Commissioner's Opinion No. 72 / 30F

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. William C. Hodges
Attorney at Law
Hodges & Nichols
19 Front Street
Danville, CA 94526

Dear Mr. Hodges:

The request for an interpretive opinion contained in your letter dated August 23, 1972, has been considered by the Commissioner. Your letter raises the question whether the agreement between Hava Snak Food Service, Inc., a California corporation ("Hava"), and persons referred to therein and hereinbelow as "licensees", are franchises within the definition of Section 31005, and subject to the registration requirement of Section 31110 of the Franchise Investment Law. Based on the assumption stated below, this question is answered in the negative.

We understand that Hava is engaged in the business of selling food and has established a reputation, demand, and goodwill under the name ''Hava Snak". According to the agreement, that name signifies the highest standards of management, supervision, merchandising, and quality of products. Pursuant to the agreement, licensees are granted the exclusive right to engage in the business of retailing certain foods at a specified location in accordance with the unique form of operation established by Hava.

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, and the franchisee is required to pay a franchise fee.

To constitute a franchise, therefore, the operation of the franchisee's business must be substantially associated with the franchisor's commercial symbol, such as a trademark, service mark, trade name or logotype. 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 such a commercial symbol of the franchisor or its affiliate. 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-P, pp. 6-7).

Paragraph 1 of the agreement in question provides that it is expressly understood by Hava and the licensee that the licensee agrees not to use the name "Hava Snak" or "Hava Snak Inc." in any advertisement, or in any stay designate by trade name, commercial symbol, trademark, service mark, any association with the name "Hava Snak" or "Hava Snak Inc." Assuming, therefore, that the licensees, in fact, do not use and do not communicate to their customers the name "Hava Snak" or any other name or commercial symbol of Hava or an affiliate of Hava, it is our opinion that the agreements between Hava and the licensees are not "franchises" within the definition of Section 31005, and are not subject to the registration requirement of the Franchise Investment Law.

We do not concur in your opinion that the elimination of paragraph 3 of the agreement would eliminate another essential element of a "franchise". That paragraph requires licensees to pay to Hava a percentage of their monthly gross sales, excluding sales taxes. It is of course true that this payment comes within the definition of a "franchise fee" in Section 31011 of the Law. "Franchise fee" is therein defined as 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 or services.

However, in our opinion, the payment required from the licensee pursuant to paragraph 2 of the agreement as consideration for the rights granted therein, is also a "franchise fee". Therefore, if other essential elements of the definition of ''franchise" above referred to, are satisfied, even with paragraph 3 eliminated, the agreement would still provide for a franchise fee within the definition of Section 31011.

Dated: San Francisco, California
January 10, 1972

By order of
BRIAN R. VAN CAMP
Commissioner of Corporations

By __________________
HANS A. MATTES
Assistant Commissioner
Office of Policy