Commissioner's Opinion No. 72 / 12F

State of California Department of Corporations

Brian R. Van Camp, 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.

Miss Barbara De Ome
Attorney at Law
Baker & De Ome
Central Building
14th and Broadway
Oakland, CA 94612

Dear Miss De Ome:

The request for an interpretive opinion contained in your letter dated August 20, 1971, as supplemented by your letters dated September 1, 1971, and February 9, 1972, has been considered by .the commissioner. Your.letters raise the question whether the arrangements between Mr. Mike Movsessian, dba Stoddard Cleaners, and various retailers, under the. circumstances described by you, are franchises within the definition of Section 31005, and subject to the provisions, of the Franchise Investment Law. Based upon the assumption stated below, this question is answered in the negative.

You have represented that Mr. Movsessian operates a wholesale dry cleaning business. His regular charge to dry cleaning establishments is 55% of their gross receipts for which he does all the cleaning work. The dry cleaning establishments keep 45% of their gross receipts. Mr. Movsessian now proposes to establish a series of retail cleaning shops, equip them, and sell them to retailers who will operate them under the trade name "Stoddard Cleaners".

You have represented that the retail stores will be self owned by the retailers and that Mr. Movsessian will have no control over the operation of the retail store which he has sold, except that the retailer will agree to send all dry cleaning to Mr. Movsessian's wholesale establishment "at the aforementioned rates", which we understand to mean 55% of the retailer's gross receipts. Operators must carry their own insurance. Stoddard Cleaners installs equipment required by the retailers for the operation of the business and charges them for this installation and it instructs the retailers in the operation of the cleaning business.

You have furthermore represented that Mr. Movsessian does not make suggestions or recommendations to the retailers concerning the use of tools, equipment, or supplies, and does not prescribe, suggest, or recommend the type of services to be rendered by the retailers. Nor does he prescribe, suggest, or recommend prices to be charged for services rendered by the retailers. He will allow them to engage in the sale of other goods or services on the premises on which to conduct the drying cleaning business. He will not supply them with order forms, receipts, instruction sheets, or other stationary items, nor with posters or notices to be displayed on the business premises, and he does not make any requirements with respect to the display or disclosure of the trade name, Stoddard Cleaners, on the premises of the retailers. He does not prescribe, suggest, or recommend business hours to be observed by the retailers or the number or type of personnel which the retailers may or must employ in the business. He does not prescribe, suggest, or recommend any action of the operators with respect to the location or appearance of the business premises, or any other action of the retailers with respect to the conduct of the dry cleaning business, nor does he .require any notification by the operators with respect to changes in operating procedures, business hours, prices, or vacations.

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 franchisee 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.

Based on the representations made by you concerning the relationship between Mr. Movsessian and the operators of Stoddard Cleaners stores, as reflected above, we assume, and expressly predicate this opinion on the assumption, that there will be no marketing plan or system for the retailers prescribed by Mr. Movsessian. In this connection, we point out that such a marketing plan or system may be deemed "prescribed" within the meaning of Section 31005, though not expressly agreed upon in writing, if as a matter of fact a sales program is suggested, recommended, or otherwise originated by Mr. Movsessian in such a way as to result in uniform operation by the retailers of the several establishments conducted under the Stoddard Cleaners trade name.

Only on the aforesaid assumption, since according to the definition of "franchise" in section 31005, a marketing plan or system prescribed in substantial part by the franchisor is an essential element of a franchise, it is our opinion that the arrangements between Mr. Movsessian and the retailers are not "franchises" within the definition of Section 31005, and are not subject to the provisions, of the Franchise Investment Law.

If, on the other hand a marketing plan is "prescribed" by Mr. Movsessian expressly or by implication, as above stated, the arrangements between him and the retailers are "franchises" subject to the provisions of the Law, because in our opinion, payment by the retailers of 55% of their gross receipts to Mr. Movsessian, would constitute a "franchise fee" within the meaning of Sections 31005 and 31001 of the Law.

Dated: San Francisco, California
April 17, 1972

By order of
Commissioner of Corporations

By __________________
Assistant Commissioner
Office of Policy