Notes & Comment
Vol. 2009, No. 3
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Business Entities
Naming A Company in California: New Regulations and Restrictions
One of the challenges with officially creating a company in California is also one of the most basic: selecting a name for the enterprise. Clients seeking to form a legal entity (corporation, LLC, limited partnership) by filing papers with the California Secretary of State have always been subject to the Secretary of State's general supervisory power to "approve" or "reject" the use of the proposed entity's name because of name conflicts with an existing business. The same is true if the client seeks to qualify an existing foreign company, such as a Delaware LLC, to do business in California -- the name of the Delaware LLC must be available for use in California.
The regulatory goal of this naming regime was to avoid confusion. New companies in California could not form if their proposed name was the same as or substantially similar to that of a pre-existing company. In the event of a name conflict, the new company was required to change its proposed name.
New Naming Regulations
The California Secretary of State's previous naming system was a hit and miss proposition, subject to bureaucratic discretion and administrative latitude that wasn't always exercised consistently. The state frequently "rejected" the proposed name of a new company that might conflict with an already-existing entity in California. But the system also permitted many, many companies to form and operate in California using names that were substantially similar to other business entities.
On May 14, 2009, the California Secretary of State issued new business entity naming regulations that apply if one chooses to form a corporation, LLC, limited partnership or other business entity in California (or seeks to qualify a foreign entity to do business in California). These new naming regulations are part of a 27-page document entitled "Business Entity Name Regulations & Additional Statutory Requirements and Restrictions."
The upshot of these new naming regulations is to make the formation of new business entities in California more difficult. Whereas the burden previously was on the state to approve or reject a new name (and the state gave new businesses the benefit of the doubt about that), these new rules basically shift the benefit of the doubt in "close name" cases against new business entrants. That's the biggest change: the Secretary of State now places the burden of finding a "clear" name on new businesses. They impose complex rules which, in "close name" cases, require the client to do legal analysis and more due diligence prior to filing organizing papers with the Secretary of State – that, or run the risk that the organizing papers will be rejected because of a name conflict with another company. The text of the final naming regulations can also be found here.
"Same or Deceptively Similar" Business Names
One main prong of the new naming rules is found in Section 21002(a) of Title 2 of the California Code of Regulations. Subject to some exceptions, it provides "the Secretary of State shall not file a document or grant a name reservation that includes a proposed name that is the same as or deceptively similar to an existing name." According to Section 21001(b), "'Deceptively similar' means to resemble so closely as to tend to deceive. A resemblance is considered as tending to deceive when a person using that care, caution and observation which the public uses and may be expected to use, would mistake a proposed name with an existing name."
The new regulations set forth eight categories of "same or deceptively similar" names that would raise red flags upon the filing of organizational documents with the Secretary of State. The following are some examples in the regulations of same or deceptively similar business names that, while technically different, would be problematic under this scheme:
- "Sampson, Incorporated, Sampson Corporation and Sampson Ltd."
- "Northwest Services Limited, Northwest Services Company and Northwest Services"
- "Southern State Contractors, Inc., Southern States Contractor, Corp. and Southern State's Contractor, Co."
- "The Finish Line Company and A Finish Line Company"
- "A B C Corp, AB C Corp. , A.B.C. Corp. and A-B-C Inc."
- "Good Time Rest Home, Inc. and Goodtime Rest Home Inc."
- "United 7 Company and United Seven, Inc."
Thus, if you seek to incorporate a new business in California to be named, for instance, "United 7 Company", and there is already a company in California named "United Seven, Inc.", the Secretary of State likely will reject your organizational papers because your proposed business name (United 7 Company) is the same or deceptively similar to a current business (United Seven, Inc.).
"Substantially Similar" Business Names
The regulations don't stop there, however. Section 21003 provides that substantially similar names can be used by new business entities with the consent of the existing business that holds the similar name. While there's no consent mechanism for "same or deceptively similar" names -- those appear subject to absolute rejection -- there is a way to use a "substantially similar" name in parallel with an existing business.
Practically speaking, how is a client to know before documents are filed if a proposed name would be classified by the Secretary of State as "same or deceptively similar" (and not subject to use even with consent) or merely as "substantially similar" (and eligible for use with consent)?
Again, Section 21002(b) covers "same or deceptively similar" names. It makes no mention of "substantially similar" names. That's provided for in Section 21003, which reads, in part:
"(a) Notwithstanding Section 21002, and without limiting the discretion of the Secretary of State to determine that a proposed name is the same as or deceptively similar to an existing name and [other exceptions], the Secretary of State may file a document containing a proposed name that is substantially the same as (sometimes referred to as "substantially similar" or "substantially similar to") an existing name only upon:
- (1) Proof of consent to the proposed name by the business entity possessing the existing name that is substantially the same; and
- (2) A finding by the Secretary of State that the public is not likely to be misled.
"(b) A proposed name is substantially the same as an existing name if it implies an affiliation with, or a subsidiary relationship to, a business entity possessing an existing name." (emphasis added).
According to the substantial similarity business name regulations, a proposed new business name is "rebuttably presumed to imply an affiliation or subsidiary relationship to a business entity [and therefore require consent]" if, among other things, the main difference between the new name and the old is the addition of a geographic designation (e.g., Acme, Inc. and Acme San Francisco, Inc.), a numerical designation (e.g., Acme Co. and Acme Co. No. 57), a compass direction (north, south, east, west) or the name "holdings" at the end of the proposed new business name (e.g., Acme, Inc. and Acme Holdings, Inc.). A geographic designation "includes the recognized name or abbreviation of a city, county, state, a recognized subdivision within a state or country, a lake or ocean, a region (such as: Central California, Bay Area, etc.), a country, or a continent. For purposes of this Section, the term geographic designation does not include street names." (Id., Sec. 21003(b)(3)).
A few examples in the new regulations perhaps help illustrate the "substantially similar" principle that would require both the consent of a preexisting business owner and the Secretary of State's finding that, even with such consent, the public is not likely to be misled by two businesses using the substantially similar name:
"Burger King, Burger King No. 5 and Burger King No. 57 are substantially the same as each other requiring consent from the oldest existing entity of record."
"Johnson Products, Inc. is substantially the same as Johnson Products of California, Inc. requiring consent."
These rules also specify the required format for the consent. See, Section 21004.
Further, only one consent is required, from the oldest business using the name: "In the event there is more than one existing name that is substantially the same as a proposed name, consent must be obtained from the business entity that acquired the substantially similar name of record on the earliest date." (Id., Section 21004(c)).
What's this all mean?
The California Secretary of State has recently enacted a complex naming scheme for new business entities that makes each proposed new business's choice of name a strategic factor almost as important as the choice of business entity itself. This new naming regime requires businesses to exercise more naming due diligence than before. It also requires a new business to focus on choosing a proposed name that's more arbitrary or fanciful (to borrow terms from trademark law) – meaning a name that's relatively unique and not generic. In fact, the Secretary of State seems generally to have imported trademark law principles into the corporate naming process in a way not previously contemplated.
The challenge is made obvious by examining the California Secretary of State's current business name database, which includes thousands of pre-existing business names. Many of these business names overlap by a considerable margin. That current overlap is not a problem in and of itself for existing businesses because they are effectively grandfathered under this new naming system. It does, however, make the new business formation process that much more tentative in California as otherwise proper organizational documents increasingly will be rejected by the Secretary of State due to name conflicts. This is a particularly unwelcome hurdle in fast-moving transactions that must close quickly. In other, less hurried formation projects, this new system will add delay and expense resulting from myriad unanticipated naming conflicts.
The new rules include no policy statements or findings of fact regarding consumer confusion, business deception or substantial inefficiency in the way business naming practices had previously been applied by the Secretary of State's office. There's no explanation given for this new rulemaking. We don't know whether the previous system "was broken" and needed fixing, or whether these new rules by the Secretary of State "broke" a business naming system in California that really didn't need repair.
Does it hurt consumers in California to allow two "mom and pop" groceries to incorporate using the same name, one in Redding and the other in Escondido? How is that deceptive to consumers? And how does the new system help California consumers facing two or more existing companies that have "same or deceptively similar" names but which are grandfathered out? Couldn't a simpler system have been put in place that requires companies to identify (and differentiate) themselves on legal documents and in advertising by the unique corporate filing number already issued by the Secretary of State (such as California attorneys must include state bar numbers on court filings)?
It's too early to tell if these new rules will streamline the corporate formation process in California, or complicate it, or have little impact. It's not clear how the new naming system will be applied by the Secretary of State's office. The rules do offer more guidance to department managers when they evaluate new corporate filings for conflicting names, but they also impose upon those managers perhaps too much of a mandate to reject "close name" filings. Moreover, it removes from state officials the flexibility to accept new "same or close name" business filings that won't really cause harm to anyone.
© Matthew Joseph 2009. Law Offices of Matthew Joseph, San Mateo, California, practices in the areas of intellectual property licensing, commercial real estate leasing, corporate formations and business transactions. No legal advice is intended by the information provided herein and recipients should independently consult counsel before taking any action related to this subject matter.