An Illinois corporation hires an employee, leases office space in California. A dispute then arises between the corporation and its California employee. The employee sues and the corporation counterclaims. The employee moves to dismiss the counterclaims based on the corporation’s failure to qualify to transact intrastate business. Who wins? If your guess is the employee, guess again.
California Corporations Code § 2105(a) provides that ”[a] foreign corporation shall not transact intrastate business without having first obtained from the Secretary of State a certificate of qualification.” A foreign corporation that fails to obtain a certificate of qualification “shall not maintain any action or proceeding upon any intrastate business so transacted in any court of this state.” Cal. Corp. Code § 2203(c). Thus, the question of whether a foreign corporation that has not qualified can maintain an action turns on whether that action:
arose out of transaction of intrastate business; and
was commenced prior to corporation qualifying to transact intrastate business.
In Jarzab v. KM Enters., 2012 U.S. Dist. LEXIS 114575 (Aug. 14, 2012), U.S. Magistrate Judge Laurel Beeler found that the employee (the counter-defendant) had not sustained his burden with respect to the motion to dismiss. As to the allegation that the corporation had hired a California resident, Judge Beeler said “simply hiring a California resident as an employee is not significant; it tells the court nothing of JT Jarzab’s [the employee] duties and responsibilities or of KME’s [the corporation] business.” With respect to the California lease, the Judge observed “while some decisions have relied upon a party’s maintenance of an office within California to be relevant, those decisions relied upon it only in conjunction with other facts demonstrating intrastate business.” Finally, the plaintiff pointed to the corporation’s own allegations in its counterclaim that it had a “thriving business in California” and that “[o]ne of JT Jarzab’s jobs was to develop that business”. Again, the court was not persuaded, noting that the corporation also alleged that the employee conducted many activities outside of California and that those activities were not directed or related to intrastate business.
The take away from this decision should not be that hiring an employee and leasing space in California are not sufficient to establish transaction of intrastate business here. Judge Beeler explicitly notes that she had not concluded that the corporation did not transact intrastate business. It is possible that discovery will create an additional record on which a conclusion may be reached.