Commissioner's Opinion No. 72 / 37F

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 M. French
Attorney at Law
Ware & Freidenrich
525 University Avenue
Palo Alto, CA 94301

Dear Mr. French:

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 licensing agreements between Green Thumb Lawn Service, Inc., a California corporation ( "Green Thumb" ), 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 upon the assumption and limited and qualified, as stated below this question is answered in the negative.

You have represented that Green Thumb, engaged in the lawn fertilization and aeration service business in California, proposes to enter into licensing agreements authorizing selected individuals for a 5 year period to engage in a similar business in designated areas of California under the exclusive trade name "Green Thumb Lawn Service", or some reasonably similar derivation or variation of this name.

The agreement provides that the licensee shall pay Green Thumb a percentage of its gross sales, with a specified minimum monthly royalty. No advance payment is required. The agreement provides for the sale or lease by Green Thumb to the licensee of a nominal amount of equipment, but such sale or lease is not required. Moreover, there are no tying arrangements governing the source of licensee's materials. The agreement requires the licensee to prepare and keep certain records for the purpose of ascertaining the amount of royalty payments, and to submit to Green Thumb weekly with his royalty payment for the preceding week and within 30 days after the expiration of each calendar year a certified statement showing the amount of gross sales in his territory during the period. The agreement may be terminated on stated conditions.

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.

A marketing plan or system may be "prescribed" within the meaning of Section 31005, although there is no obligation on the part of the licensee to observe it, where a specific sales program is outlined, suggested, recommended, or otherwise originated by the licensor. In making the determination whether there is a prescribed marketing plan or system, 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 ostensibly assumes responsibility by causing them to be operated with the appearance of centralized management and uniform standards as regards the quality and price of the goods sold, services rendered, and other material incidents of the operation (Dept. of Corps. Rel. No. 3-F, pp. 3,r 5).

You have advised us that the licensee is free to adopt whatever marketing plan, system, or style he feels best suited to his needs and preferences, and that the proposed agreements do not provide for supply of sales aids, props, or training courses by the licensor. You have also stated that the "proposed Licensing Agreement, and the atmosphere under which it is contemplated that such an Agreement would be permitted to operate, contain none of the earmarks of a marketing plan or system...including...formal or informal suggestions or recommendations resulting in the appearance of centralized management and uniform standards". It is appropriate to point out that whether a particular plan or system produces the appearance which in accordance with the criteria above set forth would be indicative of a franchise, is a legal question which must be resolved upon a review of all surrounding facts and circumstances.

No particular facts or circumstances have been brought to our attention, in the instant case, which would indicate that the licensor is prescribing a marketing plan or system to be observed by licensees in connection with the sale of the licensor's products. The prescribed reporting and record keeping requirements are normal accounting procedures under royalty agreements and in and of themselves do not amount to a marketing plan or system (Dept. of Corp. Release No. 3-F, p. 4). Under these circumstances we have no reason to disagree with the opinion expressed by you that Green Thumb is not prescribing a marketing plan or system for the sale of its products by its licensees, and that, therefore, the agreements in question do not constitute "franchises" within the meaning of Section 31005 of the Franchise Investment Law.

We point out, however, that the opinion expressed by us is based solely on the information contained in your letter, and that it is inapplicable and should not be relied upon, if additional or different facts in accordance with the principles above set forth indicate that Green Thumb has prescribed a marketing plan or system for any licensee.

Dated: San Francisco, California
October 26, 1972

By order of
Commissioner of Corporations

By __________________
Assistant Commissioner
Office of Policy