United States: The Dot-Com Drop Policy Of The California Secretary Of State

The Office of the Secretary of State in California has adopted a little-noticed internal policy that drops the ".com" from an Internet company's name for the purpose of determining whether the company's proposed corporate name is likely to mislead or deceive the public. This "dot-com drop" policy, combined with certain provisions of the California Corporations Code, means that doing business on the Internet under a particular domain name does not guarantee the use of that name when incorporating or qualifying to do business in California. Indeed, companies could be prevented from using the business names they currently own or intend to use. Given the significance of business names in the marketplace, the potential impact of the policy on dot-coms could not only affect their ability to operate but could impair their efforts to maximize the value associated with their intellectual properties---including their Internet domain names.

Most operators and managers of commercial dot-coms assume that the incorporation process simply entails adding an "Inc." to the company name. In California this may not be the case. Just as the new technology of the Internet has compelled all aspects of business and society to develop new and unique modifications to traditional operating procedures, it has also led to the adoption of California's dot-com drop policy. The potential problems associated with the policy are clearly troublesome, but fortunately they are not insurmountable.

In applying restrictions on the use of corporate business names, the secretary of state's office, under Corporations Code Sections 201 (b) and 2106(b), cannot allow a corporation to be formed or qualified if:

• It has a name that is "likely to mislead the public or which is he same as, or resembles so closely [the name of a domestic or foreign corporation] as to tend to deceive."
• The proposed corporate name is already registered with the secretary of state's office or the name is already under reservation by another corporation-either domestic or foreign (meaning one that is based either out of state or in a country other than the United States).¹

A corporation's use of a name in violation of the applicable sections of the Corporations Code may be enjoined, notwithstanding the filing of its articles by the secretary of state.²

In California, proposed corporate business names are routinely checked only against active corporations of record in the secretary of state's office. Since there is no legal requirement that corporate names be checked against other forms of business entities proposed corporate names are not checked against the names of limited partnerships, general partnerships, limited liability companies, or limited liability partnerships, nor are they checked against trademarks, service marks, or local fictitious business name filings.³

Moreover, the secretary of state's office currently is under no obligation or duty to check proposed corporate names against the major Internet domain name databases such as those maintained by Network Solutions, Inc. (nsi.com) and Register.com.

Under the secretary of state's dot-com drop policy, a submission to the secretary of state's office of the proposed name "XYZ.com, Inc.," for example, will result in a check of only the name XYZ, Inc. in the corporate name database. Permission to incorporate under the name XYZ.com, Inc. will be given only if no conflicts exist. If a conflict does occur, incorporation under a different name may be necessary

Exactly how or when the dot-com drop policy was developed is uncertain. Representatives from the Corporations Division and the Name Availability Unit of the secretary of state's office in Sacramento could not pinpoint when the policy was first formed.⁴ Indeed, the representatives were not aware of any official memorandum or published guideline on the topic and thus concluded that the policy was developed internally over time.⁵ No publication regarding the policy appears on the secretary of state's Web site, which also lacks information or a statement on the unique issues of naming rights and restrictions associated with incorporating or qualifying a dot-com.⁶ Thus the only way to obtain information on the subject seems to be through direct interaction with secretary of state representatives during the name reservation and incorporation process.

An official statement from the secretary of state with guidance on how the policy is implemented would be beneficial for the legal community and the public. Indeed, the lack of explicit guidelines has resulted in the absence of a unified or consistent understanding even among secretary of state representatives regarding the development of the dot-com drop policy and how it should be applied. Employees in the main office in Sacramento and those working in the various branch offices located throughout the state presumably should be on the same page regarding the policy and its application. Instead, personnel from the secretary of state's office have at times publicly released contradictory and materially inaccurate information on the subject of incorporating dot-coms---including the misinformation that California does not allow corporations to contain a .com in their name under any circumstances. Fortunately, that notion is erroneous. Unfortunately, however, it may be true under certain specific conditions.

The secretary of state's internal dot-com drop policy and its duty under the California Corporations Code to disallow a name that is likely to mislead the public may in fact ultimately mandate that an Internet company alter or modify the use of its existing domain name when incorporating or qualifying to do business in California. Conflicts will arise if the name XYZ, Inc., for example, is already registered by another corporation not based on the Internet or if that name has been reserved previously. An additional conflict will occur if another corporation is operating under a name that so closely resembles the proposed name that operating under the proposed name may deceive the public. For instance, XYZ Corp. or XYZs, Inc. presumably would be deemed too close to XYZ, Inc. to allow the use of that name. The secretary of state's office will not allow two corporations to have the same or closely similar names-even if only one is Internet-based-unless they are affiliated in some way.⁷

Problems such as these can wreak havoc on the best-laid business plans. A company dissatisfied with the prospect of incorporation without its valuable and unique .com may choose to incorporate in another jurisdiction, such as Delaware, Nevada, or Florida (which also allow an Internet company to incorporate with com as part of the corporate name), or in a jurisdiction where a naming conflict does not exist. Nevertheless, the single act of incorporating in another jurisdiction may not ultimately solve the problem if the company seeks to do business in California. Foreign corporations (including foreign Internet-based corporations) that attempt to qualify in California are also subject to the same restrictions regarding names and naming rights.⁸ Just as with domestic corporations, the secretary of state's office has chosen to drop the .com from the name of an Internet-based foreign corporation when considering its name reservation for purposes of qualification. For example, a foreign corporation would be unable to qualify in California under the name XYZ.com, Inc. or XYZ.com, Inc., a Delaware corporation, if the name XYZ, Inc., or a sufficiently similar name, is being used by another domestic or foreign corporation currently doing business in California.

Faced with the fact that doing business on the Internet under a particular domain name does not ensure the use of that name in California when incorporating or qualifying the company, dot-coms must be aware of their options. If the dot-com chooses to follow through with incorporation, or if it wishes to do business in California as a foreign corporation, it must adapt to the impact of the dot-com drop policy on its business domain name. At the same time, the company should refuse to relinquish the value and distinctions tied to its existence as an Internet-based enterprise.

Domain name recognition in the e-commerce marketplace has become as important as brand name recognition. Marquee value is so fundamentally tied with marketing that a domain name arguably is an irreplaceable component of the value of an Internet company's operations and its intellectual property. Consequently, Internet clients who choose to do business in California will demand, and legal counsel and advisors should provide, a resolution to the problems resulting from California's restrictions and limitations on the use of domain names as corporate names. Counsel should offer several solutions to the problem and allow the client to be flexible in choosing how to proceed.

For a dot-com considering domestic incorporation, one approach is to adopt a name that is similar, but not identical, to the name of an existing domestic or foreign corporation provided that the corporation consents, in writing, to the use of the name -- as long as the secretary of state's office finds that, under the circumstances, the public is not likely to be misled.⁹ The consent letter should be submitted on the letterhead of the consenting corporation, according to the secretary of state's office, and it should be signed by an authorized officer of the consenting corporation.

The company could choose to incorporate under another name -- for example, XYZ.com could incorporate as Internet XYZ, Inc. A fictitious business name could then be filed, which notifies the public that the corporation will be doing business in California as XYZ.com. Fictitious business names are not filed with the secretary of state's office. There is no provision in California for the registration of fictitious business names in a central registry at the state level. Thus the corporation must contact the city and/or county clerk and/or recorder in which the principal place of business is located for information regarding the requirements for filing or registering fictitious business names.

The company may consider altering its form of business entity to a limited liability company (although tax counsel should be consulted to analyze the potential issues that may arise with this action). The secretary of state's office allows limited liability companies to be organized and qualified with a com in the company name, although prohibitions against the use of the same (or closely similar) name as an existing limited liability company will apply.¹⁰ Accordingly, XYZ.com could choose to form a California limited liability company known as XYZ.com, LLC.

For a dot-com seeking qualification in California as a foreign corporation, one method is to make a submission of proof to the secretary of state's office, by affidavit or in another manner designated by the office, that covers four points:

1. The business that will be conducted in California by the foreign corporation is not the same as or similar to the business being conducted by the corporation with whose name the foreign corporation may conflict.
2. The public is not likely to be deceived.
3. The foreign corporation agrees that it will transact business in California under an assumed name disclosed to the secretary of state.
4. The foreign corporation will use the assumed name in all its dealings with the secretary of state and the conduct of its affairs in California. The assumed name may consist of the corporation's name with the addition of some distinguishing word or words (including, perhaps, .com) acceptable to the secretary of state, or it may simply be another name that is available. A foreign corporation that makes an agreement with the secretary of state to use an assumed name must refrain from doing business in California under any other name as long as the agreement remains in effect ¹¹

A number of other options should be considered. First, the foreign corporation also may choose to come into California using a different corporate name. For instance, XYZ.com, Inc. can choose to qualify in California as XYZ.com, Inc., a Delaware corporation that will do business in California as Internet XYZ, Inc. Second, the foreign corporation can become the sole shareholder of a newly formed California subsidiary corporation. The new California subsidiary corporation could then file a fictitious business name using the Internet domain name. Third, a foreign corporation can form a California single member limited liability company using its Internet domain name and become the sole member of the new limited liability company. Finally, a foreign corporation seeking to qualify to transact intrastate business in California is authorized under the Corporations Code to obtain and file an order from a court of competent jurisdiction that permanently enjoins another corporation with a conflicting name from doing business in California under that name. ¹²

Other options may be available to dot-com clients given specific factual scenarios. With all these approaches, however, counsel should bear in mind that the filing of organizational documents with the California secretary of state does not authorize the use in California of any name that violates the preexisting rights of an individual or entity to a name under the Federal Trademark Act,¹³ the California Trademark Act,¹⁴ the Fictitious Business Name Act ¹⁵ and common law, including rights to a trade name.

1 CORP. CODE §§201(b), 2106(b).

2 CORP. CODE §201(b).

3 For more information on corporate name availability, see the Web site of the California secretary of state at http://www.sa.ca.gov.

4 Telephone interviews conducted by the author (June 2000).

5 Id.

6 See the Califomia secretary of state's Web site, supra note 3. 7

7 Id.

8 CORP. CODE §2106(b).

9 CORP. CODE §201(b).

10 CORP. CODE §17052.

11 CORP. CODE §2106(b).

12 Id.

13 The Federal Trade Mark Act, 15 U.S.C. §§1051 et seq

14 The Califomia Trademark Act, BUS. & PROF. CODE §§ 14200 et seq.

15 The Fictitious Business Name Act, Bus. & PROF. CODE §§ 17900 et seq.