible consequences that flow from non-qualification when qualification is mandatory.
Another frequent scenario that plays out in the case law, that elucidates the determination of whether a company is doing business or not in a particular state involves a non-qualified company as the defendant. So here you have the business entity in litigation outside its home state, and it's attempting to avoid the suit in that foreign state, so it's the defendant company, and it would be arguing that it can't be sued in the foreign state because it is not or was not doing business there. And again, the procedural posture could be a motion to dismiss, perhaps some other means for framing out the argument that the case should not be allowed against the foreign entity.
In both the scenarios that we've talked about, the foreign entity as plaintiff or here the foreign entity as defendant, the non-qualified foreign entity attempts to demonstrate that its activities in the foreign state do not rise to the level of doing business in that state. A court resolving this issue generally analyzes the relevant statutes to determine whether a company's activities require qualification. Accordingly, a company ordinarily will be served well by consulting experienced counsel and others who can help it navigate this doing evaluation of whether it has done business or is doing business in the state. And sometimes the issue comes up in the context of qualification or non-qualification.
These issues also arise in the context of arguments about personal jurisdiction or lack thereof. We'll talk about personal jurisdiction during the course of this presentation, we've touched on it already a little bit, not because that's the primary consideration that we're looking at today. In fact, clearly it isn't. But those personal jurisdiction considerations can illuminate some of the issues we're talking about relative to the question of whether a company is "doing business" in a foreign state for purposes of the qualification statute.
With that said, as previously mentioned, there are a number of corporate activities that typically do not require qualification, also known as exceptions to doing business or safe harbors. Alyssa, can you spend a little time reviewing for us some of these exceptions to doing business that typically appear in state qualification statutes?
Alyssa: Sure. So there are a number of general exceptions that are common across the various state statutes. Again, keep in mind that these are being discussed today only in general terms and you'll need to look to the individual state statutes for specific exceptions.
With that said, the first exception that you'll see on the screen is litigation. A typical statutory provision would say that a company may maintain, defend, or settle any proceeding in the state without first qualifying to do business there. Thus, if a company's only activity in the state is to commence a lawsuit, then the company need not qualify to do business in that state.
The next exception is that a company may hold meetings of a board of directors of the company and carry on certain internal corporate activities in a foreign state without having to qualify to do business there. Additionally, merely maintaining a bank account in a foreign state typically does not require qualification to do business.
Another common exception is that a company may maintain offices or agencies for the transfer of the company's own stock and securities without having to qualify to do business. And generally speaking, a company is not conducting business for qualification purposes if it sells goods in a foreign state through independent contractors, but only so long as the sales transactions maintain interstate characteristics.
Additionally, soliciting or obtaining orders through mail, employees, agents, or other channels in a given state usually does not trigger the qualification requirement, provided that the orders require acceptance outside of that particular state before they become contracts.
The next exception on this slide typically is invoked by banks that create mortgages and then foreclose on the property secured by that mortgage. The states which have adopted these exceptions have agreed that creating mortgages and indebtedness and enforcing mortgages and security interests in property, securing such indebtedness do not require the bank or company seeking to collect on the debt to qualify in the jurisdiction where the property is located.
A somewhat related exception involves merely owning real or personal property in a foreign state. Although many states have adopted this exception, few state courts have interpreted it, and that makes it difficult to draw general conclusions about the corporate activities that might fall under this protection.
Conducting an isolated transaction that is complete within 30 days and that is not one in the course of repeated transactions of a like nature generally does not constitute doing business for qualification purposes. It should be fairly simple to determine whether a company has complied with a statutory time limit in this exception, but it might be much more complicated to determine whether a company's activities constitute an "isolated transaction." The answer to that question can vary from state to state, and it's important to analyze the case law for the particular at issue to determine how that state's court interpret the isolated transaction exemptions. As a general matter, it is important to understand that a single act or transaction can be more than an isolated transaction if it indicates a willingness or intent to conduct other business in the state. The key issue is whether the activity is sporadic and isolated, such that it does not constitute carrying out the ordinary affairs of the company.
The next general exception is for interstate commerce, the concept that Matt briefly touched on a few minutes ago. The Commerce Clause of the United States Constitution prohibits states from regulating interstate commerce. States can only regulate intrastate commerce, meaning commerce within that state. Consequently, many states have adopted the exemption of transacting business in interstate commerce. Note however, that the interstate commerce exception will apply even in those states that have not specifically codified it because the U.S. Constitution overrides state law. Therefore, if a company's activity within the state is merely incidental to interstate commerce, the company will not trigger the qualification requirements. However, if the activity becomes routinely localized in a particular state, the company will be required to do business there.
Finally, the last exception that we wanted to note is the exception for companies that are responding to state declared emergencies. As of early 2021, around half of U.S. states have enacted legislative exceptions to their qualification rules for foreign companies that transact business or services in a state due to state disasters or emergencies. And three more states have introduced similar bills since then. Much of this can be attributed to a model business act adopted by the National Conference of State Legislatures adopted in 2014, called the Facilitating Business Rapid Response to State Declared Disasters Act of 2014.
Matt: That's a pithy little title, isn't it?
Alyssa: The idea behind the model act is to provide states with model legislative language to waive qualification requirements for companies involved in the rapid response to state declared emergencies, such as earthquakes, tornadoes, or man-made disasters like chemical spills. Although more states adopted similar acts in light of the COVID-19 pandemic, not all states have adopted a version of the model act. So it's important to check applicable state law.
Matt: Thanks, Alyssa. One additional thing to remember regarding general exceptions to doing business is that the exceptions we're talking about are generalizations, and I appreciate the fact that we're sounding a bit like a broken record on this point. But each state's statutes may have exceptions different from those we've discussed here.
For example, as we mentioned earlier, the Delaware General Corporation Law provides an exception to qualification requirements applicable to an insurance company doing business in Delaware. The type of entity you're dealing with will often dictate, as we mentioned earlier, which statute a company needs to look at to determine what the exceptions are. A foreign LLC engaging in activity in Delaware, as I mentioned, needs to look at provisions of the LLC Act. An out-of-state limited partnership needs to look at relevant provisions in the limited partnership statute.
So let's move on to the next slide and let's talk about what doing business means on a general level and the types of activities and conduct that constitute doing business.
Alyssa: Sure. So there are certain types of activities or actions that will generally trigger a finding of doing business in a state. For example, if you have a physical presence in a state and you hold yourself out as doing business there, such as a listing in a phone book or some other business directory or a website showing an address in that state, or if you advertise in that state, you're likely going to be considered to be doing business in that state. If you're considering whether you should register in a particular state, consider the scope of your business activities there, such as whether you have a physical location, you have employees in that state, if you take meetings with customers regularly in that state, or if you generate significant revenue in that state on an ongoing basis thanks.
Matt: Thanks, Alyssa. So we have activities conducted in a foreign state that qualify as regular, systemic, extensive, and continuous, that is to say the kinds that can trigger a qualification requirement. As you might imagine and as we've discussed already, this area of the law is fact intensive. Many corporate acts fall into a gray area between those activities that obviously require qualification and those that just as obviously do not require qualification. This is a spot where the CSC "Qualification Handbook" can come in very handy because it delves into the activities that are likely to require qualification or the converse.
So while this list on the slide is not exhaustive, it's representative of the kinds of activities that typically require qualification. These include accounting services, provision of accounting services, advertising, banking, construction. As you can imagine think about the factual nature of a construction project, it seems sensible that that would constitute doing business in a particular state. Also sales activity, including third-party sales.
So Alyssa will now touch on a few of the examples listed here.
Alyssa: So ultimately in determining whether a company is doing business in a state, there will be an analysis that takes into account the totality of the circumstances. In other words, if a company is engaging in multiple activities that on a one-off or even two basis would otherwise be exempt or be considered to be an activity that's an exception to doing business, the cumulative effect of those activities might result in a finding that the company is doing business in the state. So we're going to go through just a couple of the examples that were listed on the previous slide, and we'll start with accounting.
As noted in CSC's "50 State Guide to Qualification," many states have enacted licensing statutes requiring out-of-state certified public accounting companies to obtain temporary permits before practicing in those states. Although the CSC books does not discuss these licensing requirements, accounting companies should note that they must obtain these temporary permits before conducting accounting activities in those states. Courts will often consider the state's licensing laws as one of several factors when determining when a foreign accounting company is doing business in the state for qualification purposes.
We're next going to talk about banking. Most states have general qualification statutes that identify the maintenance of a bank account as a business activity that does not require qualification. In the four states that do not provide a bank account exception, the question becomes whether maintenance of a bank account triggers the obligation to qualify as a foreign company. For example, the Delaware qualification statute is silent as to whether maintenance of a bank account in Delaware requires qualification. At least one commentator has suggested however that the maintenance of a Delaware bank account alone or even together with some other minor activities, such as advertising in a Delaware newspaper, would not by themselves be sufficient to constitute doing business in Delaware.
Matt: Thanks, Alyssa. We'll touch briefly here on recent case law developments relating to personal jurisdiction, which can be affected by qualifying in a foreign state. To set the table, personal jurisdiction is a legal concept. It refers to a court's authority over each party involved in a particular lawsuit and includes the court's power to render an enforceable decision against those litigants.
One type of personal jurisdiction is general jurisdiction. If courts of a particular state have general jurisdiction over a party, that means that the court can render a decision against that party relating to any issue regardless of whether the lawsuit is related to the party's contact with the state or not. On the other hand, if a court has only specific personal jurisdiction over a litigant, the court may decide only a case that arises out of or relates to that party's specific contacts with the state.
With that as background, we'll run through some recent case law now, and Alyssa will talk about a pending Supreme Court decision that could have a big impact on company decisions whether to qualify to do business in foreign states.
So in 2014, the U.S. Supreme Court decided the case Daimler AG v. Bauman. Personal jurisdiction can be established if a foreign company has a principal place of business within the state where the suit is brought or if the company is incorporated in that state. But if neither of those elements is present, then in order to find personal jurisdiction over the party, the court must determine "whether that company's affiliations with the state are so continuous and systematic as to render it essentially at home in that state." In other words, the contacts must establish the same type of close relationship with the state where the suit is filed as would being incorporated there or owning a principal place of business in that state.
State courts have reacted to the Daimler decision in different ways. One example is the Delaware Supreme Court's 2016 Genuine Parts decision, and that decision interpreted state law in light of Daimler. In Genuine Parts, the Delaware Supreme Court held that merely registering to do business in the state, in other words qualifying in Delaware and merely having a registered agent, under the qualification statute, appointed to receive service or process in Delaware does not subject a foreign corporation to general personal jurisdiction in Delaware for claims unrelated to Delaware. The Delaware Supreme Court said that qualification in Delaware does not amount to a broad consent to personal jurisdiction in any cause of action and that any use of the service of process provision for registered, i.e., qualified foreign corporations must involve an exercise of personal jurisdiction consistent with the due process clause of the 14th Amendment. And this shows you the interplay between personal jurisdiction cases and qualification statutes, one example of that interplay.
More recently, in 2021, the U.S. Supreme Court unanimously held, in a case called Ford Motor Company v. Montana Eighth Judicial District Court, that when a company serves a market for a product in a state and that product causes injury in the state to one of that state's residents, the state courts have specific personal jurisdiction to hear the case. The main legal issue in this decision was whether state courts have specific personal jurisdiction over a corporate defendant that has purposefully availed itself of doing business in the forum state but has not directly caused the plaintiff's injuries in that state through its conduct in that state.
The particular case, Ford Motor Company case, it involved two companion cases, each of which involved a plaintiff who was resident in the forum state, who was injured in the forum state by an allegedly faulty Ford vehicle, and Ford did not design or manufacture that vehicle in the forum state, nor did it sell the vehicle to a dealer in the forum state. In each case in short, Ford had nothing to do with the allegedly faulty vehicle's presence in the forum state as each plaintiff bought its vehicle in a secondary market through a private sale. It was a used car.
Despite these facts, the U.S. Supreme Court found that the forum state properly did have personal jurisdiction. The Court parsed whether each plaintiff's claim had arisen "out of or related to" Ford's activities in the forum state and held that a claim can relate to the defendant's activities even without a causal connection. The Court found that Ford by advertising, maintaining retail dealerships, and providing parts and services for vehicles in the forum state created a market in the state for its cars. Further, each plaintiff's harm in the forum state was caused by a Ford vehicle that was of the same type as Ford marketed in the state, which resulted in the Court's finding of relation to the creation of the market, and that triggered a finding of specific personal jurisdiction.
This Ford case is notable because it's the first case in quite some time that saw the plaintiffs prevail in a personal jurisdiction case before the U.S. Supreme Court. That said, Ford Motor Company is a fairly narrow decision, and it may not apply if a plaintiff is not a resident of the forum state or if the defendant doesn't market the exact type of product in the forum state that is alleged to cause the particular harm.
So on the Delaware side, the Genuine Parts case is a good example of why it's important to understand the consequences of qualifying to do business in a foreign jurisdiction. One consequence may be that the company becomes subject to specific personal jurisdiction in that state.
Also and again apologies for continuing to beat this drum, folks need to keep in mind that different states' legislatures and courts may respond differently to Supreme Court precedent. So it's always important to review the relevant statutes for your particular jurisdiction as well as that jurisdiction's case law.
Now I mentioned that Alyssa would discuss this pending Supreme Court case. Alyssa, do you want to talk about that?
Alyssa: Sure. Thanks, Matt. So as we've foreshadowed, this is a pending case. There were oral arguments for Mallory v. Norfolk Southern Railway in November 2022, and we're awaiting the Supreme Court's decision. The case involves the ability of states to require corporations to agree to the jurisdiction of the state's courts as a condition of doing business in that state. The first decision is expected sometime this year, and it could have an enormous impact. The finding in favor of the plaintiff Mallory could result in plaintiffs' ability to sue a company in any of the states where the company has registered to do business.
So the Mallory v. Norfolk Southern Railway case was filed in Pennsylvania and specifically in Philadelphia's Court of Common Pleas. The plaintiff, a Virginia resident, who is a former employee of Norfolk Southern, sued the railway company, a Virginia corporation, with claims that he, the plaintiff developed cancer from on-the-job exposure to asbestos and other toxic chemicals. Despite both the plaintiff and the railway being based in Virginia, the plaintiff claims the Pennsylvania courts have personal jurisdiction over the defendant under a Pennsylvania statute stating that if a foreign corporation qualifies to do business in Pennsylvania, general personal jurisdiction is established in the Pennsylvania courts.
The defendant Railway successfully contested personal jurisdiction at both the trial court and the Pennsylvania Supreme Court levels on the grounds that establishing general personal jurisdiction through business qualification is a violation of the defendant's due process rights under the 14th Amendment of the U.S. Constitution. But then the plaintiff appealed to the U.S. Supreme Court, and as I mentioned the case was heard last November.
During oral arguments, the plaintiff took the position that under the Pennsylvania foreign qualification statute, any company that registers to do business in Pennsylvania under that statute automatically consents to general jurisdiction in the state. The Supreme Court justices discussed during oral arguments that Pennsylvania is the only state to use a consent by registration law for out-of-state companies, but if the Court were to rule in favor of the plaintiff, then such a rule would then apply in every state.
Matt: Right, and as I mentioned earlier, the Delaware Genuine Parts case shows you the converse of the argument that the plaintiff is arguing in that case. The Genuine Parts court said qualification necessarily means there is only specific personal jurisdiction over the qualified company. Thank you, Alyssa. It'll be interesting to see how the Supreme Court rules on that issue.
Let's talk now a little bit about the intersection of qualification to do business with internet and e-commerce operations, and obviously this is an area of some interest and I think some of the questions that have come in touch on some of these issues. Everyone knows that the internet has revolutionized a company's ability to transact business across state boundaries, whether it's buying and selling products or services, conducting virtual meetings or other business operations, or just communicating, sending messages. The sheer volume of business activity that takes place over the internet on any given day is mind-boggling. So it's no surprise that internet activity has gotten lots of attention in the courtroom, and corporate decision-makers are facing lots of legal issues involving their e-commerce and other internet activities.
A company's gateway to the internet is its website, and one significant legal issue regarding websites is whether a company's use of a website constitutes doing business in a state outside the one in which the company is located or the website was created. So a company needs to determine whether maintaining or owning the website means that it has to qualify to do business in any state where the website can be accessed or where customers use the products or services that are offered on that site.
There is relatively little statutory law and relatively little case law addressing the question whether owning or operating a website constitutes doing business for foreign qualification purposes. However, as we've been talking about, numerous cases address a similar issue, that is whether internet activities of a particular company in a foreign state constitute doing business in that foreign state sufficient to warrant that court in the foreign state exercising personal jurisdiction over the company. Exploring the issue of personal jurisdiction with regard to websites, again by analogy, can be useful when trying to make a determination whether a company needs to qualify to do business in a foreign state based on its website activity.
In broad terms, the important distinctions between transacting any business for purposes of personal jurisdiction and doing business for qualification purposes, for purposes of foreign qualification statutes is that a greater amount of business activity generally is required to mandate foreign qualification than the amount of activity needed to establish personal jurisdiction. And really that's to bring the discussion back to the purpose of this webinar, foreign qualification focus. Generally speaking, there is a higher threshold for doing business for qualification purposes than there is for doing business for personal jurisdiction purposes.
This means that it's easier for a company engaging in activities in a foreign state to satisfy the minimum contacts test for jurisdictional purposes than it is to satisfy the doing business test for qualification purposes. Logically then, if a company's contacts with a foreign state are not sufficient to justify the exercise of personal jurisdiction, the court should find that those same contacts will not trigger a company's duty to qualify in that state. Alyssa will give us some more detail on this point.
Alyssa: Yeah. Thanks, Matt. So the 2014 U.S. Supreme Court decision in Daimler made a huge impact on in other judicial opinions regarding whether personal jurisdiction is created by internet activity or websites. Although Daimler was not an internet case per se, it explores the outer limits of personal jurisdiction in cases implicating global matters, including whether or not personal jurisdiction can be based on a website that can be accessed around the world.
The analysis must determine when minimum contacts grants a court personal jurisdiction. Before Daimler, many courts applied a sliding scale test tailored to internet activities to determine the level or types of activities that constituted minimum contacts for general jurisdiction purposes.
At one end of the scale were passive websites, which alone did not generate sufficient contacts with the foreign state necessary to establish personal jurisdiction. A passive website is only used to post information. It doesn't actively solicit orders for goods or services or support other commercial activities. At the other end of the scale were active websites, which did generate sufficient business over the internet to establish personal jurisdiction. Interactive websites fell in the center of the scale, and courts determine whether to exercise personal jurisdiction over the interactive website owner on a case-by-case basis.
We did just want to briefly talk about a 2021 United States District Court for the Western District of Pennsylvania decision that denied a defendant's motion to dismiss on the grounds that the court lacked personal jurisdiction over the defendant because it includes some helpful guidance. This decision stated that although the defendant, a California apparel business operated a website and social media platforms that were capable of doing business with a Pennsylvania customer, such as the plaintiff, the mere fact that these online platforms tried to appeal to a customer base outside of California, without specifically referring to Pennsylvania in any particular way, was insufficient to establish a base for exercising personal jurisdiction. However, the Court denied the defendant's motion to dismiss in this particular instance without prejudice in order to allow the plaintiff to conduct jurisdictional discovery.
And we do just want to briefly go over some additional factors that courts consider in evaluating jurisdictional issues for websites. Matt.
Matt: Thanks, Alyssa. I'm going to give this discussion very short shrift in light of the time. What I'll say just very briefly is that courts have applied a three-part effects test in determining whether specific personal jurisdiction can be established. And some courts have combined both the sliding scale test that Alyssa just mentioned and this effects test in their personal jurisdiction analysis.
So we'll sort of come down from the mountaintop now and descend from consideration of a lot of these theoretical issues about personal jurisdiction and analogizing to qualification issues and really get practical. So let's talk nuts and bolts.
As we've noted previously, qualification involves a formal registration. And I'd like to ask Harry, from CSC's perspective, can you give us a practical handle on how companies qualify to do business in a foreign jurisdiction?
Harry: Thank you, Matthew. Good morning. So as Matthew and Alyssa mentioned earlier, every state has their own statutes similar to the domestic or home state, which is the state of incorporation.
So when you venture into the various state agencies that you're actually starting to do business, you want to first make sure that you check your name, your true name, and I'll get into this in more specific, but your true name of your entity. When you go to start registering to do business, you want to check to make sure that is available. And the reason why you want to do that is there's a term that we utilize called an assumed name, and there's a voluntary assumed name and there's what's called a forced assumed name.
So when you go into a particular state, you want to check to see if your true name, the true name that you registered in your home state is available. If for some reason you get into a particular state and your true name is not available, a lot of state agencies has their own provisions where they're going to force you to utilize another alternative name other than your true name. It has no effect on the true name of your company. It just means that, for example, you register in the state of Florida, the state of Florida is going to make you do business or cross-reference under an alternative name. So that's kind of the concept of why you want to check name availability.
And then your next process is to actually go and look at the actual state applications for certificate of authority. And I use that generically. Most of the state agencies, their registration form and every state has a form, it's a state-approved form that is regulated by the statute of that particular state, of your foreign state that you're actually going to conduct business in, and they each have statutes that regulate that. And the forms are pre-approved for that particular state. So you want to make sure that you're getting the necessary forms to register in that particular state.
And then when you get that particular aspect taken care of, then most states will have some kind of supporting document. They want to make sure that you are legally registered or incorporated in that particular state. For example, as Matthew mentioned, we're focusing on Delaware as your home state, as your main domestic state. They're going to want a certificate of good standing or a certified copy of the actual incorporation documents to present to the state that you're actually registering to do business. And CSC can assist with the process of the availability, the forms, and getting the necessary supporting documents.
Once you get that, each state, with the exception of a handful, each state will have what's called a registered agent. That individual or company, as in CSC, has to be located in the particular state that you're actually conducting business in. There is a statutory requirement. Each state has regulations for the registered agent. For example, there are statutes that say, hey, if you appoint this registered agent, that person is available during certain business hours to accept service of process in a lawsuit if the company gets served in a lawsuit in that particular state. So you really want to look at the statutes that govern the state that you're registering in, that the registered agent meets certain criteria. Corporation Service Company can assist in that process of acting as registered agent. We cover all 50 states.
In addition to the process of qualifying, there's some states that have publications or recording requirements. Publications are that, for example, if you're registering to do business in the state of New York, for a limited liability company, in addition to the registration process, they're going to make you publish in a periodical newspaper for a number of weeks or months after the actual registration process. It's key that you look at all the requirements because if, in fact, you don't publish in that particular state and you do register and forget the publication aspect, they can overturn that registration and it could stop doing business or conducting business in that particular state.
Recording requirements, Kentucky has a requirement where once you register with the Secretary of State's office, you actually record in the county that you're conducting business in. So that's part of the requirement process.
Each state has statutory requirements as to filing fees. Some states are flat rate states. Some states are a little more complex based on the authorized shares of your company, depending on your stock structure, actually having property in a particular state. So it [inaudible 01:05:47], as Matthew mentioned prior, that you really look at the states that you're conducting business and look at the statutory requirements.
And going back a little bit, as to the original forms that you're looking to actually complete to start the process, every state on that form will have a statute in that particular state. So it is very important that you actually go and look at the statutes. And it kind of covers certain criteria as to filing fees, accessing certain requirements in that particular state.
Some states, like Illinois, may want to see what kind of property you own. If you're going to conduct business in that state, they may want kind of an estimated fee as to what business you're going to be transacting business on a financial term. So it could constitute, depending on what you put on that application as to what the state's going to charge your business to do, conduct business there.
In addition to the registration process, there's initial annual reports that may be required. For example, South Carolina has an initial compliance report that has to be filed at the time of the registration. California, for example, in addition to the registration, they have a statement of information, which is your annual report that has to be filed within so many days after the initial registration. So in most cases it's a good practice to go ahead and file the application in addition to any annual report that may be required at the time of filing.
Ramifications as to qualifying in a particular jurisdiction, again I reiterate it's very important to look at the statutes. Going back to the name availability, there's always a question that we get raised about your name. And Matthew kind of touched on this. Companies that have insurance in the name, have banking in the name, like a professional service, whether it's a doctor, attorneys, architectural firms, all of those words within your legal name could constitute other filings outside of the secretary of state. You may have to have consent from the department of banking. You may have to have consent from the department of insurance. You may have to go to the board that regulates a profession, such as architectural or contractors. So there is more to registering than just filing a document. There may be other ramifications and making sure that the names are properly approved in going to other jurisdictions.
Matt: Thanks, Harry. Alyssa will now very briefly discuss how a company can cure failures to qualify. And needless to say, we are rapidly running out of time.
Alyssa: Yes. I'll be very brief on this. A company may find that it's doing business in a foreign state without a certificate of authority, and as a result it might be subject to certain statutory penalties. Although state laws may vary on whether and how a company may cure this type of defect, generally the company is going to be able to file an application for qualification and pay all required fees as well as any penalties associated with its failure to qualify and the late filing. In such a case, the effects of the filing is generally retroactive. However, there are certain situations and in certain states where the failure to qualify may prevent a company from maintaining a lawsuit in that state. Therefore, a company should not opt out of qualifying in a state on the assumption that it can just cure the failure to qualify in the future.
So Harry, we have just one or two minutes left, and we were wondering if you can very quickly note any situations where you've seen a company cure a failure to qualify to do business.
Harry: Sure. So just briefly, a lot of times state agencies, secretaries of states where you're registering to do business also may communicate with the department of revenue. So in some cases, if you're conducting business in a particular state and you neglect to register in that state, but your tax department files like a sales tax or some kind of tax documentation with the department of revenue and you neglect to file with the secretary of state's office, the secretary of state could impose penalties for conducting business without registering to do business in their state.
Alyssa: All right. Thank you, Harry. Appreciate it.