Commissioner's Opinion No. 74 / 11F

State of California Department of Corporations

Robert L. Toms, 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. Donald F. Conviser
Attorney at Law
Henry Manning, a Professional
Law Corporation
14011 Ventura Blvd., Suite 208
Sherman Oaks, CA 91403

Dear Mr. Conviser:

The request for an interpretive opinion, contained in your letters dated July 17, 1974, as supplemented by your letter dated August 2, 1974, has been considered by the Commissioner. Your letters raise the question whether the so-called "Sub-Contractor Contract" ("Contract"), between Thomas J. Manning & Associates dba Manning Manufacturing Company, a California corporation ("Manning") , and persons referred to therein and hereinbelow as "sub-contractors" are "franchises" within the definition of Section 31005 and subject to the provisions of the Franchise Investment Law. The question also raised in your letters as to whether the Contracts are " securities" within the meaning of Section 25019, and subject to the qualification requirements of the Corporate Securities Law of 1968, is answered in a separate opinion under that Law issued contemporaneously herewith.

Pursuant to the Contract, Manning agrees to purchase from subcontractor components and products in quantities up to 500 per month which sub-contractor manufactures according to specifications furnished by Manning, provided same are of a quality and in conformity with said specifications. Sub-contractor will pay Manning for all equipment, tools, jigs, pictures, training and plans for the production and manufacturing of said components and products. Subcontractor, at his own expense, shall maintain all jigs, fixtures and plans in good and proper condition so as to achieve the quality required by the "Specifications Sheet(s)". Sub-contractor is prohibited from selling, transferring, loaning, or renting any of the products components and/or jigs, fixtures and plans to any other person or business entity without the prior consent of Manning.

The Contract further provides that sub-contractor will manufacture and deliver to Manning the products and components on a daily, weekly or monthly basis in the minimum quantity of 200 acceptable component products within each 30-day period following completion of training. All components and products delivered to and accepted by Manning at its usual place of business during regular business hours prior to the first day of the month will be paid for by Manning no later than the 15th of the month, and all components and products delivered to and accepted by Manning prior to the 15th day of each month will be paid for by Manning no later than the last day of the month.

Section 31005 of the Franchsie 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. 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.

As indicated above, the definition of a "franchise" includes the granting of the right to engage in the business of offering, selling or distributing goods or services and that the operation of the franchisee's business be substantially associated with the franchisor's commercial symbol. The Commissioner has expressed the opinion that for the operation of the franchisee's business to be substantially associated with the symbol, it must be communicated to the customers of the franchisee (Dept. of Corps. Release No. 3-F (Revised) p.7). In reaching this conclusion the Commissioner referred to the objective of the Law which is "to deal with a multiplicity of business establishments created by the franchisor which he presents to the public as a unit or marketing concept and for all of which he ostensibly assumes responsibility by causing them to be operated with the appearance of some centralized management and uniform standards as regards the quantity and price of the goods sold, services rendered, and other material incidents of the operation" (ibid p.3. Emphasis added).

In line with this objective, it is our opinion that a franchisee must be granted the right to distribute and sell goods and services to others than the franchisor and that the commercial symbol must be presented to such other customers. In the instant case, however, Sub-Contractors are required to sell all components and products to Manning and Manning is the only entity to which the commercial symbol is significantly communicated. Accordingly, it is our opinion that the contracts between Manning and Sub-Contractors 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
September 16, 1974

By order of
ROBERT L. TOMS
Commissioner of Corporations

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