Commissioner's Opinion No. 74 / 8F
State of California Department of Corporations
Robert L. Toms, Commissioner
In reply refer to: File No. _____
This letter is not an Interpretive Opinion for the reasons stated below.
Mr. Thomas H. Coleman
Attorney at Law
Grossman, Smaltz, Graven & Perry
One Wilshire Building - Suite 2420
Los Angeles, CA 90017
Dear Mr. Coleman:
The request for .an interpretive opinion, contained in. your letter dated-April 18, 1974, has been considered by the Commissioner. Your letter raises the question whether the arrangements between U-Fix, Inc. dba Do-It-Yourself Auto Repair Centers International Limited ( "DIYARCIL" ) and persons, referred to hereinbelow as "companies", 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.
We understand that, pursuant to the "agreement" enclosed with your letter, DIYARCIL grants Company the right to participate in "the program offered by Do-It-Yourself Auto Repair Centers International, Limited, in order to more efficiently establish and commence to operate your own 'do-it-yourself' auto maintenance and repair center." Company agrees to pay a specific sum, as a so-called "program fee", for which it receives instruction at Auto Hobby Center in Van Nuys, California, as necessary to enable it to organize a "do-it-yourself" automobile maintenance and repair facility at a location near a specified city similar to the Auto Hobby Center. DIYARCIL agrees to furnish no more than a specified number of eight-hour days of instructional services at Company's place of business. All costs of accommodations and transportation will be paid by Company.
The instructional services include instruction in the layout of Company's physical plant and facility, purchase and acquisition of tools and other machinery arid equipment, purchase of appropriate business insurance, creation and implementation of tool loan systems and procedures and related business planning, together with locating and setting up machine services. DIYARCIL will give Company information regarding the proposed "do-it-yourself" auto repair and maintenance business, which is of a secret and confidential nature and may be classified as "trade secrets".
Company agrees that it will not disclose any such confidential information to any one other than to members of its immediate family or to those persons whose names are set forth in writing arid delivered to DIYARCIL concurrently with the signed copy of the agreement, provided, however, that DIYARCIL reserves the right to reject any of said parties, in which case the entire agreement will be null and void.. DIYARCIL may seek injunctive relief in the event of unauthorized disclosure.
Company is not precluded from organizing additional auto repair and maintenance facilities provided they are operated by Company, its immediate family or by persons set forth in the agreement.
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. Section 31011 defines "franchise fee" to mean any fee or charge at 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.
In our opinion the agreement between DIYARCIL and Company contain all the essential elements of a "franchise" within the definition of Section 31005 of the Franchise Investment Law. Especially, the provisions in the agreement regarding extensive instructional services, and "trade secrets", which we must assume relate to the conduct of the proposed "do-it-yourself" business, tend toward the conclusion that DIYARCIL is "prescribing" a marketing plan or system in substantial part. (See Dept. of Corps. Release No. 3F (Revised) pp. 26.)
We are also of the opinion that DIYARCIL, by the agreement, grants Company the right to engage in business of distributing services, namely, "do-it-yourself" auto maintenance and repair services, pursuant to a marketing plan or system prescribed in substantial part by DIYARCIL, especially, through the use of DIYARCIL's so-called "trade secrets" (Ibid. p. 2). This conclusion is supported by the provision in the agreement requiring that any additional auto repair facilities must be organized and operated by Company.
We have noted the statement in your letter that "there is no relationship or requirement that the business of the person to whom the consulting services are to be rendered is in any respect to be associated with DIYARCIL in terms of advertising or other commercial symbol designating the relationship of affiliation, such as, a trademark, service mark, trade name or logotype". In this connection, the Commissioner has stated that for the operation of a franchisee's business to be substantially associated with the franchisor's commercial symbol, it must be communicated to the customers of the franchisee. Therefore, if the franchisee is granted the right to use or permitted to use the franchisor's commercial symbol, the franchise concept is satisfied, even if he is not obligated to display the symbol (Ibid., p. 7). The various references in the agreement to "do-it-yourself" auto maintenance and repair business or service as well as the indication that written and printed material will be made available to Company by DIYARCIL prevent us from concluding that a commercial symbol associated with DIYARCIL will not be communicated to the customers of the Company.
We have further noted your statement that although a "consulting fee is contemplated, there is no fee to be paid for the right to enter into the business, and no royalties, license fees, service fees or other similar charges would be involved." In this connection, the Commissioner has stated that any fee or charge which the franchisee is required to pay to the franchisor is a franchise fee regardless of the designation given to, or the form of, such payment (Ibid., p. 7). As indicated above, the so-called "program fee" is given in consideration for instructional services and trade secrets given to Company by DIYARCIL. Therefore, in our opinion, they are similar to a training fee which has been opined to be a "franchise fee" in Comm. Ops. Nos. 71/60F and 73/39F.
The agreement states that "this is an Agreement to provide you (Company)" with instruction and related services and is not intended by either party to be a franchise agreement under the laws of the State of California or any other state. It is acknowledged that you will own and operate your own business, and we shall place no controls over your business whatsoever."
The Commissioner has stated that a provision in the agreement that the franchisor is not concerned with the means employed by the franchisee to make sales or with the manner in which the business of the franchisee is conducted, does not preclude the possibility that the franchisee's business is, actually and in fact, operated pursuant to a marketing plan or system prescribed in substantial part by the franchisor, and such agreement, if other requirements are satisfied, may be a franchise (Ibid., p. 5).
In conclusion, we are unable to express an opinion that the agreements between DIYARCIL and Companies are not "franchises" within the definition of Section 31005, and subject to the provisions of the Franchise Investment Law.
Inasmuch as interpretive opinions are issued for the principal purpose of providing a procedure by which members of the public can protect themselves against liability for acts done or omitted in good faith in reliance upon the administrative determination made in the opinion, and since there can be no such reliance where the Commissioner asserts jurisdiction with respect to a particular situation or determines that a legal requirement is applicable, advice to that effect, as contained in this letter, does not constitute an interpretive opinion.
Dated: San Francisco, California
March 23, 1974
By order of
ROBERT L. TOMS
Commissioner of Corporations
J. DOMINIQUE OLCOMENDY
Supervising Corporations Counsel
Office of Policy