Interpretive Opinion No. 71 / 46F
State of California Department of Corporations
James L. Kelly, Acting 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. Melvyn B. Fliegel
Attorney at Law
Schwartz & Alschuler
1880 Century Park East
Los Angeles, CA 90067
Dear Mr. Fliegel:
The request for an interpretive opinion contained in your letter dated May 20, 1971, as supplemented by your letter dated June 23, 1971, has been considered by the Commissioner. Your letters raise the question whether the agreements between National Home Inspection Services, Inc., Maryland corporation ("National") , and the persons referred to in your letter and hereinbelow as "regional managers'' and "inspectors", are franchises within the meaning of section 31005 and subject to the provisions of the California Franchise Investment Law. This question is answered in the negative.
You have represented that National is engaged in the business of providing inspections of homes for and reporting to prospective purchasers, mortgage lenders, and other interested persons who pay for such service a fee equal to approximately 1/10 of one percent of the proposed sales price.
National maintains its principal offices in the Baltimore-Washington metropolitan area. It proposes to conduct business in California by engaging regional managers who will have responsibility for various metropolitan areas within this state. It will advertise its services in national and local media, and the regional managers also may place advertising in local media. The regional managers will respond to inquiries produced from such advertising and will accept orders for inspection. The premises occupied by the regional managers will be identified as premises of National. Qualified inspectors will be employed on behalf of National for individual jobs to make the inspection and report. All reports will be issued under National's trade name on copyrighted forms bearing its trademark. Regional managers and inspectors probably also will solicit inspection business on their own.
Inspection fees will be collected either by the regional manager at the time when he accepts the customer's order, or by the inspector at the time when the service is performed. The fees will be apportioned approximately 50% to the inspector, 10% to the regional manager, and 40% to National. You have represented that regional managers will be employed either as independent contractors operating an office of National or as employees of National, and that inspectors will be employed, intially at least, as independent contractors.
For an agreement to come within the definition of "franchise", as contained in Section 31005 of the Franchise Investment law, it is essential that the franchisee thereby be 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 the franchisor, and that the business operated by the franchisee pursuant to such plan or system, be substantially associated with the franchisor's trade name, trademark, or other commercial symbol.
Based upon your representations, as :reflected above, we conclude that to the extent that regional managers and inspectors are engaged in the business of offering or distributing services in their own respective names and on their own accounts, they do so independent of. National, and not under National's marketing plan or system, nor in connection with any commercial symbol of National; and that to the extent that they render services for the account of National and associated with National's trade name, they will not be engaged in a business of their own but in a business conducted by National.
In this connection, it appears that all reports will be issued in National's trade name and bearing National's trademark. The fact that the regional managers and inspectors participate in the gross receipts from inspections and reports, is not inconsistent with our understanding that the regional managers and inspectors are not under contract to the clients of National, in that such participation in payments by these clients is compensation to the regional managers and inspectors for the services which they render to National.
For the foregoing reasons, we are of the opinion that the agreements between National on the one hand and the regional managers and inspectors on the other, are not "franchises" within the definition of Section 31005, and are not subject to the provisions, of the Franchise Investment Law.
Dated: San Francisco California
August 26, 1971
By order of
JAMES. L. KELLY
Acting Commissioner of Corporations
HANS A. MATTES
Office of Policy