Commissioner's Opinion No. 72 / 47F

State of California Department of Corporations

Brian R. Van Camp, Commissioner
In reply refer to: File No. _____

This letter is not an Interpretive Opinion for the reasons stated below.

The request for an interpretive opinion contained in your letter dated September 25, 1972, has been considered by the Commissioner. Your letter raises the question whether the so called Agreement between W, Inc. and X is a franchise within the definition of Section 31005 and subject to the provisions of the Franchise Investment Law.

Inasmuch as the agreement was executed en September 21, 1972, issuance of an interpretive opinion, as requested by you, would not be appropriate. such opinions under Section 31510 of the Franchise Investment Law are issued for the principal purpose of providing a procedure by which members of. the public can protect themselves against liability for acts done or omitted in good faith in reliance upon the administrative determination made in the opinion, and of course there can be no such reliance where the transaction in question has already taken place (see Dept. of corps. Release No. 2-F). Although, under the circumstances, we cannot issue an interpretive opinion; we will herein express our views concerning the agreement in question with the understanding that this letter is not an interpretive opinion and therefore does not have the legally binding effect of such an opinion.

We understand that W is experienced in the establishment and operation of retail jewelry stores and with affiliated companies asserts proprietary rights to the trade name " Y ". Pursuant to the agreement, will render to x advice in the establishment of a retail jewelry store and will permit X to use the name " Y " W's services will include assistance in decorating the store, purchase of opening inventory, training of personnel, and the general operation of the jewelry store. After the store is opened and initial training furnished, W will provide continuing advice and management assistance. Upon request of X, W will purchase inventory for X's account without charge or mark-up, except for out-of-pocket expenses. For these services, X is obligated to pay W 4% of its gross sales.

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. Release No. 3-F, pp. 3, 5). Whether a particular plan or system produces the appearance which in accordance with these criteria would be indicative of a franchise, is a mixed question of fact and law which must be resolved upon a review of all surrounding circumstances in the light of the legal principles outlined above.

You have advised us that Mr. Z , the sole shareholder of x will not be required to accept the management assistance or adcive [sic] of w; he need not abide by such advice; and he need not use W's buying assistance or or follow a set floor plan or decor; and there is no intention for X to be required by contract to follow a set marketing plan or system.

Nevertheless there is the possibility that the utilization for the x store of the services made available by the agreement, will make that store appear to be a link in the chain of stores operated, we understand, by w and its affiliates. If this result is produced, it would mean, in our opinion, that a marketing plan of system is prescribed in the agreement. At the very least, we are unable to state that the agreement does not contain the elements which may cause the licensee's business to be operated pursuant to a marketing plan or system prescribed by W.

The agreement also provides for the payment of a franchise fee, inasmuch as it provides for the payment by X to W of a royalty amounting to 4% of gross sales. "Franchise fee" is defined in section 31011 of the Law as any fee or charge that a franchisee is required to pay or agrees to pay for the right to enter into a business under a franchise agreement. Such a fee may be payable in a lump sum or in installments, and the amount of the installments may be made to depend on gross receipts in the form of a royalty (Dept. of Corps. Rel. No. 3-F, p. 8).

In accordance with the foregoing, we cannot express the opinion that the agreement in question does not constitute a "franchise" within the meaning of Section 31005 or that it is not subject to the provisions of the Franchise Investment Law.

Dated: San Francisco, California
December 29, 1972

By order of
BRIAN R. VAN CAMP
Commissioner of Corporations

By __________________
HANS A. MATTES
Assistant Commissioner
Office of Policy