Commissioner's Opinion No. 72 / 24F
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.
Mr. Thomas J. McGlynn
Attorney at Law
Pugh and McGlynn
756 Rio Street
Red Bluff, CA 96080
Dear Mr. McGlynn:
The request for an interpretive opinion contained in your letter dated May 30, 1972, has been considered by the Commissioner. Your letter raises the question wether the agreements describe by you between Dudley and Erbes, Inc., a California corporation ("Dudley"), and persons referred to therein and hereinbelow as "licensees", are franchises within the definition of Section 31005 and subject to the provisions of the Franchise Investment Law. Based on the assumption stated below, this question is answered in the negative.
We understand that Dudley is the agent of Boyd Fiberglass, Inc, an Ohio corporation ("Boyd") , and duly authorized to grant exclusive licenses for the manufacture and sale of fiberglass septic tanks under a pending patent registered No.116-730. Pursuant to the agreement in question, Dudley grants to the licensee an exclusive license to manufactured sell the aforementioned septic tank's, or any variation thereof within a specified territory. The licensee agrees not to sell any tanks manufactured by him outside his territory, or which he know's the purchasers intend to use outside that territory. The licensee agrees to pay Dudley a specified royalty for each tank manufactured by him, and to purchase from Dudley and its authorized sources of supply, all supplies necessary to produce the tanks, as well as other specified equipment.. In addition the licensee agrees that he will not purchase any such supplies from other sources without the prior written permission of Dudley. Moreover, he is required to devote his best and exclusive efforts, skill and diligence to the conduct of the business of manufacturing and selling tanks; to manufacture a specified number of tanks each month; not to manufacture, distribute or sell competing products; to allow inspection of his books and business premises; and to maintain public liability insurance of not less than $250,000/$500,000 for personal injury and $25,000 for property damage.
Dudley determines the standard of quality and specifications for the tanks manufactured by licensees with a specific requirement that the thickness of the fiberglass in the whole coverage of the tank be not less than 3/16ths of an inch. Dudley also will furnish licensees with advice in setting up equipment and a basic training program for the operation of the equipment and production of the tank.
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 of offering, selling, or distributing goods or services under a marketing plan or system prescribed in substantially part by a franchisor, the operation of the franchise 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.
You have advised us that there is no required trademark, service mark, trade name or logotype which must be used by the licensee pertaining to the septic tanks, and that the licensee may market tanks under whatever name he elects. Moreover the agreement provides that the licensee has exclusive election with respect to sales and promotion of sales assuming therefore that the licensee does not, in fact, use a commercial symbol associated with Dudley or Boyd, it is our opinion that the agreements in question are not "franchises" within the definition of Section 31005, and are not subject to the provisions of the Franchise Investment Law.
On the other hand, if the licensee in connection with the sale of' the tanks, uses a commercial symbol associated with Dudley or Boyd, it is our opinion that the agreements are "franchises" within the meaning of Section 31005, and are subject to the provisions of the Franchise Investment Law, inasmuch as contrary to the view expressed by you, we are of the opinion that the agreements in question provide for a marketing plan or system prescribed in substantial part by Dudley; and the royalty stipulated in the agreement constitutes a franchise fee within the meaning of Section 31011.
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 ostensively assumes responsibility by causing them to be operated with the appearance of centralized management and uniform standards in regard to the quality and price of 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 management and uniform standards is achieved (Dept. of Corps. Release No. 3-F, p.5).
In the instant case, the agreement provides definite quality standards for the tanks, defines the territory in which a franchisee may manufacture and sell them, limits his sources of supply, and imposes other restrictions regarding number of tanks to be manufactured by the licensee, sale of competing products, inspection of the licensee's books and business premises by the licensor, and other incidents of the licensee's business operations. Taken together, these provisions, in our opinion, prescribe a marketing plan or system within the meaning of Section 31005.
Dated: San Francisco, California
July 31, 1972
By order of
BRIAN R. VAN CAMP
Commissioner of Corporations
HANS A. MATTES
Office of Policy