Corporate Registration and Jurisdiction in Transnational Litigation
April 11, 2022
When companies register to do business in a U.S. state, are they granting state courts the power to exercise jurisdiction over them for claims arising outside the state—and perhaps outside the country? The answer to this question is not an easy one. The effect of business registration is hotly contested in the United State, and is currently the subject of a pending petition for certiorari in the Supreme Court.
Personal (Adjudicative) Jurisdiction
Judges and lawyers in the United States use the term “personal jurisdiction” to describe a court’s authority to require a defendant’s appearance in a case—a concept that exists everywhere, but is more commonly called “adjudicative jurisdiction” outside the United States. Personal jurisdiction in federal and state courts in the United States is a matter of both constitutional and statutory law. Jurisdictional disputes depend on state borders, as courts must examine whether the defendant has the requisite degree of connection with the forum state.
In a series of cases over the last decade, the Supreme Court has significantly restricted the ability of courts in the United States to exercise jurisdiction over out-of-state defendants. Several of those cases involved nonresident foreign defendants, and the Court expressed particular concern for maintaining good international relationships. Although convincing arguments have been made to develop specialized rules for transnational cases, the Supreme Court has not yet done so, instead currently treating foreign defendants similarly to out-of-state domestic defendants.
The Supreme Court has developed several pathways for personal jurisdiction. First, “general” or “dispute-blind” jurisdiction exists where the defendant is “at home.” That is, plaintiffs can bring all claims, wherever they arose, in the state or states where the defendant is at home, such as a corporate defendant’s place of incorporation or principal place of business. For individual defendants, general jurisdiction also exists if the defendants are served (or “tagged”) with process in the forum, even if they are present only temporarily. Second, “specific” or “forum-linked” jurisdiction arises in states connected to the dispute. Specific jurisdiction requires that the defendant establish purposeful contacts with the forum state, the dispute “arises from or relates to” the defendant’s in-state contacts, and the jurisdictional assertion satisfies certain standards of reasonableness. Third, defendants may consent to personal jurisdiction, either by contract or litigation conduct, in states where they would not otherwise be subject to personal jurisdiction.
These jurisdictional limitations create obstacles to transnational litigation in U.S. courts. Jurisdiction may not exist over necessary international parties, for example, in mass products-liability cases involving multiple domestic and foreign manufacturers and third-party claims, especially if plaintiffs hale from all over the United States and the harm did not arise in a single jurisdiction. And effective remedies in transnational litigation, whether sounding in tort or contract, require that prevailing parties have the capability to enforce the resulting judgment, which often draws nonparty multinational financial institutions into the dispute.
Incorporation vs. Registration
The Roberts Court’s restrictive turn in personal jurisdiction has generated new challenges in obtaining jurisdiction over international parties. In some cases, jurisdiction may depend on whether the foreign entity has incorporated or registered to do business in the United States. When a foreign corporation incorporates a subsidiary entity in the United States, that subsidiary will be “at home” in its state of incorporation and will be subject to personal jurisdiction for any claim against it, regardless of whether that claim arose elsewhere. However, when a corporation merely “registers” to do business in a state, the situation is less clear.
State Corporate Registration Statutes
Every state statutorily requires out-of-state corporations (including international corporations) transacting in-state business to register with and obtain a certificate of authority from a designated official to do business in the state. Without obtaining the required authorization, a nonresident corporation cannot access the state’s judicial system under all or almost all these registration statutes, with many states also imposing fines and other penalties, including the restraint of further intrastate business transactions, for the failure to comply. The Supreme Court has consistently upheld the constitutionality of both these registration and authorization statutes and their associated consequences for non-compliant nonresident corporations.
Not all corporate business transactions, though, can constitutionally trigger a registration responsibility in the absence of congressional approval. The dormant Commerce Clause prohibits states from placing, in the absence of congressional authorization, an undue burden on interstate or international commerce, thereby barring state-compelled registration or the accompanying burdens on out-of-state or international corporations not conducting local business operations within the state. Although Congress could authorize the states (or the federal government) to impose a broader registration requirement on interstate and international commerce, it has generally avoided doing so, requiring state registration statutes to comport with the restrictions of the dormant Commerce Clause.
To ensure compliance with this dormant Commerce Clause limitation, general corporate registration statutes explicitly limit their application to those nonresident corporations that “transact business” in the state, which is typically statutorily defined by excluding those in-state activities that are not sufficient to constitute transacting business (such as interstate business activities, isolated in-state transactions, or mere solicitations). Only those corporations engaging in an ongoing and regular course of intrastate or local business activity must register and obtain a certificate of authority, as such corporations are conducting activities comparable to a local business enterprise. These local, ongoing activities implicate the regulatory authority of the state to attach conditions on the terms under which the nonresident corporation operates within the state. In other words, in exchange for the state’s permission to conduct such local activities, the corporation can be obligated to accept proportional state-imposed qualifications.
International corporations headquartered abroad typically avoid the state registration requirement by conducting any in-state businesses through domestic subsidiaries that are subject to the registration requirement. But not all foreign corporations are able to avoid the registration requirement. Foreign banking corporations organized outside the United States but transacting business within a state must often register and appoint an agent for service of process. And other international corporations likewise must register when conducting business within the state.
The Historical View of Corporate Registration and Jurisdictional Consent
What is the impact of state registration on a foreign corporation’s amenability to suit? Historically, the original purpose of corporate registration statutes was to provide a basis for service on an in-state agent within state territory that would authorize jurisdictional power over the nonresident corporation while comporting with the then-prevailing sovereignty limitations on adjudicative authority. States in the mid-nineteenth century began enacting such statutes compelling corporations, as a condition for transacting in-state business, to register with the state and appoint an agent for service of process, thereby ensuring the registering corporation’s amenability for its in-state obligations. The Supreme Court first upheld this quid pro quo in Lafayette Insurance Co. v. French (1856), reasoning that a corporation “must be taken to assent to the condition upon which alone such business could be there transacted.” Yet the Court explicitly limited its decision to situations in which the suits were related to the business conducted within the forum.
Subsequent nineteenth-century cases continued to describe the permissible corporate consent for the privilege of conducting business as limited to actions related to the corporation’s conduct of business within the forum. As the corporate presence fiction developed, though, service on a statutory agent became a jurisdictional basis in early twentieth-century cases to adjudicate claims unrelated to the corporation’s activities within the state, with some cases indicating that service on a registered corporate agent within the state sufficed for amenability. Yet these cases were linked to the then-prevailing “presence” by “doing business” construct. The Court was hesitant to predicate a defendant’s amenability on serving a registered agent when the defendant no longer was conducting business within the forum, several times construing state registration statutes as not encompassing such a questionable jurisdictional reach.
Yet if the defendant was conducting business in the forum, the Supreme Court did not need to evaluate the impact of registration on the defendant’s amenability under other jurisdictional doctrines that developed in the twentieth century, such as corporate presence and implicit consent through in-state activities. While these early twentieth-century fictions were cast aside by International Shoe Co. v. Washington (1945) in favor of a more realistic analysis of the reasonableness of the jurisdictional assertion in light of the defendant’s forum activities, the new Shoe paradigm precluded the need in most cases to evaluate the continuing relevance of jurisdiction predicated on corporate registration alone. Since International Shoe, the Supreme Court has never returned to the constitutionality of jurisdiction predicated on corporate registration except in dicta.
Now, though, after the Roberts Court’s restrictive turn in personal jurisdiction, the issue is more salient as a jurisdictional alternative in both domestic and transnational cases. But the permissibility of such a scheme is in doubt.
The Constitutionality of Jurisdiction by Registration
The permissibility of such jurisdiction based on corporate registration depends on interpreting the state’s corporate registration statute while recognizing constitutional limits.
Existing state registration statutes rarely specify the jurisdictional consequences, if any, of a corporation’s in-state registration to do business. Instead, these consequences have depended upon case law interpretation. A federal court in Illinois, for example, has held that Illinois’ registration statute did not give rise to general jurisdiction over a foreign bank that had registered to do business in Illinois, explaining that under the Supreme Court’s modern framework “numerous district courts in this Circuit have concluded that registering to do business in a state and/or designating a registered agent for service of process is not enough to make a corporation ‘at home’ in that state.” Most federal circuit courts and state supreme courts over the last few years have likewise interpreted state registration statutes as not requiring a registering defendant’s all-purpose jurisdictional amenability to suit.
On the constitutional question, federal and state courts have indicated that the continued constitutional validity of all-purpose jurisdictional consent via corporate registration is doubtful after the Roberts Court limited general jurisdiction to a defendant’s home states. The Second Circuit argued that all-purpose consent from registration would subject every corporation “to general jurisdiction in every state in which it registered,” which would rob the “at home” requirement “of meaning by a back-door thief.” Likewise, the Pennsylvania Supreme Court struck down a statute explicitly authorizing dispute-blind jurisdiction over any entity “qualif[ied] as a foreign corporation under the laws of this Commonwealth.”
The Supreme Court of Georgia, by contrast, recently upheld jurisdiction over out-of-state entities registered to do business inside the state. That decision, Cooper Tire & Rubber v. McCall, is now being challenged in the United States Supreme Court. If the Supreme Court decides to grant cert, we may soon have answers regarding the effect of business registration on jurisdiction. If not, state and federal courts will be left to continue to wrestle with the underlying questions and sometimes come to differing answers.
In prior writing, we’ve recommended that the Uniform Law Commission (ULC) propose a Model Act for amending existing state corporate registration schemes to require, as a condition of doing business in a state, the corporation’s consent to suit in defined circumstances that implicate state sovereign interests. For example, the statute might authorize jurisdiction when the suit arises from an injury suffered in the state, the suit is brought by a state resident, the suit is governed by that state’s law, or the suit is to enforce a judgment or remedial order against persons or property within the state, such as funds held by an international bank. As we discuss, such an explicit, defined-consent scheme, limited only to those claims implicating well-recognized state adjudicative interests, promotes predictability, satisfies current constitutional limitations, and achieves a balance between the interests of plaintiffs, defendants, and sovereign states. This would assist transnational litigation by offering greater predictability about when and where foreign entities are subject to compulsory process.