Qualifying to Do Business: A Hidden Risk?

Businesses seeking to conduct business in a new state generally understand that they must first qualify to do business by registering with the state’s secretary of state. Qualification is separate from any state or local tax registration requirement, such as the requirement that a vendor register as a vendor for state sales tax purposes. However, some states consider the mere act of qualifying to do business as a consent to general (all-purpose) jurisdiction, and businesses may not understand the Pandora’s box they may open by qualifying to do business in a state.

After Wayfair¹ and its expansion of substantial nexus to include situations in which an in-state physical presence is lacking, companies that had not registered with some states may now opt to qualify to do business there. This raises the prospect of businesses being sued in those states for matters wholly unrelated to the nexus-generating event. Although “doing business” may have different meanings depending on the jurisdiction and the context, the mere act of registering to do business may open the door to assertions of tax nexus.²

The question scheduled for argument before the U.S. Supreme Court on October 11 in Mallory v. Norfolk Southern Railway Co. is whether registering in a state leaves a company open to general jurisdiction by the state over the company.³ In Mallory, the Supreme Court of Pennsylvania held that the state’s corporate registration statute is unconstitutional to the extent that it confers general jurisdiction over foreign corporations that are not “at home” in Pennsylvania. The court also held that the registration statute — which, unlike other state registration statutes, explicitly provides that registration constitutes consent — does not constitute voluntary consent to general jurisdiction by a foreign corporation.

Before Mallory, a petition for a writ of certiorari on the same issue was filed by Cooper Tire & Rubber Co.⁴ Cooper Tire, the petition for which remains pending before the Court, challenges a decision diametrically opposed to the Pennsylvania court’s view in Mallory: In Cooper Tire, the Georgia Supreme Court concluded that, by statute, the company’s registration to transact business in Georgia amounted to its consent to general jurisdiction by Georgia for claims lacking connection with that state.

The parties in Mallory argued that Mallory is “a better vehicle” than Cooper Tire to resolve whether it is constitutional to require consent to general jurisdiction as a condition for corporate registration. Apparently, the Supreme Court agreed. Unlike Georgia’s statute, which does not explicitly notify out-of-state companies that registration triggers general jurisdiction by Georgia courts, the Pennsylvania statute provides such notification.

We will briefly discuss state business qualification and provide some background on jurisdictional standards below. We will then explain the issue and its implications and discuss recent case law. Finally, we will make some observations and predict how the Court might rule in Mallory.

Business Qualification: Some Background and History

State business qualification requirements first arose in the context of corporations but have now generally been extended to limited partnerships, limited liability partnerships, limited liability companies, business trusts, real estate investment trusts, cooperatives, and public or private limited companies. We focus on corporate registrations, although the issue — whether the act of qualifying to do business should amount to consent to general jurisdiction — applies to all entity types.

Corporations are creatures of statute. The state that authorizes a corporation’s existence (the right “to be”) is often referred to as the corporation’s domicile. In states where the corporation wants to conduct business as a foreign corporation,⁵ the entity that wants “to do” business must qualify to do business in that state. Corporations that conduct business in a state other than their state of domicile without first qualifying to do so are subject to noncompliance penalties that vary by state. For example, Wisconsin and Wyoming impose a $5,000 fine, while California imposes some of the harshest penalties for noncompliance, including a $250 suspension penalty, a $2,000 penalty per tax year for failure to file missing tax returns within 60 days of receiving a written demand to do so, and contract voidability and unenforceability for any contracts entered into while not in good standing.⁶

Some early pundits viewed the ability of states to regulate foreign commerce as antithetical to Congress’s exclusive regulatory right under the commerce clause. One expert argued that “a corporation created by a State has, like an individual, an absolute right to engage in interstate or foreign commerce.”⁷ Taxation of interstate commerce was barred until Spector Motor Service was overruled by Complete Auto Transit.⁸

Jurisdictional Standards: A Primer

Under the due process clause of the 14th Amendment, a state can exercise personal jurisdiction over an out-of-state defendant if the defendant has sufficient “minimum contacts” with the state and the suit does not offend “traditional notions of fair play and substantial justice.”⁹ There are two types of personal jurisdiction: (1) general or all-purpose jurisdiction, and (2) specific or case-linked jurisdiction.¹⁰ While general jurisdiction permits suits on causes of action regardless of whether they derive from actions in the state, specific jurisdiction is limited to causes of action derived from or connected with the particular jurisdiction.¹¹

The burden on the defendant is the “primary concern” in determining whether personal jurisdiction exists. Specifically, the burden requires a court to consider not only the practical problems resulting from litigation in the forum but also the “more abstract matter” of the defendant’s submitting to the coercive power of a forum that may have little legitimate interest in the claims in question.¹²

In 2011 the Court heralded a shift in personal jurisdiction jurisprudence by concluding in Goodyear that a court may assert general, all-purpose jurisdiction over foreign corporations to hear any and all claims against them only when their affiliations with the forum state render them essentially “at home” in that state.¹³ Goodyear rejected the “sprawling” view of general jurisdiction and held that only a limited set of affiliations with a forum state will render a defendant amenable to all-purpose jurisdiction there.¹⁴

The shift in general jurisdiction jurisprudence announced in Goodyear was solidified in Daimler,¹⁵ when the Court reiterated that the inquiry under Goodyear was not whether a foreign corporation’s in-forum contacts can be said to be in “some sense” continuous and systematic but whether the corporation’s affiliations with the state are so continuous and systematic, as to render the corporation “essentially at home” in the forum state.¹⁶ Specifically, the Court looked at whether the corporation was incorporated in the state or whether it had its principal place of business there.¹⁷ Otherwise, approving the exercise of general jurisdiction in every state where a corporation engaged in “substantial, continuous, and systematic course of business” would be “unacceptably grasping.”¹⁸ Significantly, the Court viewed the general jurisdiction inquiry as “call[ing] for an appraisal of a corporation’s activities in their entirety, nationwide and worldwide,” and did not simply consider a defendant’s contacts with the state.¹⁹ For example, despite having over 2,000 miles of railroad track and employing 2,000 workers in Montana, the Court found that BNSF Railway was not “at home” in the state and that general jurisdiction was lacking.²⁰

The narrowing of general jurisdiction by Daimler has expanded attempts by plaintiffs to find that defendant foreign corporations have consented to general jurisdiction by registering and qualifying to do business in their states. This is now considered a “go-to alternative to Daimler’s holding” and referred to as the “rise of Pennoyer’s ghost.”²¹

Is Qualifying to Do Business Equivalent to Consent to General Jurisdiction?

Corporations can consent to the exercise of personal jurisdiction over them.²² While corporations may decide not to do business in a particular state, they are not free to ignore states’ qualification requirements once they begin to conduct business there. Sometimes, moreover, corporations may register to do business in a state because they think they may eventually do business there but never actually do business there. Given due process and commerce clause protections and the recent U.S. Supreme Court jurisprudence limiting the scope of general jurisdiction, can a state’s qualification statute explicitly require that registrants consent to its exercise of general jurisdiction or implicitly deem corporations to have consented to general jurisdiction?

What the Supreme Court Has Said

In 1917 the Court held in Pennsylvania Fire — a pre-International Shoe doctrine decision — that corporate registration could be treated as consent to general jurisdiction.²³ In Pennsylvania Fire, a fire insurance company had filed a power of attorney with Missouri’s insurance department to obtain a license to do business in Missouri.²⁴ The Court ruled that a claim regarding an insurance policy issued in Colorado, served on the superintendent of the Missouri insurance department, granted jurisdiction over the company to Missouri and that this grant did not deprive the defendant of due process.²⁵ The Supreme Court has not explicitly overruled Pennsylvania Fire, although its recent jurisprudence, particularly Daimler, calls its continued vitality into serious doubt.

Before Pennsylvania Fire, the Court expressed similar views. In 1867 Congress enacted a corporate consent statute that authorized suits against foreign corporations doing business in the District of Columbia.²⁶ In Harris, the Court applied the statute and concluded that it “made the company liable to suit.”²⁷ Harris was favorably cited by the Court seven years later in Ex parte Schollenberger, which concerned a petition for a writ of mandamus requiring the judges of a federal circuit court to hear suits brought by insurance companies incorporated by the laws of other states but doing business in Pennsylvania.²⁸ Applying the principles from Harris, the Court found that “there cannot be any doubt . . . of the jurisdiction of the Circuit Court over” the defendant insurance companies.²⁹ The Court stated that “although the company was a foreign corporation, it was subject to suit in the District, because it had in effect consented to be sued there, in consideration of its being permitted by Congress to exercise therein its corporate powers and privileges.”³⁰ In Louisville & N.R. Co. v. Chatters, the Court noted that the appointment of an agent “operates as a consent to suit upon a cause of action like the present arising out of an obligation incurred within the state, although the breach occurred without.”³¹ Whether the Court will overturn Pennsylvania Fire and the expansive view of consent presaged in Harris, Schollenberger, and Louisville & N.R. Co. will likely soon be decided in Mallory.

What State and Federal Courts Have Said

Unlike the Pennsylvania statutes at issue in Mallory, most states’ qualification provisions do not explicitly provide that registration equals consent to general jurisdiction, and most state and federal courts have concluded that consent should not be implied both pre- and post-Daimler.³² However, after Daimler, some courts have questioned the continuing viability of deemed consent to general jurisdiction. In its opposition to the petition for a writ of certiorari, Norfolk Southern Railway argued that courts have understood that Daimler and Goodyear resolved the issue and that “a state ‘may not exact’ a forfeiture of constitutional rights ‘as a condition of [a] corporation’s engaging in business within its limits.’”³³

Cases in which courts found that consent to general jurisdiction exists without violating due process rely on Pennsylvania Fire and its progeny. Relying on the appointment by a registering corporation of an agent for service of process emphasized that the breadth of a corporation’s consent depended on “how broadly or narrowly the appointment was treated by the state itself.”³⁴ In a 2011 (pre-Daimler) case, the Ninth Circuit highlighted that the Supreme Court “has never revisited Pennsylvania Fire, nor has it stated that its holding is no longer viable.”³⁵ The Ninth Circuit then cited Perkins³⁶ for the proposition that “due process did not prohibit a state from opening or compel it to open its courts to in personam jurisdiction over actions that did not arise out of a corporation’s activities in the state, and alluded to the appointment of an agent for service of process as one possible method in conferring jurisdiction.” The court cited Pennsylvania Fire in its reasoning.³⁷

Post-Daimler, with the notable exception of Georgia in Cooper Tire,³⁸ many state supreme court decisions on this issue have held that basing general personal jurisdiction on consent by registration to do business violates due process. For example, the Nebraska Supreme Court concluded that treating a corporation’s “registration to do business in Nebraska as implied consent to personal jurisdiction would exceed the due process limits prescribed” in Goodyear and Daimler, given that every state requires foreign corporations to register and appoint an agent for service of process.³⁹ The court noted that allowing consent by registration would “permit a corporation to be subject to general jurisdiction in every state in which it does business,” which is the exact type of “global reach” jurisdiction that the U.S. Supreme Court “expressly rejected as being inconsistent with due process.”⁴⁰ The Delaware Supreme Court reached the same conclusion in Genuine Parts Co. v. Cepec, going so far as to say that because “any use of the service of process provision for registered foreign corporations must involve an exercise of personal jurisdiction consistent with the Due Process Clause of the Fourteenth Amendment,” and in “most situations where the foreign corporation does not have its principal place of business in Delaware, that will mean that Delaware cannot exercise general jurisdiction over the foreign corporation.”⁴¹ After Daimler, the vast majority of state and federal courts have found consent by registration to be irreconcilable with Goodyear and Daimler, many for similar reasons.⁴² It will be interesting to see whether the Court in Mallory will hold firm to Pennsylvania Fire or jettison that decision and align with the majority of courts that have rejected a broad view of consent after Goodyear and Daimler.

Mallory

Mallory involves a suit brought in Pennsylvania by Robert Mallory, a citizen of Virginia, against Norfolk Southern Railway Co. Mallory alleges that the railroad’s negligent and reckless conduct caused him to be exposed to asbestos and other toxic chemicals during his work for the railroad as a carman in Ohio and Virginia, resulting in his developing colon cancer. The railway is incorporated and has its principal place of business in Virginia, and it moved to dismiss the complaint on due process grounds. The Pennsylvania trial court dismissed the complaint, observing that the railroad did not voluntarily consent to jurisdiction since it was required to register as a precondition of doing business in Pennsylvania, notwithstanding that section 5301(a)(2)(ii) of the Pennsylvania Judiciary Act provides that foreign corporations’ qualifying to do business in the state provides a sufficient basis to support general jurisdiction.⁴³ The Pennsylvania court cited some of the Supreme Court’s recent due process decisions, including Goodyear and Daimler, stating that they “dramatically altered general jurisdiction analysis.”⁴⁴

The Pennsylvania court stated that foreign corporations wanting to do business in Pennsylvania are faced with a “Hobson’s choice”⁴⁵: They must consent to general jurisdiction or not do business there. The Supreme Court decisions, including Pennsylvania Fire, were viewed as “relics of the Pennoyer era” by the state court, which viewed Shaffer v. Heitner as acknowledging that these Pennoyer-era cases were overruled by International Shoe.⁴⁶ The Pennsylvania trial court concluded that “wrapping general jurisdiction in the cloak of consent” violated the due process clause’s doctrine of federalism.⁴⁷ The Supreme Court of Pennsylvania affirmed the trial court’s dismissal and held that “compliance with mandatory registration provisions . . . cannot serve as a voluntary relinquishment of due process rights.”⁴⁸

Mallory argues that “any sensible application of ‘fair play and substantial justice’ must hold corporate persons to the same standards as flesh-and-blood people,” emphasizing that “the same Congress that proposed the Fourteenth Amendment enacted a consent-by-registration requirement for the District of Columbia.”⁴⁹

Cooper Tire

Cooper Tire involved a product liability suit brought in Georgia by a Florida resident who sustained injuries in an auto accident in Florida purportedly because of a faulty tire. Cooper Tire is a Delaware corporation with its principal place of business in Ohio.⁵⁰ The trial court dismissed the case against the company, but the Georgia Court of Appeals reversed, relying on the 1992 Georgia Supreme Court decision in Allstate Insurance Co. v. Klein ⁵¹ that found that “Georgia courts may exercise general personal jurisdiction over any out-of-state corporation that is ‘authorized to do or transact business in this state at the time a claim or cause of action arises.’”⁵² The court rejected Cooper Tire’s request to reconsider its holding in Allstate Insurance. Even though the court correctly observed that Allstate Insurance “is in tension with a recent line of United States Supreme Court cases,” it nonetheless held that because the U.S. Supreme Court had not overruled its 1917 decision in Pennsylvania Fire,⁵³ it was appropriate to continue to follow Allstate Insurance because of stare decisis concerns.

Tax Administrator Positions

Several state revenue departments maintained that registering with the state’s secretary of state is sufficient to establish corporate income tax nexus,⁵⁴ while other states expressed by legislation or guidance that merely registering to do business is insufficient to create nexus.⁵⁵ States are presumably relying on specific jurisdiction rather than general jurisdiction to support their income tax nexus assertions — a position of questionable validity. It is worth noting that many of the jurisdictions that maintain that merely registering to do business in a state is in itself a tax-nexus-generating event inconsistently provide that registration does not trigger jurisdiction or have had court decisions rendered that reject the position that registration conveys general jurisdiction.⁵⁶ Taxpayers that are faced with a tax department’s assertion of tax nexus based merely on the act of registering to do business would be well served by reviewing that state’s case law on the effect of registration.

Mallory’s Effect on State Legislation to Secure Consent Jurisdiction

Pennsylvania is the only state that has a statutory provision stating that a foreign corporation consents to the general jurisdiction of the state’s courts by registering to do business there, and an affirmance by the Court in Mallory should bar any other state from seeking to provide consent by statute.⁵⁷ It is a time-honored legal maxim that: “All the powers of the states, as sovereign states, must always be subject to the limitations expressed in the United States Constitution. . . . What is forbidden to them, and which they cannot do directly, they should not be permitted to do by color, pretense, or oblique indirection.”⁵⁸ If Mallory is affirmed based on Goodyear and Daimler and the Court confirms that the due process clause limits general jurisdiction to corporations “at home” in a jurisdiction, any state legislation mandating consent to general jurisdiction for registrants will seemingly “subvert the very foundation of all written constitutions.”⁵⁹

A Mallory decision that upholds the inclusion of explicit statutory authority for consent to general jurisdiction would also raise commerce clause concerns. Mandatory consent to general jurisdiction effectively restricts interstate commerce, and we would expect many or all states to revise their registration statutes.

Observations

Although the Supreme Court granted certiorari in Mallory rather than Cooper Tire, the Mallory decision will likely apply both to states that provide consent to general jurisdiction by statute and to states that do not. We predict that the Court will affirm the Pennsylvania court’s decision in Mallory. It is highly questionable that the 1917 decision in Pennsylvania Fire is still viable after the Court in Goodyear and Daimler concluded that an “at home” requirement was needed to support general jurisdiction. Upholding the Pennsylvania statute’s automatic trigger of general jurisdiction would eviscerate Daimler and Goodyear; any corporation registered to do business (after Wayfair, most multistate businesses are registered nationwide) would be compelled to consent to “sweeping” general jurisdiction even though they were not “at home” in the state of registration. It is also antithetical to International Shoe’s notion of “fair play and substantial justice” that corporations not domiciled in a state can be forced into domicile status if they want to do business there.

The Court has also been reluctant to take an expansive view of jurisdiction in the narrower and arguably less invasive domain of specific jurisdiction, which requires “purposeful availment” by the defendant for that jurisdiction to exist. The Court’s Ford Motor Co. decision provided a hint of how it may rule in Mallory. The majority opinion, drafted by Justice Elena Kagan, suggested that the hypothetical “retired guy in a small town” in Maine who “carves decoys” to sell over the internet might not have established jurisdiction in the states where he sells his decoys if his activities were isolated and sporadic, even though he purposefully availed himself of other state marketplaces.⁶⁰ Justice Neil Gorsuch in his concurring opinion, joined by Justice Clarence Thomas, also recognized the reluctance of the majority of “hauling individuals to jurisdictions where they have never set foot.” These opinions signaled that the Court may not countenance states’ attempts to unilaterally force general jurisdiction on all corporations that register to do business.

We noted the due process concerns implicated by deemed consent to general jurisdiction. There are also commerce clause concerns. The commerce clause was drafted for the “maintenance of harmony and proper intercourse among the States.”⁶¹ The Constitution’s drafters were concerned with “future contrivances” by states that would act to limit consumers’ free access to goods and services necessary for the success of the nation.⁶² States’ protectionist impulse is to protect their populace, and imposing general jurisdiction on corporations that register to do business would negatively affect interstate commerce. Doing so would provide a substantial deterrent for out-of-state businesses to venture into other states for fear of being hauled into court for any cause of action, regardless of where it occurred or whether it had any relationship to the businesses’ activities in the state.

The Court narrowed general jurisdiction by its decisions in Daimler and Goodyear. If our prediction is incorrect and the Court reverses in Mallory, we expect that states will revise their registration and related statutes to provide that registration is deemed to constitute consent to general jurisdiction to secure for their citizens the ability to sue out-of-state companies for all manner of issues. This would open the floodgates to rampant forum shopping because businesses, particularly after Wayfair, are likely to have expansive registration footprints.