Commissioner's Opinion No. 76 / 4F

State of California Department of Corporations

Willie R. Barnes, 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. John R. Clifton
627 Deep Valley Drive
Rolling Hills Estates
Parlos Verdes Peninsula

Dear Mr. Clifton:

The request for an interpretive opinion, contained in your letter dated January 9, 1976, as supplemented by your letters dated March 9, May 19, July 28, September 29, and the letter of Mrs. Polly B. Taylor dated October 18, 1976, has been considered by the Commissioner. Your letter raises the question whether the Agreement between Crownetics arid persons referred to therein and hereinbelow as "sub-licensee" is a "franchise" within the definition of Section 31005 and subject to the provisions of the Franchise Investment Law ("Law").

The Agreement provides that Crownetics has acquired a license to make, use and sell a patented invention relating to an engine conversion system in certain geographical areas from H. Bruce Crower, which invention will be sold under the trademark "Crower." Pursuant to the Agreement, Crownetics grants sub-licensees the right to make, use and sell the invention in a specified state, utilizing independent contractors to perform operations or to manufacture products in connection with the invention. Crownetics will provide confidential information and advice as necessary for the sub-licensee to make effective use of the invention. The sub-licensee may grant additional sub-licenses provided the sub-license not be longer than the tem of the Agreement and that each sub-licensee agrees to pay royalties corresponding to the prevailing royalty rates, which royalty will be guaranteed by the sub-licensee. The Agreement requires sub-licensee to pay to Crownetics a first year minimum fee of $10,000 one year from the execution of the Agreement. The second year fee will be $20,000. The sub-licensee will pay to Crownetics a royalty at the rate of $10.00 for a conversion kit. Sub-licensee is required to carry a minimum amount of liability insurance with Crownetics named as an additional insurer.

Section 31005 of the 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.

In our opinion, "Crower" is a commercial symbol of Crownetics pursuant to its license with Mr. Crower. Since the Agreement grants sub-licensee the right to manufacture and sell "Crower" engine conversion kit, the sub-licensees, businesses will be substantially associated with a commercial symbol of Crownetics (Dept. of Corps. Release No. 3-F (Revised) pp 6-7). It is also our opinion that the $10,000 and $20,000 minimum fees as well as the royalty payments constitute. "franchise fees" (ibid, pp 7-12). It is our opinion, however, that the Agreement lacks the element of a marketing plan or system prescribed in substantial part by a franchisor. Although the Agreement grants exclusive territory, requires Crownetics to provide sub-licensees with confidential information and advice and authorizes sub-licensees to grant additional sub-licenses under specified conditions, it does not prescribe the manner by which sub-licensee may solicit sales of the invention. The agreement provided does not contain indicia that Crownetics is prescribing a marketing plan in substantial part within the meaning of Section 31005(b), such as through training sessions, operating manuals, required displays, restrictions on prices (ibid, pp. 2-6 and Comm Op. No. 75/5F).

You should be aware that a marketing plan or system may be "prescribed" within the meaning of Section 31005 although there is no obligation on the part of the franchisee to observe it, where a specific sales program is outlined, suggested, recommended or otherwise originated by the franchisor. See Comm. Op. No. 73/29F. This opinion, therefore, is predicated on the assumption that Crownetics will not prescribe marketing activities for sub-licensees other than those set forth in the Agreement.

In conclusion, it is our opinion, based on the assumption stated above, that the Agreements between Crownetics and sub-licensees are not "franchises" within the definition of Section 31005 and are not subject to the provisions of the Law.

Dated: Sacramento, California
March 30, 1976

By order of
Commissioner of Corporations

By __________________
Assistant Commissioner
Office of Policy