Notice Risk and Registered Agency.

• Author: Jennings, Andrew K.

1. INTRODUCTION 76 II. NOTICE RISK AND NOTICE TECHNOLOGY 77 III. THE COSTS OF REGISTERED AGENCY 81 A. Costs to Business 81 B. Costs to Public Administration 85 C. Costs to Civil Process 86 1. Default Costs for Defendants 86 a. Agent Failure 87 b. Mutual Failure 87 c. Client Failure 88 2. Compliance Costs for Plaintiffs 88 IV. REPLACING REGISTERED AGENCY 89 V. CONCLUSION 92 APPENDIX 94 I. INTRODUCTION

   Registered agents have been a workaday feature of American corporate law for over a century. Despite their long history, this Article is the first to be focused on them as a scholarly topic. (1) And given that it proposes to do away with them, it should also perhaps be the last.

   Appointing a registered agent is an early and familiar step in forming a business entity. (2) The agent has a simple, but occasionally important, job: be available to accept service of process on behalf of the business entity and forward those papers on to its management. (3) If they prefer to skip this intermediary, plaintiffs are generally free to serve a defendant firm's officers or directors directly. (4) Personal service can be challenged, however, by not knowing who a firm's officers or directors are, much less where they are located. Because serving officers or directors is challenging, if not infeasible, a technology is needed to make serving corporate defendants both reliable and efficient, i.e., defendant firms' decision-makers receive actual notice of actions against the firm and plaintiffs perfect service with minimal expense or uncertainty. (5) Registered agents fill that role. Because agents' names and addresses are centrally filed with state corporate administrators and are freely accessible to the public and lawyers, plaintiffs can readily "find" and serve firms without knowing the names or whereabouts of their officers or directors, or needing to litigate later whether the person who received the papers was the right person to do so. (6)

   Despite being an ingenious and elegant solution to the problem of serving business entities, registered agency is a nineteenth-century technology in a twenty-first-century world. (7) It has, no doubt, seen some enhancements along the way. For example, commercial registered agents (8) now routinely scan served papers and post them to online customer portals, rather than forwarding them via U.S. mail. Despite some modern touches, though, this technology is still a manual one that imposes unnecessary costs and risks on business, public administration, and civil process. That is not to say, however, that there is no longer a need for a technology that makes service on firms reliable and efficient. The incumbent technology may be outdated, but the need for its functionality remains. With these points in mind, this Article proposes replacing registered agency with a less expensive, more reliable notice technology: email.

   The Article's first part explains the beneficial role of registered agency as a technology for managing notice risk in civil litigation. The second part estimates the costs and risks registered agency imposes on business, public administration, and civil process. The last part shows how email can replace registered agency and answers likely objections to its doing so. As a final word, the Appendix proposes model legislation--the Electronic Entity-Service Act--that states can use to begin making the switch.

2. NOTICE RISK AND NOTICE TECHNOLOGY

   Registered agency helps manage notice risk in civil litigation. As this Part shows, that function is as important today as it was a century ago.

   Although registered agency is a feature of every state's corporate law, Delaware is a good starting point for thinking about the registered agent's role. When it first adopted the General Corporation Law in 1899, Delaware required process to be served either personally on the corporation's president or "by leaving the [papers] at the [president's] dwelling house or usual place of abode." (9) If the president lived out of state, then the corporate secretary or a director could be served, (10) either personally or by substitution. (11)

   That kind of notice system would be fairly workable in an economy of small, locally focused firms. (12) A supplier to a factory, for example, might personally know and interact with the company's president; it would not be so difficult to perfect personal service on the president in a dispute over unpaid invoices. Needless to say, the scale and geography of enterprise have changed since 1899. A supplier to Walmart, Inc. or Facebook, Inc., or another large company incorporated in Delaware, would have a hard time finding or serving its president, secretary, or one of its directors. (13) In 1925, Delaware addressed this who-and-where challenge by introducing two innovations for serving a corporation: service on a "resident" agent (which itself could be a corporation) or substituted service on the Delaware Secretary of State. (14) Those provisions remain conceptually in place today. (15)

   These innovations effected a legal technology that facilitated the civil-procedural task of allocating notice risk between plaintiffs and defendants. Due process requires that defendants have notice of actions so that they may participate in the litigation. (16) For defendants, notice risk is the risk that actions proceed without their knowledge, preventing them from participating in the actions or exercising rights they may have. (17) For plaintiffs, it is the risk that if defendants' notice rights are violated, an action might be dismissed, preventing substantive claims from being vindicated. Allocating notice risk means balancing the interest of defendants in having actual notice against plaintiffs' interest in litigation going forward and avoiding incentives for defendants to evade service. (18) In the context of litigation against firms, that balancing means that plaintiffs should not gain an advantage because defendants' officers are unaware of actions or learn of them at the last moment. (19) Nor should corporate defendants be advantaged because their incorporeal nature makes serving them too hard, or leaves the effectiveness of service too uncertain. (20)

   To balance these interests, civil procedures provide rules for allocating notice risk between parties. (21) First, plaintiffs must serve papers in accordance with procedures "reasonably calculated" (22) to ensure that defendants receive actual notice. They bear the risk, including the potential of dismissal, if service fails to follow these procedures and, as a result, defendants do not receive notice. (23) After plaintiffs have followed those procedures, though, defendants bear the risk of having actual notice, i.e., the papers getting to the person who will need to make active decisions about the litigation. (24) For defendants, this risk includes default judgment or having less time to prepare a response. (25)

   To illustrate notice risk, imagine a rule that papers need only be sent by mail to any address where the plaintiff reasonably believes that the defendant conducts business. Such a rule could be justified on the ground that plaintiffs should not be required to guess who the appropriate decisionmaker to serve is, knowledge that may exist only within the defendant firm. But this rule would risk that organizationally complex defendants would not receive actual notice, giving plaintiffs tremendous advantages in litigation. For example, mailing service to a branch of a national chain would at least slow down the materials getting to the appropriate decision-makers, and it could cause a failure of notice altogether (e.g., an inattentive branch manager neglects to forward the papers). (26) In turn, the defendant could face consequences as severe as default judgment. (27)

   Contrast that hypothetical rule with one requiring that "the chief corporate legal decision-maker" must have actual notice for service to be effective. (28) A justification for this rule would be that the person who makes legal decisions for the firm should personally know about litigation it faces. Yet under this rule, a plaintiff might diligently attempt to perfect service while having no way to know whether the chief corporate legal decision-maker ever received the papers. Indeed, the plaintiff might have no way of knowing who that person is. (29) If it guesses wrongly, its claim could be dismissed.

   In these hypotheticals, either the defendant or the plaintiff is harmed by failures of actual notice. A service rule loose about actual notice will disadvantage defendants, while one that is strict will disadvantage plaintiffs. (30) Civil procedures allocate this risk between the two sides through rules, like Civil Rules 4 and 5, that approximate actual service. (31) In other words, these rules provide service procedures that are "reasonably certain to inform those affected" by a legal action. (32)

   In the corporate context, that is where registered agents come in. The firm chooses the agent and can instruct it on what to do with the service it accepts. (33) The plaintiff satisfies its burden by serving the agent, who is responsible for getting the papers to the firm. The risk for a failure of actual service is thus allocated to the firm because it chose the agent for this specific task and can police the agent's performance by appointing a new one. (34)

   Registered agents are thus a technology by which plaintiffs can reliably and efficiently give corporate defendants notice that they are being sued. (35) "Actual notice" has residual uncertainty in the case of artificial persons: how can it be known whether papers have found their way to the appropriate decision-maker? Despite that residual uncertainty, this notice technology allows plaintiffs confidence that they have perfected service, while it gives defendants control (in the form of appointing and replacing their agents) over their ability to receive actual notice. More, it accounts for the...