Commissioner's Opinion No. 74 / 9F

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. Williams W. Stark, Jr.
Attorney at Law
2000 San Hill Road, Building 2
Menlo Park, CA 94025

Dear Mr. Stark:

The request for an interpretive opinion, contained in your letter dated March 25, 1974, has been considered by the Commissioner. Your letter raises the question whether the so-called "TennisAmerica Affiliation Agreement" between TennisAmerica, Inc., a California corporation ( "TennisAmerica"), and persons, referred to therein and hereinbelow as "affiliates", are "franchises" within the definition of Section 31005, and subject to the provisions of the Franchise Investment Law.

We understand that the initial thrust of TennisAmerica, which was cofounded in 1969 by Billy Jean King and Dennis Van der Meer, is the business of teaching tennis at various camps and clinics owned and operated by it. In addition to its own camps and clinics, which in 1974 have been expanded to 22, TennisAmerica has instituted an "Affiliate Program", the purpose of which is to acknowledge and publicize those tennis facilities which have elected to adopt the TennisAmerica System of tennis instruction. Pursuant to the Agreement, which is for a specified period of time and may be terminated upon 30 days, written notice, TennisAmerica agrees to provide affiliates with one tuition-free chief instructor's course conducted at a regularly scheduled TennisAmerica University class of by arrangements with a traveling member of TennisAmerica. Affiliate agrees that the chief instructors used in the TennisAmerica Affiliate Program at its location will be certified by TennisAmerica to do the actual, on-court instruction under the TennisAmerica System. To be certified, instructors must attend and successfully complete a TennisAmerica Teacher's Program or be certified by a member of the TennisAmerica teaching staff. TennisAmerica reserves the right to observe and critique affiliate's teaching efforts at any time a TennisAmerica program is in progress, and to rate the quality of instructor.

Inferior instruction, by TennisAmerica standards, is considered grounds for terminating the Agreement. In addition, TennisAmerica retains the right to de-certify any instructor failing to maintain specified quality of group instruction consistent with its standards; follow the TennisAmerica methods of instruction within reasonable limits use TennisAmerica's student kit materials inconjunction with TennisAmerica's advertised program; or meet and pass a scheduled annual performance check conducted at affiliate's location or at a TennisAmerica location.

We further understand that affiliate agrees to purchase on a "cash-with-order basis" a minimum of 100 student kits at the start of each year of the Agreement, including the first year, at a purchase price which is 70% of the public retail price. Each kit may contain, but is not limited to, a student notebook, winners mark system and standard of achievement, TennisAmerica "Persistent Pin" for program completion, and fabric arm patch with TennisAmerica symbol TennisAmerica also agrees to provide affiliate with a complete initial set of marketing material which may include, but is not limited to, countertop displays, wall displays, brochures, mailers, mats for local newspapers/magazine advertising, banners and pictures. Affiliate may purchase additional TennisAmerica marketing material at published prices and may also purchase from TennisAmerica at established affiliate prices and sell TennisAmerica retail goods, including T-shirts, hats and bumper stickers. Affiliate may not manufacture or buy merchandise which incorporates TennisAmerica' name or symbol except from TennisAmerica.

Affiliate agrees not to make use of TennisAmerica's name or symbols except in conjunction with specific TennisAmerica instructional programs and to follow TennisAmerica's established and published quality control standards for tennis instruction and marketing done in connection with the TennisAmerica name. TennisAmerica agrees to identify affiliate's location in appropriate magazine advertising.

In addition to the purchase price paid for the aforementioned items, affiliate agrees to pay TennisAmerica a one-time "affiliation fee" of $1,900. However, in the event affiliate already has a TennisAmerica certified instructor, the one-time affiliation fee is $1,140.

Section 31005 of the Franchise Investment Law defines "franchise" to include an agreement, either oral or written, between one 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 our opinion, the Agreements between TennisAmerica and affiliates contain all the essential elements of a "franchise" within the definition of Section 31005 of the Law. We do not concur in your opinion that TennisAmerica does not "prescribe" a marketing plan or system in substantial part. In this connection, you have represented that there is no specified mode of distribution; no provision contemplating exclusive or semi-exclusive areas or uniformity of prices and marketing terms; no controls over terms of project by customers warranties and representations; no provisions concerning collateral services; no provision or limitation on offering competitive or noncompetitive goods not identified with TennisAmerica; and no duties imposed upon the selection of locations, appearances of business premises, and that fixtures and equipment utilized therein, advertising signs, uniforms of employees, hours of operation, housekeeping, etc.

However, as stated in the introductory paragraph of the Agreement, "when an affiliate adopts the TennisAmerica system, affiliate agrees to use tennis instructors who have successfully learned and maintained the skills necessary to each the TennisAmerica system affiliate agrees to buy from TennisAmerica the student materials necessary to complement the learning process designed by TennisAmerica; and affiliate agrees to meet certain standards of quality in any marketing which uses TennisAmerica's name or symbolism. This statement, as well as the provisions of the Agreement regarding instructions, certification and de-certification, use of TennisAmerica kits and other materials and the furnishing of advertising, tends toward the conclusion that TennisAmerica is, in fact, "prescribing" a marketing plan or system by which TennisAmerica's instructional services may be distributed to the public.

We also do not concur in your opinion that the affiliate's operation will not be associated with TennisAmerica's commercial symbol because the affiliates, which are on-going tennis facilities, will not be changing their names to "'TennisAmerica Club' or the like". 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 (Dept. of Corps. Release No. 3-F (Revised) p. 7). In the instant case, the TennisAmerica name will be communicated to the customers of affiliate in various ways, including the TennisAmerica student kits, "Persistent Pin", arm patches, awards and advertising material. In addition, as indicated above, TennisAmerica agrees to identify affiliates' locations in appropriate magazine advertising.

We understand you to suggest that the Agreement is not a franchise because tennis instruction in most instances comprises no more than 15% or a minor part of affiliate's revenue. The percentage of gross revenues of a "franchisee" under an agreement is not a factor in determining whether the Agreement in question is a "franchise" (See Comm. Ops. Nos. 72/41F and 73/23F).

In conclusion, it is our opinion that, under the circumstances described by you as outlined above, the Agreements between TennisAmerica and affiliates are "franchises" within the definition of Section 31005, and subject to the provision 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
May 23, 1974

By order of
ROBERT L. TOMS
Commissioner of Corporations

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