Commissioner's Opinion No. 73 / 22F

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. W. Gordon Eustice
Attorney at Law
Eustice, Feeley & Maguire
160 Main Street
Los Altos, CA, 94022

Dear Mr. Eustice:

The request for an interpretive opinion, contained in your letter dated September 22, 1972, as supplemented by your letter dated November 29, 1972, has been considered by the Commissioner. Your letters raise the question whether the arrangements between Medical Group Insurance Services, Inc. ("Services"), and persons referred to by you and hereinbelow as "regional representatives", are franchises within the definition of Section 31005 and subject to the provisions of the Franchise Investment Law. This question is answered in the affirmative.

You have represented that Services is licensed by the California Department of Insurance as a life and disability agent. It is engaged in the insurance agency business and sells group insurance in the life, disability, and major medical fields, exclusively to doctors and their employees in the group practice of medicine. Services contracts with the regional representatives in California and other states granting them certain territories in which to operate. While these territories are not exclusive, nevertheless a regional representative is paid an override commission on insurance written in his territory by others, and if he writes insurance in the territory of another representative, that representative takes an override. The regional representatives are full-time insurance agents licensed by the state. in which they do business, and activities with Services will constitute only a small part of their overall employment and income.

You have further represented that the regional representatives must follow the business format outlined by Services to the extent that they sell programs of Services. This includes Services' underwriting requirements which are the underwriting requirements of the insurance carrier, as customary in the insurance industry. Monthly premium payments are remitted to Services which forwards them to the carrier.

A regional representative each year for the first three years, charged an amount varying from $100 to $1000 on account of advertising expenses. However, this charge is reduced by certain credits earned by the regional representative, which may offset the charges completely during the second and third years. No other fees or royalties are charged and no advertising charges are assessed after the third year.

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.

We assume that there is no identification with the "Services" commercial symbol or name and expressly limiting our conclusion to this assumption, because no information has been submitted which would indicate the use of such symbol or name. On the assumption that none of the forms, advertising, brochures or literature which Services agrees to provide the regional representatives for delivery to customers will contain any commercial symbol of Services, that the regional representatives do not use any signs or identification mark of Services in dealing with their customers, and that no advertising is done which uses the services name or symbol and which relates to the operations of the regional representatives, it is our opinion that the agreements between Services and the regional representatives are not "franchises" within the definition of Section 31005 and are not subject to the provisions of the Franchise Investment Law. Otherwise, for the reasons stated below, it is our opinion that the agreements are "franchises" and are subject to the provisions of the Franchise Investment Law.

The arrangements between services and the regional representatives contain the other essential elements of a franchise. Especially, it appears that services prescribes the business format and underwriting requirements which regional representatives must follow in dispensing their services. This means that even though Services regards the regional representatives as independent contractors, a marketing plan or system is prescribed for them by Services in substantial part within the meaning of Section 31005. Services' charges for advertising constitute a franchise fee defined in Section 31011 to mean any fee or charge that a franchisor 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.

we should point out that the jurisdiction of the Insurance Commissioner over the activities of Services as an insurance agency: is separate and different from the discipline imposed by the Franchise Investment Law, which according to Section 31001, is designed to provide prospective franchisees with information enabling them to make an intelligent decision regarding franchises being offered and to accomplish other purposes not related to the regulation of the insurance business.

Dated: San Francisco, California
May 21, 1973

By order of
Commissioner of Corporations

By __________________
Supervising Corporations Counsel
Office of Policy