Commissioner's Opinion No. 72 / 27F

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. Rodney M. Gray
Attorney at Law
6331 Hollywood Boulevard
Hollywood, CA 90028

Dear Mr. Gray:

The request for an interpretive opinion contained in your letter dated June 30, 1972, has been considered by the Commissioner. Your letter raises the question whether the Computer Service Agreement between Computer Capital Corporation, a division of Travel Aids Corporation, a California corporation'("CCC"), and persons referred to therein and hereinbelow as "consultants", constitutes a franchise within the definition of Section 31005 and subject to the registration requirement of Section 31110 of the Franchise Investment Law. Based upon the assumption stated below, this question is answered in the negative.

You have represented that CCC was organized by persons having extensive executive, administrative, and practical experience in business and financial consulting; and has developed and acquired a list of investors, lenders, commercial banks, insurance companies, funding companies and other financial institutions desirous of providing capital for worthwhile projects. CCC has reduced this list to IBM computer cards for efficient sorting and grouping and has keyed the cards to facilitate mailings.

By its agreement CCC grants to the consultant the right to utilize its lists, mailing services, methods, systems, and trade secrets. The right is exclusive in the consultant's area as long as he orders a specified amount of CCC services. The price for each service unit is $400 including mailing and postage of mailings to 100 clients, plus an amount not disclosed to us in consideration of CCC's execution of the agreement, plus 1% of funds collected by the client as the result of CCC's services. The consultant is required to order a number of service units not disclosed to us and to pay for each such unit $200 in advance and as a "performance guarantee". For the first twenty-four months of the agreement, the consultant provided he is not in default, will be given credit of $200 per unit purchased and paid for, until he has received total credits in an amount specified in the agreement.

The agreement is effective for five years and automatically renewed for five years provided a minimum quota is maintained. Thereafter it continues on a year to year basis by consent of both parties. It may be terminated by CCC for acts contrary to the public interest, good morals, or ethics; breach of any provision thereof; consultant's bankruptcy, receivership, insolvency, or assignment for benefit of creditors; or failure quarterly to order and pay for a number of service units not disclosed to us.

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 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.

You have represented that CCC does not grant consultants the right to use its name, trademark or business style. Under the statutory provisions above-mentioned, an agreement is not a franchise, though it prescribes a detailed marketing plan or system for the operation of the business authorized thereby, if that business is not substantially associated with a commercial symbol of the franchisor or its affiliate, and for the operation of the franchisee's business to be substantially associated with the symbol, it must be communicated to the customers of the franchisee {see Dept. of Corp. Release No. 3-F, p. 6).

Assuming that the consultants will not communicate to their clients any commercial symbol of CCC, it is our opinion that the agreements between CCC and the consultants are not "franchises" within the meaning of Section 31005 and are not subject to the registration requirement of the Franchise Investment Law.

Otherwise, in our opinion the agreements are "franchises" subject to that registration requirement. Although you have represented that CCC has very little control over its clients and does not furnish office space, advertisements, literature or any kind of formal training program, we are of the opinion that it substantially prescribes a marketing plan or system. In this regard it is significant that under the agreement consultants are granted exclusive rights to use the methods of CCC, are not to divulge CCC's information, processes and methods, and are to treat their dealings with CCC as a trade secret. These directions, in our opinion, constitute a marketing plan or system prescribed in substantial part by CCC (see Dept. of Corp. Release No. 3-F, pp. 2-6). Moreover, the various charges made by CCC, as detailed above, are "franchise fees" within the meaning of Section 31011.

Dated: San Francisco, California
August 9, 1972

By order of
Commissioner of Corporations

By __________________
Assistant Commissioner
Office of Policy