Doing Business in California: Failing to Obtain a Certificate of Qualification

Doing Business in CaliforniaAs we discussed in our blog last week, a foreign corporation or other business entity transacting business within California must comply with the certification requirements of Corporations Code § 2105 and obtain a Certificate of Qualification.  As set forth in the following list, the consequences for failing to comply with the California Corporations Code (the “Code”) can be harsh.

  • A foreign entity is not permitted to maintain an action or proceeding within California regarding business transacted intrastate until it comes within compliance of the Code.

  • Transacting unauthorized intrastate business is deemed as consenting to the jurisdiction of California courts in any civil action arising in California in which the entity is named as a defendant.

  • The entity may be subject to a per diem (per day) penalty of $20.00 for each day that unauthorized intrastate business is transacted.

  • Prosecution may be brought by the California Attorney General and an additional money penalty may be sought against the entity.

The harsh consequences described above can be avoided by obtaining a Certificate of Qualification.  Under Corporations Code § 2105, in order to obtain that certificate a foreign corporation or other business entity must file a form prescribed by the Secretary of State that is signed by a corporate officer or a trustee stating, among other things:

  • Its name and the state or place of its incorporation or organization.

  • The street address of its principal executive office.

  • The street address of its principal office within California, if any.

  • The name of an agent for service of legal process located within California.

  • Irrevocable consent to service of process directed to it upon the California agent designated

  • Affirmation of compliance with certain insurance requirements, if applicable.

Once the foreign entity makes all appropriate filings and pays the associated filing fees it receives a Certificate of Qualification from the Secretary of State.

The corporation may then maintain or refile a case that had been dismissed because of its non-compliance.  However, and importantly, the corporation must be cognizant of the otherwise applicable statute of limitations and refile promptly if necessary.  If refiling an action that had previously been dismissed, the entity must file receipts and evidence of compliance (such as the Certificate of Qualification) with the clerk of the court.

Doing Business in California: “Transacting Intrastate Business”

We have previously written about doing business in California, and how the California Corporations Code uses a “transacting intrastate business” test.  Importantly, if a corporation or other entity is deemed to be doing business in California under the “transacting intrastate business” test, that entity must obtain a “Certificate of Qualification” under Corporations Code § 2105.  This post will look at what will and will not constitute “transacting intrastate business.”

Transacting Intrastate Business

Transacting intrastate business means that the entity or some part thereof enters into or conducts repeated and successive business transactions (sales, deals, etc.) in California.  Like many legal tests, certain factors will be weighed to determine whether or not the test is satisfied.  To assist courts and businesses in determining what may or may not qualify as transacting intrastate business, Corporations Code § 191 sets out what activities will not be considered to be transacting intrastate business, although a listed activity may be taken with other activities that, taken together, constitutes transacting intrastate business.  Some of the protected activities include:

(1) Maintaining or defending any action or suit or any administrative or arbitration proceeding, or effecting the settlement thereof or the settlement of claims or disputes.

(2) Holding meetings of its board or shareholders or carrying on other activities concerning its internal affairs.

(3) Maintaining bank accounts.

(4) Maintaining offices or agencies for the transfer, exchange, and registration of its securities or depositaries with relation to its securities.

(5) Effecting sales through independent contractors.

(6) Soliciting or procuring orders, whether by mail or through employees or agents or otherwise, where those orders require acceptance outside this state before becoming binding contracts.

(7) Creating evidences of debt or mortgages, liens or security interests on real or personal property.

(8) Conducting an isolated transaction completed within a period of 180 days and not in the course of a number of repeated transactions of like nature.

Likewise, a foreign corporation will not be considered to be transacting intrastate business solely because one of its subsidiaries transacts intrastate business.  A foreign corporation or other entity  will also not be considered to be transacting intrastate business solely because of its status as any one or more of the following:

(1) It is a shareholder of a domestic corporation.

(2) It is a shareholder of a foreign corporation transacting intrastate business.

(3) It is a limited partner of a domestic limited partnership.

(4) It is a limited partner of a foreign limited partnership transacting intrastate business.

(5) It is a member or manager of a domestic limited liability company.

(6) It is a member or manager of a foreign limited liability company transacting intrastate business.

In addition to the above, it is important to note that, in the digital age, an entity conducting significant business over the internet may have sufficient contacts with California to allow a court to exercise personal jurisdiction over the entity.  Furthermore, California law permits a plaintiff to conduct initial discovery against a defendant corporation or other entity to determine whether or not the corporation has been doing business within the state.

Ninth Circuit: Section 16600 Applies to Settlements

Section 16600 of the California Business and Professions Code prohibits contracts from restraining individuals “from engaging in a lawful profession, trade, or business of any kind.”  While the reach of Section 16600 is broad (recently reaching as far as the  Delaware Court of Chancery), it has traditionally been applied only to employment contracts or agreements that contain non-competition or non-compete clauses where the former employee is prevented from working with a competitor.

But what about a settlement agreement that prohibits employment with a former employer, i.e., an agreement that a former employee can only work for competitors?  Last week the 9th Circuit Court of Appeals addressed that very issue in Golden v. California Emergency Physicians Medical Group, No. 12-16514, 2015 WL 1543049 (Apr. 8, 2015).

In that case, Donald Golden (“Golden”), an emergency room doctor, sued his former employer, California Emergency Physicians Medical Group (“CEP”), and others alleging various causes of action including racial discrimination.  In open court CEP agreed to pay a “substantial monetary amount” to Golden, and Golden agreed to withdraw his claims against CEP and “waive any and all rights to employment with CEP or at any facility that CEP may own” now and in the future.  (Notably, CEP is a consortium of more than 1,000 physicians and staffs and manages emergency rooms and inpatient centers throughout California.) 

Golden later refused to sign the settlement agreement.  The district court ultimately granted a motion by Golden’s former counsel to intervene and ordered that the settlement agreement be enforced. Golden appealed to the 9th Circuit on the single issue that the settlement agreement was void under Section 16600.

After addressing the issue of ripeness, the majority began by noting that the California Supreme Court had not ruled on whether Section 16600 applies outside of “typical so-called ‘non-compete covenants,’” and specifically “whether a contract can impermissibly restrain professional practice, within the meaning of the statute, if it does not prevent a former employee from seeking work with a competitor and if it does not penalize him should he do so.”

The majority found that the breadth of the statute meant that Section 16600 was not so limited and that the district court improperly determined that the settlement agreement need not comply with Section 16600.  As the court noted, Section 16600 prohibits “every contract” (not specifically excepted by another statute) that “restrain[s]” someone “from engaging in a lawful profession, trade, or business.”  Therefore, Section 16600 applies to all such restrictions “no matter [their] form or scope.”  The case was reversed and remanded to the district court for further proceedings.

Notably, former 9th Circuit chief justice Alex Kozinski filed  a dissenting opinion accusing the majority of ruling on the case despite the fact that, according to him, “the settlement agreement does not limit Dr. Golden’s ability to practice his profession at this time—except to the extent that he can’t work for CEP.”  In his opinion, the majority misconstrued Section 16600 and allowed it to preserve “an unfettered right to employment in all future circumstances, no matter how remote or contingent.”  Judge Kozinski would have dismissed the case for lack of standing until Golden had actually been fired or denied a position due to the settlement agreement. 

California’s Presumption Against Non-Compete Agreements Recognized in Delaware

Terms of Employment ContractPreviously on the blog we discussed how non-compete agreements in California are presumed void unless they meet one of two very narrow statutory exceptions. A recent decision from the  Delaware Court of Chancery further emphasized the reach and effect of this presumption by upholding a California employee’s right to contract despite a non-compete agreement in an employment contract governed by Delaware law.

Specifically, in  Ascension Insurance Holdings, LLC v. Underwood et al., the Delaware Court addressed the issue of whether a non-compete provision governed by Delaware law could be enforced against a California-based employee competing against his California-based employer. Ascension Insurance Holdings, LLC v. Underwood et al., C.A. 9897-VCG (Del Ch. January 28, 2015). 

Ascension is a limited liability company incorporated in Delaware, but its principal place of business is in California.  Ascension acquired the assets of another company and as part of the acquisition Underwood entered into agreements not-to-compete with Ascension or its subsidiary Alliant Insurance Services, Inc. (“AIS”), where Underwood had been previously employed.

Underwood allegedly began competing in violation of the agreement’s non-compete, and Ascension sought an injunction seeking to enforce the non-compete against Underwood. The defendants argued that the covenant was not enforceable as it was against the public policy of California. However, Ascension argued that the covenant not-to-compete signed by Underwood contained a Delaware choice of law provision, and therefore the covenant was enforceable.

The Delaware Court of Chancery concluded that California law, not Delaware law, applied. Despite the fact that the employment agreement contained a Delaware choice-of-law provision, the court did not enforce the non-compete agreement and denied the request for an injunction. The court noted that it does not have to automatically defer to the parties’ choice of law selection, but rather examined whether enforcement of the non-compete would conflict with California’s strong statutory policy against non-compete agreements.  In fact, the court found that such a conflict did exist, and it also found that California’s interest in upholding its policy against the enforcement of non-competes outweighed Delaware’s interest in enforcing the non-compete agreement.

The impact of this case is significant in light of the fact that many companies chose to incorporate in Delaware but principally operate in California, and that those companies may also choose to apply Delaware law to their contractual agreements.  A recent report found that out of 211,929 observed businesses nationwide, 54.57% incorporated in Delaware. The next biggest state is New York with 5.15%, followed by California with 4.38%.  The top 10 states make up over 80% of all corporations.

If you have any questions about on-compete clauses, consult with an experienced attorney. Ezer Williamson Law provides a wide range of both transactional and litigation services to individuals and businesses. Contact us at (310) 277-7747 to see how we can help you.

Enforcing Restrictive Land Covenants

Land Covenant AttorneysRestrictive covenants are contract clauses that  limit a contracting party’s future conduct. A restrictive land covenant prevents certain use of the land. In this article, we will discuss restrictive land covenants, and how to enforce them in California.

In general, restrictive land covenants serve the purpose of enforcing neighborhood presentation standards. These are your restrictive easements, Covenants, Conditions, and Restrictions (“CC&Rs”), and other Home Owner’s Association rules. They can range from mandating where a home owner puts his trash cans to the permissible colors of a home’s façade. Such covenants are typically written into a deed, or at least referenced in the deed and recorded. Nahrstedt v. Lakeside Village, 8 Cal.4th 361 (1994). Restrictive land covenants are usually created by developers of a planned community, and enforced by community representatives or land owners.

Restrictive covenants “run with the land.” This means that they are tied to the property (land), and not to a  specific owner(s). In other words, the limitations of a restrictive land covenant are legally binding for anybody who subsequently buys the property.

A restrictive land covenant is enforceable as long it was recorded, it is being enforced in a fair and non-discriminatory manner, and there is still an individual or group benefiting from it. It can be enforced by any individual land owner who benefits from the restriction, or the collective homeowner’s association if there is one.  (Cal. Civ. Code §5975).

For the most part, homeowner’s associations are the principal enforcers of restrictive land covenants. California’s Civil Code authorizes these types of associations to initiate legal action, defend, settle, or intervene in litigation, arbitration, mediation, or administrative proceedings on behalf of the association membership (Cal. Civ. Code §5980). An association can take action to enforce CC&Rs, resolve issues concerning damage to common areas, and similar land-use matters.

Steps for enforcing a restrictive land covenant will vary based on the planned community. For example, one particular homeowner’s association may have outlined provisions for commencement of an enforcement action. In the absence of a homeowner’s association, the land owner seeking to enforce a restrictive land covenant can sue. A plaintiff in an action seeking to enforce CC&Rs can petition the court for an injunction against the defendant, which would require the defendant to stop non-compliance and seek money damages.

If you have any questions about restrictive covenants, consult with an experienced attorney. Ezer Williamson Law provides a wide range of both transactional and litigation services to individuals and businesses. Contact us at (310) 277-7747 to see how we can help you.