Interpretive Opinion No. 71 / 42F

State of California Department of Corporations

Anthony R. Pierno, Commissioner
In reply refer to: File No. _____

This interpretive opinion is issued by the Commissioner of Corporations pursuant to section 31510 of the franchise investment law. It is applicable only to the transaction identified in the request therefor, and may not be relied upon in connection with any other transaction.

Mr. Dixon Q Dern
Attorney at Law
Dern and Mason
9465 Wilshire Boulevard
Beverly Hills, CA 90212

Dear Mr. Dern:

The request for an interpretive opinion contained in your letter dated June 2, 1971, has been considered by the Commissioner. Your letter raises the question whether the license agreements described therein between Bill Derman Productions, Inc., a California corporation ("Derrnan"), and television stations, are franchises within the definition of Section 31005, and subject to the provisions, of the Franchise Investment Law. This question is answered in the negative.

You have represented that Derman is engaged in the business of producing television properties and programs. It proposes to enter into license agreements with television stations granting them the right to produce a series of programs based upon the format of a "game-show type" series produced and owned by Derman, known as "Beat the Odds". The. television stations will be authorized by the agreement to use the format and trade name "Beat the Odds." Moreover, Derman will arrange to produce and furnish to the stations an electric box prop and perhaps other props for use in connection with the production of the show. Derman will charge the stations a weekly royalty for the use of the format and trade name. This royalty may either be in a flat weekly amount or a percentage of the revenues received by the stations from advertising. An additional charge will be made for the props and this charge may or may not be included in the royalty.

You have further represented that, in addition, Derman or an affiliated company may in some instances supply merchandise for use as giveaway prizes on "Beat the Odds", in return either for cash or broadcasting time. Generally, the consideration received by Derman for the merchandise will be equal to, but in some instance it may be more than, the wholesale cost of the merchandise plus a handling fee from 15% to 20%. As presently contemplated, this "merchandising service" will be optional for the stations, but at a later time it may be made obligatory.

Section 31005 defines "franchise" to include an agreement, either oral or written, between two or more persons by which a franchiseee is granted the right to engage in the business of offering, selling or distributing goods or services under a marketing plan or system prescribed in substantial part by a franchisor, the operation of the franchisee's business pursuant to such plan or system is substantially associated with the :franchisor's commercial symbol, such as its trade name, and the franchisee is required to pay a franchise fee. Section 31011 defines "franchise fee" to mean any fee or charge that a franchisee or subfranchisor is required to pay or agrees to pay for the right to enter into a business under a franchise agreement, including, but not limited to, any payment for goods and services. The purchase or agreement to purchase goods at a bona fide wholesale price is not considered the payment of a "franchise fee" pursuant to Section 31011 (a), and Rule 011 of the Commissioner exempts from the registration requirement of Section 31110 of the Law, any offer or sale of a franchise which would be subject to registration solely because the franchisee purchases or agrees to purchase goods at a price other than the bona fide wholesale price, if the total payment in excess of the bona fide wholesale price computed on an annual basis does not exceed $100.

We concur in your opinion that the license agreements do not provide for a "marketing plan or system", as those terms are used in Section 31005(a). Derman licenses the stations to produce the "Beat the Odds" show. Such license, of course, includes the format and the use of props used by licensees to produce the show. However, it does not appear that Derman in any way prescribes or controls the manner in which the television station so licensed will market the show. Any business arrangements "which the station may deem appropriate for the purpose of producing revenue from the production of the show, as far as we are informed, are left entirely to its discretion.

Inasmuch as the essential element of a marketing plan or system prescribed in substantial part by the franchisor, is lacking in the instant case, it is unnecessary for us to consider whether the agreement in question provides for the payment of a "franchise fee" and especially whether the royalty which the stations are required to pay for the license to produce the show, is such a fee.

It is our opinion that, under the circumstances described in your letter as outlined above, the license agreements between Derman and the television stations do not constitute "franchises" within the meaning of Section 31005 and are not subject to the provisions of the Franchise Investment Law.

Dated: San Francisco California
July 27, 1971

By order of
ANTHONY R. PIERNO
Commissioner of Corporations

_______________________
HANS A. MATTES
Assistant Commissioner
Office of Policy