Interpretive Opinion No. 71 / 9F

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. John Hatch
McDonald's Corporation
221 North LaSalle Street
Chicago, IL 60601

Dear Mr. Hatch:

The request for an interpretive opinion contained in your letter dated February 12, 1971, has been considered by the Commissioner. Your letter raises several questions with respect to the adequacy of the Statement to Licensees ("Statement") which McDonald's System of Calif., Inc. ("System" ) proposes to use in California, to meet disclosure requirements set forth in Section 3ll01(c) of the Franchise Investment Law.

We understand that you do not seek our opinion as to whether the Statement generally is sufficient to meet the requirements of Section 3110l(c) or to avoid liability arising under Sections 31300 and 31301of the Law, and, of course, we are unable to express such an opinion since we have no knowledge concerning the facts disclosed.

You have raised the question whether a disclaimer paragraph may be included in the Statement. While the wording of such disclaimer paragraph has not been submitted to us, we can state that to secure the exemption from the provisions of Chapter 2 of the Franchise Investment Law, and especially from the registration requirement of Section 31110, a franchisor who meets the requirements of Subdivisions (a) and (b) of Section 31101, must furnish to each prospective franchisee at the time specified in Subdivision (c), a written statement containing the information set forth in Items 1 through 14 of that Subdivision. The statement of the information required by these 14 items should be accurate, unambiguous, unconditional, and unqualified.

You have raised the further question whether to secure the exemption provided in Section 31101, the written disclosure required in Subdivision (c) of that Section must be furnished to an applicant for a franchise or a prospective franchisee who makes payment to System of a refundable deposit. You have stated that such deposit often is made as much as a year in advance of serious negotiations toward the execution of a franchise. Section 31101(c) requires the written disclosure to be made to each prospective franchisee at least 48 hours prior to the execution by the prospective franchisee of any binding franchise or other agreement, or at least 48 hours prior to the receipt of any consideration. The receipt of a refundable deposit constitutes receipt of consideration, and therefore is one of the events prior to which the disclosure must be made. Accordingly, in our opinion, to secure the exemption of Section 31101, System must make the disclosure required by Subdivision (c) of Section 31101 at least 48 hours prior to the receipt of the refundable deposit.

If no deposit, refundable or not, and no other consideration is received by Systems, the disclosure need not be made, unless Systems or its field personnel on its behalf enter into a binding franchise or other binding agreement with the prospective franchisee. Disclosure is not required if the negotiations of the field personnel and the oral. or written "preliminary agreement" referred to by you with a prospective franchisee, is not binding.

As regards the question raised by you with respect to the statement of the franchise fee charged, as required by Item 6 of Section 3110l(c), this item, in our opinion, calls only for a statement of the fee charged to the prospective franchisee to whom the particular disclosure is addressed, and not for a statement of fees charged to other franchisees or prospective franchisees. As regards the requirement for disclosure of "the proposed application of the proceeds of such fee by the franchisor", where as proposed by you, such use is not restricted, it would be appropriate to disclose that the franchise fee payable by the prospective franchisee will be included in the general operating funds of the franchisor.

Answering your final question as to disclosure of earnings projections, Item 13 of Section 31101(c) requires such disclosure only if the franchisor desires to use a statement of estimated or projected franchisee earnings. There is no requirement that the franchisor use such a statement. However, he may not use it unless it has been set forth in the written disclosure required to be made by Subdivision (c) at least 48 hours prior to the execution of a binding franchise or other agreement and at least 48 hours prior to the receipt of any receipt of a refundable deposit as above stated. The statement in paragraph 13 proposed by you, in our opinion does not comply with the requirements of Item 13 of Subdivision (c).

Dated: San Francisco, California
March 10, 1971

By order of ANTHONY R. PIERNO
Commissioner of Corporations

By __________________

HANS A. MATTES
Assistant Commissioner
Office of Policy