Commissioner's Opinion No. 73 / 44F
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. Richard Crake
Attorney at Law
Woolley, Crake, Collins & Ward
Union Bank Building, Suite 2007
San Diego, CA 92101
Dear Mr. Crake:
The request for an interpretive opinion contained in your letter dated August 16, 1973, as supplemented by your letters dated September 14, 1973 and October 4, 1973, has been considered by the Commissioner. Your letters raise the question whether the proposed arrangements between Medical Health Management, Inc., a proposed California corporation ("Health"), and various operating clinics ("clinics") are "franchises" within the definition of Section 31005 of the Franchise Investment Law. On the assumption stated below, this question is answered in the negative. The question also raised in your letters whether these agreements are "securities" within the meaning of Section 25019 of the Corporate Securities Law of 1968, and subject to the qualification requirements of that Law, is answered in a separate opinion issued under the Law contemporaneously herewith.
You have represented that La Jolla Clinic, a California partnership ("La Jolla" ), has been engaged in the treatment of patients and in research on methods of psychological treatment, with particular emphasis on a technique of treatment known as biofeedback. Recently, psychologists and psychiatrists, with practices in the San Diego area, have consulted with the partnership with the view toward setting up their own clinics emphasizing the biofeedback techniques, and have requested that a plan be devised whereby these techniques could be purchased and additional refinements in the biofeedback technique could be made available to them as developed.
You have further represented that the existing partners of La Jolla propose to form Health with an initial capitalization of $5,000 with the existing partners of La Jolla being the sole stockholders. Health would then propose to enter into an agreement with an incorporated clinic, whereby Health would be obligated to give basic training in biofeedback techniques to the members of the staff of the clinic and prior to its opening to provide necessary instruction manuals and other basic documentary information on techniques. In addition to the formal training, Health would be obligated to provide additional consultation and advice prior to the opening of the clinic. In consideration of entering into the agreement, the clinic would pay an amount anticipated to be between $5,000 and $10,000 to Health together with a minority interest in the incorporated clinic, anticipated to be approximately 20% of the stock of the clinic corporation.
The clinic would also have an optional right to enter into a services agreement ("agreement") with Health. The agreement would entitle the clinic to lease basic biofeedback equipment through Health at a monthly rental which is anticipated to be less than the cost of leasing such equipment in the retail leasing market. Health would also offer a centralized accounting and billing system devised by Health, as administered by a third party, and would undertake to keep the clinic informed of the latest biofeedback developments, technology and techniques through literature supplied to the clinic. All of these services would be rendered for a fee to be paid to Health.
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 a franchisee business pursuant to such plan or system is substantially associated with the franchisor's commercial symbol, such as his trade name or trademark, and the franchisee is required to pay a franchise fee.
The Commissioner has expressed the opinion that for the operation of the franchisee's business to be substantially associated with the commercial symbol, such symbol must be communicated to the customers of the franchisee. A trademark which a supplier of goods only uses in his invoices or in his advertising to his distributors but which he does not permit his distributors to show in dealings with their customers is not, in the eyes of the public, substantially associated with the operation of the supplier (Department of Corporations Release No. 3-F, Page 6).
In this connection, you have represented that Health will not attempt, in any way, to tie together in the minds of the public the association between the various clinics and Health. Assuming that the clinics do not, in fact, use a commercial symbol associated with Health, it is our opinion that the agreements in question are not "franchises" within the definition of Section 31005, and are not subject to the provisions of. the Franchise Investment Law.
Since we have concluded that the operation of the clinics are not associated with Health's commercial symbol, we express no opinion as to whether the agreements call for a payment of a "franchise fee" within the meaning of Section 31011 of the Law or whether a marketing plan or system is prescribed in substantial part by Health.
Dated: San Francisco, California
November 12, 1973
By order of
BRIAN R. VAN CAMP
Commissioner of Corporations
J. DOMINIQUE OLCOMENDY
Supervising Corporations Counsel
Office of Policy