Significant responsibilities or liabilities can depend on whether one is “doing business” in a state. As this post explains (principally referring to California law for examples), “doing business” can mean three different things in three different contexts.

First, an out-of-state entity will need to register with a state as a “foreign” entity if it is doing business in the state. As explained in “Doing Business in CA? Be Sure to Register”, the term used in the California Corporations Code is to “transact intrastate business”, which is defined as “entering into repeated and successive transactions of its business in this state, other than interstate or foreign commerce” (emphasis added).

Second, one will need to pay taxes to a state if it is doing business in the state. The term used in California Revenue and Taxation Code Section 23101 is whether a business is “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit” (emphasis added).

Third, one will be subject to personal jurisdiction in a state (i.e., one can be sued there) if one is doing business in the state. The test set forth in California Code of Civil Procedure Section 410.10 is the broadest one that is legally possible: “A court of this state may exercise jurisdiction on any basis not inconsistent with the Constitution of this state or of the United States” (emphasis added).

Interestingly, the limit of what is consistent with the U.S. Constitution is discussed in New York Department of State Legal Memorandum CO01, which addresses the three tests for “doing business” in New York:

The classic statement of that principle is that for a state to assert jurisdiction the defendant must have “certain minimum contacts . . . such that the maintenance of suit does not offend traditional notions of fair play and substantial justice.” International Shoe Co. v. Washington. A party subjects itself to jurisdiction consistent with traditional notions of fair play and substantial justice when it “purposefully avails itself of the privilege of conducting activities within the forum state, thus invoking the benefits and protections of its laws.” Hanson v. Denkcla. Conducting activities without the state that are purposefully directed at the forum state also satisfies the constitutional standard. Burger King Corp. v. Rudzewicz. The defendant’s conduct and connection with the forum state must be such that he should reasonably anticipate being brought into court there. World-Wide Volkswagen v. Woodson. [Citations omitted.]

Bottom line: If you want to know what constitutes doing business in a state, be clear on why you are asking the question.

Photo credit: Rose Ann via stock.xchng

Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

“Texting” is booming in popularity, especially among younger workers. Are your personnel sending text messages on company-provided devices? If so, you should know about the Ninth Circuit’s decision in Quon v. Arch Wireless Operating Co., Inc., 529 F.3d 892 (2008).

Update: On June 17, 2010, the U.S. Supreme Court, in City of Ontario v. Quon,  overturned the Ninth Circuit decision, ruling that the search of employee text messages did not violate the Fourth Amendment prohibition against unreasonable search and seizure because (a) it was motivated by a legitimate work-related purpose and (b) it was not excessive in scope. However, the Court expressly sidestepped the issue of whether employees have a reasonable expectation of privacy in their text messages, so the precautions listed at the end of this post still are relevant.

Business vs. Personal Use

The City of Ontario, California, provided two-way text pagers to certain police officers. Arch Wireless owned the network that delivered the messages and stored the messages on its servers.

The City had no policy specifically directed to use of text pagers. However, the City did have a policy directed to use of its computers, Internet access and e-mail. The policy said that such resources must be used only for City business and that users should have no expectation of privacy, because the City reserved the right to log and monitor all such use, with or without notice. Officers were told that the policy applied to the pagers.

The City had to pay Arch an overage fee for every month that any officer used more than 25,000 characters. Because work-related usage would require fewer than 25,000 characters, excess usage was assumed to result from personal use, so the officer was required to pay the overage fee. The Lieutenant who administered the pagers told one officer, Sergeant Quon, that if he paid the overage fee, the Lieutenant would not audit Quon’s messages to determine which were personal.

After Quon exceeded the monthly limit several times, the Lieutenant ordered transcripts of Quon’s messages, which Arch Wireless provided. An Internal Affairs investigation showed that many of the messages were personal in nature, and some were sexually explicit.

Quon and other plaintiffs brought suit against Arch Wireless, the City, and other defendants, alleging, among other things, violation of plaintiffs’ Fourth Amendment right against unreasonable search and seizure.

Reasonable Expectation vs. Unreasonable Search

The Ninth Circuit noted that, generally, users have a reasonable expectation of privacy in the content of their text messages vis-a-vis the service provider and their employer. In this particular case, however, the City sought to eliminate that expectation through its published policy.

Yet the City’s policy was undercut when the individual responsible for administering the pagers said that so long as Quon paid for overages – which he did – his messages would not be audited. Quon’s reasonable expectation of privacy, thus, was reinstated. Consequently, the City’s search was unreasonable in scope and violated the Fourth Amendment to the U.S. Constitution.

Because this case arose in the context of a public employer and violation of the Fourth Amendment, it is not entirely clear whether and to what extent the ruling applies to private-sector employers. Nevertheless, given the growing popularity of text messaging (albeit typically on mobile phones, rather than pagers), prudent employers should act as though the Quon decision applies to them.

Precautions vs. Liability

So here are steps employers can take to help avoid Quon-type liability:

1. Company policies should be broad enough to cover all technology resources. To the extent that specific types of technology (such as mobile phones and computer networks) are discussed, they should be expressly identified as examples rather than an exhaustive list of the technologies that the policies govern.
2. There should be a policy stating that company-supplied technology is to be used only for company business purposes. Some employers feel that this recommendation is not appropriate for their businesses – they want employees to spend a lot of time at work, so they are willing to let technology resources be used for personal purposes. For these companies, the third recommendation is extra-important.
3. The company should notify employees that they should have no expectation of privacy with respect to (a) use of company-supplied technology and (b) any information that is obtained or produced while performing their duties for the company, irrespective of where the information may be stored.
4. The foregoing should be documented in an employee handbook that limits how its terms can be modified – typically, only in writing by a specified officer of the company.
5. Managers and administrators should be trained not to contradict, or grant exceptions to, provisions in the handbook.

Related post: Limiting Non-business E-mail: Define Precisely and Enforce Consistently (selective enforcement of an e-mail policy constituted a violation of federal labor law)

Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.