Commissioner's Opinion No. 73 / 35F

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. Nathaniel A. Humphries
Attorney at Law
Mason, Fenwick & Lawrence
310 O F C Building
1730 Rhode Island Avenue, N.W.
Washington, DC 20036

Mr Nathaniel A. Humphries

The request for an interpretive opinion, contained in your letter dated July 5, 1973, as supplemented by your letter dated July 13, 1973, has been considered by the Commissioner. Your letters raise the question whether the license agreement between Speedling, Incorporated, a Florida corporation ( "Speedling" ) and Golden Gate Nursery of Bakersfield, California ("Golden Gate" ), is a franchise within the definition of Section 31005 and subject to the provisions of the Franchise Investment Law. Based upon the assumption stated below, this question is answered in the negative.

You have represented that Speedling proposes to enter into a license agreement with Golden Gate for the use of Speedling's trademark on seedling plants. The agreement would not require the purchase of goods from Speedling and the payment of money by Golden Gate to Speedling would be limited to a royalty of a set amount for each 1,000 seedlings sold under the trademark. Additionally, the seedling plants would be grown by Golden Gate in accordance with specifications prescribed by Speedling for the purpose of maintaining high quality for the plants sold under the agreement; however, the sale or distribution of the plants would not be controlled in any manner by Speedling. Golden Gate would be free to sell the plants in any manner deemed desirable by it.

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 party 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 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 the 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 to quality and price of the goods sold, services rendered, and other material incidents of the operation. 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 trademark device patented to the inventor and which leaves a manufacturer free to sell a 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.

In the instant case, Golden Gate is required to follow the specifications prescribed by Speedling for the purpose of maintaining high quality for the plants to be sold by the licensor; however, you represent that Golden Gate would not be controlled in any manner with respect to the sale or distribution of the plants and that Golden Gate would be free to sell the plants in any manner deemed desirable by it. The desire of Speedling to maintain the high quality of its plants is reasonable considering that the failure to maintain such high quality might be seriously prejudicial to Speedling's reputation in the trade.

Based on your representation that Seedling will in no way control the sale or distribution of the plants, we concur in your opinion that the license agreements do not provide for a "marketing plan or system" as those terms are used in Section 31005(a). However, if by reason of facts not brought to our attention, or as a result of any of Speedling's activities, a marketing plan or system would be established, in our opinion, the license agreements would be franchises by reason of the use of the trademark name and because the royalty stipulated in the agreement would constitute a "franchise fee" within the meaning of Section 31011.

We do not concur in your opinion that Golden Gate is not paying a "franchise fee". Section 31011 defines "franchise fee" to mean 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 such payment for goods and services. The payment of a royalty of a set amount for each 1,000 seedling sold under the trademark constitutes such a payment and is, therefore, denominated a "franchise fee".

Since, based upon the assumption made above, the license agreement in question does not prescribe a marketing plan or system, it is not a franchise within the definition of Section 31005 and is not subject to the provisions of the Franchise Investment Law.

Dated: San Francisco, California
September 19, 1973

By order of
BRIAN R. VAN CAMP
Commissioner of Corporations

By __________________
J. DOMINIQUE OLCOMENDY
Supervising Corporations Counsel
Office of Policy