Commissioner's Opinion No. 73 / 2F

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. Marcus E. Crahan, Jr.
Attorney at Law
Abbott & Crahan
Suite 1410, Kirkeby Center
10889 Wilshire Boulevard
Los Angeles, CA 90024

Dear Mr. Crahan:

The request for an interpretive opinion contained in your letter dated September 5, 1972, has been considered by the Commissioner. Your letter raises the question whether the so-called Field Applicator License Agreements between SteelStone Corporation, a California corporation ("SteelStone"), 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. This question is answered in the negative.

You have represented that SteelStone proposes to enter into agreements, in consideration of a fee and royalties as described below, licensing the use in specified territories of its trade secrets and building construction system, referred to as SteelStone System ( "System" ), for which a patent application is pending. SteelStone proposes to enter into these agreements with State licensed lathing and plastering subcontractors. The agreements will be exclusive in some territories and nonexclusive in other territories and will be solicited and granted depending on the demand for the System and on the basis of the credit and reputation for quality work of the subcontractor.

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.

In the Commissioner's opinion, the agreements contemplated in the instant case do not prescribe a marketing plan or system. In making the determination whether there is such a 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 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; but as the Commissioner has pointed out in his Release No. 3-F,. a license agreement by which an inventor, for a fee designated as a "license fee" or "franchise fee" , grants to a manufacturer the right to produce and sell a trademarked device patented to the inventor and which leaves the manufacturer free to sell the device according to his own plan, is not a franchise even if it imposes upon the manufacturer procedures or techniques customarily observed in business relationships in the particular trade or industry, and which to some extent may restrict the freedom of action and discretion of the manufacturer.

You have represented that in the instant case licensees are required to bid competitively and to quote and charge for construction work utilizing the System so that prices do not exceed the licenses's actual cost plus customary profit plus an amount of 6¢ per sq. ft., that amount being the royalty payable by the licensees to SteelStone. Licensees must submit a written account each month and permit review and copying of their accounting and construction records by SteelStone or its agents for the purpose of verification of the royalty. At the time of the execution of the agreement, a specified amount is prepayable by the licensee as an advance royalty to be credited against future royalties.

You have further represented that licensees a~e required to use their best efforts to promote the operation of the System in their respective territories, to comply with SteelStone's written accounting and reporting requirements, standards, instructions and manual for the use and application of the System, and with all governmental regulations, to communicate to SteelStone any ideas or suggestions regarding the System, to police against the unauthorized use of the System by others and to cooperate with SteelStone in defending the System and the name "SteelStone" from being unlawfully used, to use the System, the name "SteelStone" , and information concerning the System only in accordance with the agreement, and to treat information concerning the System in confidence as the property of SteelStone. Alleged:y to maintain a uniform high level of quality in the application of the System, licensees are required to use only metal and structural components designated by SteelStone, and they may not assign their rights under the agreement without SteelStone's written consent.

In the Commissioner's opinion, the terms on which licenses to use the System are thus to be granted, are not indicative of a prescribed marketing plan. The restrictions imposed on licensees, as above stated, generally are designed to protect the alleged patent rights of SteelStone. The desire of SteelStone to guard against careless or inexpert application of the System, is reasonable considering especially the fact that the results of such application have to meet the test of building code requirements and pass inspection of supervisory public agencies whose rejection of System produced construction even in only one or a few cases, might be seriously prejudicial to SteelStone's reputation in the trade.

Since the agreements in question do not prescribe a marketing plan or system, they are not franchises within the definition of Section 31005 and are not subject to the provisions of the Franchise Investment Law.

Dated: San Francisco, California
January 24, 1973

By order of
Commissioner of Corporations

By __________________
Assistant Commissioner
Office of Policy