Neogard Corp. v. Malott & Peterson-Grundy

• Decision Date: 28 May 1980
• Docket Number: PETERSON-GRUNDY
• Citation: 106 Cal.App.3d 213,164 Cal.Rptr. 813
• Court: California Court of Appeals Court of Appeals
• Parties: NEOGARD CORP., etc., Plaintiff and Appellant, v. MALOTT &, etc., Defendant and Respondent. Civ. 44406.

Page 813

164 Cal.Rptr. 813

106 Cal.App.3d 213

NEOGARD CORP., etc., Plaintiff and Appellant, v. MALOTT & PETERSON-GRUNDY, etc., Defendant and Respondent.

Civ. 44406.

Court of Appeal, First District, Division 3, California.

May 28, 1980.

Rehearing Denied June 27, 1980.

Hearing Denied July 23, 1980.

Halley, Cornell & Lynch, Roger C. Peters, San Francisco, for plaintiff and appellant.

Dooley, Anderson, Berg & Pardini, David M. Dooley, David B. Franklin, San Francisco, for defendant and respondent.

RHODES, ^* Associate Justice.

The parties have raised a single, narrow issue: whether the State of California can temporarily prevent appellant Neogard Corporation from maintaining this lawsuit against appellee Mallott & Peterson-Grundy without running afoul of the Commerce Clause of the United States Constitution. Specifically the issue is whether Neogard's business efforts in California from 1965 to 1974 constituted sufficient local contact with this state to make it reasonable for the latter to enforce Corporations Code sections 2105 and 2203, subdivision (c), statutes designed to facilitate service of process on and to prevent tax evasion by out-of-state corporations. We conclude that Neogard's local presence was extensive enough to make application of the statutes to it reasonable and we affirm the judgment entered below.

I.

Neogard is a Texas corporation that markets a waterproofing system for certain floor surfaces in all 50 states. It is a wholly-owned subsidiary of Jones-Blair Paint Co., also a Texas corporation. Jones-Blair manufactures a waterproofing solvent and is the licensee of a patented process for bonding the solvent. From 1965 to 1974 Neogard's function in California was to develop a market for the waterproofing "system," that is the package consisting of the solvent and its application process. While the corporation did not maintain inventory, an office, a bank account, a telephone number, or payrolled employees in the state during the decade in question, it nonetheless played an active local role in all critical areas of the marketing process: selling the system to architects, controlling how and by whom the system was physically applied, guaranteeing its quality, and supervising the repair of subsequent defects.

Promotion of the system was conducted in the following manner. Neogard hired a local firm to ferret out construction projects whose design indicated that a waterproofing system would be needed. The local firm (manufacturer's representative) would then undertake to persuade the architects or engineers of such projects to designate Neogard's system as one of the waterproofing systems upon which bids by contractors would be accepted. ¹ The manufacturer's representatives were paid on a commission basis for any project that ultimately used the Neogard system.

The local firm was not on its own. Neogard personally trained its manufacturer's representatives how best to sell the system and supplied them with brochures and specification data sheets for use by the architects they contacted. Moreover, Neogard's sales representative for the West Coast made quarterly visits, during which he would accompany the manufacturer's representatives to project designers' offices and would make the sales pitches himself. According to the Northern California manufacturer's representative for 1967-1969, Neogard's West Coast sales representative accompanied him during those two years to the offices of 96 of the 126 promising projects he had discovered. It is conceded that the sales representative was on the payroll and an employee of Neogard.

When a sales effort was successful and the Neogard system was specified as one of those upon which bids would be taken, the process by which the contract to do the waterproofing was awarded was largely a formality controlled by Neogard. Neogard did not bid to install its own systems on California projects. ² Rather, it certified one to three waterproofing contractors in a particular area as qualified to apply its product and informed project designers that only these designated contractors would bid to apply the Neogard product. With these companies it signed an "Applicator Agreement" that demanded that a contractor winning a Neogard bid had to purchase the solvent from Neogard and apply it according to Neogard's specifications.

Mallott & Peterson-Grundy (hereafter MPG) became a Neogard applicator in 1965 and was apparently the only one in Northern California. Established in 1911, its reputation with architects redounded to Neogard's benefit. According to MPG's president, Neogard would insist on knowing the precise specifications of every job bid upon. It would then advise MPG exactly what it would cost the latter to obtain the necessary materials from Neogard, MPG would tailor its bid accordingly, and the latter would succeed in obtaining the contract in 90 to 95 per cent of the cases in which the Neogard system had been specified by name.

With respect to the actual performance of the construction contract the trial court found that Neogard exercised local supervision and control over MPG. The testimony established that it was of critical importance to Neogard that its system be applied correctly. It therefore trained its certified applicators locally and carefully, taking them step by step through their first few jobs and, until MPG proved itself competent, observed the latter's work closely in its first year with Neogard. Neogard also published an application manual to promote consistently high quality. MPG's president testified that Neogard people flew out from Texas to inspect every project MPG ever worked on, and that such inspections took place before, during, and after the application. On these visits the Neogard employee would invariably contact the architect's or the owner's representative as liaison between the latter and the contractor. ³

Finally, the evidence showed that a major selling point of the Neogard system was that Neogard and the contractor would jointly guarantee their work and product for three to ten years. Normally only the contractor guarantees such work and only for one year. Thus Neogard committed itself to an ongoing involvement with the local project as well as with the local contractor. The trial court found that a Neogard representative was sometimes present in California at completion of the project in order to sign the guarantee. ⁴ It appears too that when defects manifested themselves after the completion of a project and the guarantee had to be made good, Neogard people would appear at the site to assist MPG in remedying the problem.

In 1974 Neogard brought this lawsuit following a dispute between the parties as to which should bear the cost and responsibility for repairs necessary on four projects. MPG counterclaimed and in addition raised the affirmative defense that Neogard lacked the capacity to maintain a lawsuit based on intrastate business because it had not obtained a certificate to conduct such business prior to filing suit. (Corp.Code, §§ 2105, 2203, subd. (c).) A trial on the special defense was conducted first (Code Civ.Proc., § 597) whereupon the trial court found that the "business relationship between plaintiff and defendant between 1965 and 1974 constituted an interconnected pattern of inseparable business transactions," and that Neogard had "transacted intrastate business within the State of California in the course of that relationship." Since Neogard conceded that it had not obtained a certificate to conduct intrastate business the court entered judgment for MPG, holding that Neogard could not maintain the action until it complied with the penalty provisions of Corporations Code section 2203, subdivision (c). ⁵

Neogard appeals, ⁶ contending that, as defined by decisions construing the Commerce Clause of the United States Constitution, prior to 1974 it had engaged only in interstate, not intrastate, business in California, and that preventing it from proceeding with this lawsuit forthwith is repugnant to the Commerce Clause.

II.

The statutory scheme at issue works as follows. By virtue of its doing business in California, even though that business is interstate, an out-of-state corporation may lawfully be made, and is made, amenable to service of process in California. (Corp.Code, § 2111; Shaffer v. Heitner (1977) 433 U.S. 186, 97 S.Ct. 2569, 53 L.Ed.2d 683; Cornelison v. Chaney (1976) 16 Cal.3d 143, 127 Cal.Rptr. 352, 545 P.2d 264; Buckeye Boiler Co. v. Superior Court (1969) 71 Cal.2d 893, 80 Cal.Rptr. 113, 458 P.2d 57.) In addition, the out-of-state corporation may incur a tax obligation to the State of California by virtue of doing business, even interstate business, in and with residents of this state. (Rev. & Tax Code, §§ 23151.1, 23501, 6203; cf. National Geographic Society v. California Board of Equalization (1977) 430 U.S. 551, 97 S.Ct. 1386, 51 L.Ed.2d 631 (use tax); Complete Auto Transit v. Brady (1977) 430 U.S. 274, 97 S.Ct. 1076, 51 L.Ed.2d 326 (franchise tax); Northwestern States Portland Cement Co. v. Minnesota (1959) 358 U.S. 450, 79 S.Ct. 357, 3 L.Ed.2d 421 (net income tax).)

To facilitate service of process and to protect against tax evasion Corporations Code section 2105 requires that any foreign corporation wishing to transact intrastate business in California obtain a certificate from the Secretary of State. To obtain the qualifying certificate the corporation must consent to service of process, provide essential bits of information, and pay a licensing fee. ⁷ A corporation transacting intrastate business without a certificate risks a number of sanctions, both civil and criminal. Among them is the sanction provided for by Corporations Code section 2203, subdivision (c), the only one that has been applied to Neogard and the only one in issue. Corporations Code section 2203, subdivision (c) provides:

(c) A foreign corporation subject to the provisions of Chapter 21 (commencing...