Interpretive Opinion No. 71 / 54F
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. M John Carson
Attorney at Law
Reed C. Lawlor
412 West Sixth Street
Los Angeles, CA 90014
Dear Mr. Carson:
The request for an interpretive opinion contained in your letter dated August 31, 1971, as supplemented by your letters dated September 13, 1971 and September 28, 1971, has been considered by the Commissioner. While your letters raise several problems in connection with a proposed patent license agreement between Angeles Metal Systems ("Angels") and a person referred to therein and hereinbelow as "Licensee", the principal question presented by you which, in our opinion, renders unnecessary detailed analysis of incidental problems, is whether Angeles in said agreement prescribes a marketing plan or system in substantial part to be observed by the Licensee. On the assumption stated below, this question is answered in the negative and the opinion expressed that the agreement does not constitute as "franchise" to the provisions of the Franchise Investment Law.
We understand that if Angeles has developed, manufactures and sells lightweight prefabricated housing systems ("systems") on which its patent application is pending. The agreement provides that it is entered into "in consideration of the sum of One ($1.00) Dollar and other good and valuable consideration." It further provides that Angeles grants to Licensee a non-exclusive right to manufacture the systems in Ventura County and to sell and install them anywhere in the United States, except as set forth therein, as well as to use its know-how in relation to the system. Beginning January 1, 1973, Licensee, upon notice and payment of $2,500, will have the exclusive right to manufacture systems (we assume the term "Building Systems") also in Santa Barbara and San Luis Obispo Counties. Licensee will not, without prior written consent of Angeles, advertise, sell or install systems under a trademark or trade name of Angeles. It will pay Angeles a royalty of $0.10 per lineal foot of systems manufactured by it during the term of the agreement.
You have explained certain language in the agreement which to us appears to contain inconsistencies, as intended to mean that Licensee may sell competitive housing systems without paying a royalty to Angeles, provided Angeles' know-how is not used, but that if such know-how is used, the royalty stipulated for Angeles systems is payable. If Licensee fails to pay Angeles a royalty of at least $1,000 for any quarter after the first quarter, Angeles may terminate the agreement on 90 days notice. Angeles also has the right to cancel the agreement on 90 days notice, if Licensee repeats defaults during any 6-month period.
Section 31005 of the Franchise Investment Law defines "franchise" to include an agreement, either oral or written, between two or more persons by which a franchise 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 or trademark, 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 such 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.
In making the determination whether there is a "prescribed marketing plan or system" within the meaning of Section 31005, it is necessary to keep in mind the objective of the Law to deal with a multiplicity of business establishments created by the franchisor, for all of which he ostensibly assures responsibility by causing them to be operated with the appearance of some centralized management and uniform standards as regards the quality and price of the goods sold, services rendered, and other material incidents of the operation. The marketing plan or system is prescribed by the franchisor as one of the important means by which the appearance of centralized managements and uniform standards is achieved (Dept. of Corps., Rel. 3-F, p. 5).
In this connection, we note that the agreement requires Licensee to maintain and bear the expense of a manufacturing facility, a sales and distribution system, and a warehouse in Ventura County, and to keep and maintain specified books of account and to make duly verified reports to Angeles before the15th day of each month. If Licensee chooses to operate under any of the approvals or permissions obtained by Angeles from various designated agencies, and Angeles is dissatisfied with the quality of the systems or the installations of Licensee, it may, if Licensee after notice, does not promptly remove "such causes", terminate the agreement on 30 days written notice.
In our opinion, the foregoing provisions do not substantially prescribe a marketing plan or system within the meaning of Section 31005; they merely establish requirements customary and appropriate for verification of the royalty accounting under the agreement and for the protection of the trade secrets, know-how, and potential patent rights of Angeles.
Nothing contained in your letters and the documents submitted therewith, indicates the imposition on Licenscees of an obligation to observe other directions concerning the manner in which systems may be marketed or sold, and your have asked us to assume that the blanks in the form of agreement submitted to us, when filled in, will not, call for any acts or practices which would have a bearing on the question of whether Angeles is prescribing a marketing plan or system.
In this connection, we wish to point out that a marketing plan or system may "prescribed" within the meaning of Section 31005, although it is not expressly Set forth in the agreement, if as a result of the franchisor's formal or informal suggestions or recommendations a sales program is originated which results in uniformity of operation on the part of the franchisor's several licensees, so as to create the appearance of centralized management and uniform standards characteristic of a "marketing plan or system" within the meaning of Section 31005.
Predicated on the assumption that such a marketing plan or system will not be implemented either by the terms of the agreement, as represented by you, or in the actual operation. thereof, we are of the opinion that the agreement in question does not constitute a "franchise" within the definition of Section 31005, and is not subject to the provisions, of the Franchise Investment Law.
In view of the conclusion which we have reached above, other questions raised in your letters do not require detailed analysis. We note, however, that in our opinion the payment of "the sum of One ($1.00) Dollar and other good and valuable consideration," apparently referring to the payment of the $.10 per lineal foot royalty and the $2,500 payment stipulated for extension of Licensee's territory beginning January 1, 1973, constitute "franchise fees" within the meaning of Section 31005; and furthermore that in our opinion the of Licensee's trade name, regardless of whether the use of such trademark or trade name is mandatory or optional with Licensee.
Dated: San Francisco, California
October 28, 1971
By order of
BRIAN R. VAN CAMP
Commissioner of Corporations
HANS A. MATTES
Office of Policy