Commissioner's Opinion No. 77 / 1F

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. Stanley Sevilla
Attorney at Law
Suite 400, Clubview Building
10203 Santa Monica Boulevard
Los Angeles, Califronia 90067

Dear Mr. Sevilla:

The request for an interpretive opinion, contained in your letter dated December 14, 1976, has been considered by the Commissioner. Your letter raises the question whether the license agreement between Altainer, Inc., a California corporation ("Altainer"), and persons referred to therein and hereinbelow as "licensees" constitutes a "franchise" within the definition of Section 31005 and is subject to the provisions of the Franchise Investment Law ("Law").

You have represented that Altainer is a manufacturer of loose-fill packing material made of expandable and expandable synthetic plastic composition. Altainer holds two patents on methods for producing such materials and has developed manufacturing techniques in the nature of trade secrets. Pursuant to the license agreement, licensees receive the exclusive right within a specified territory to use Altainer's patented processes and knowledge for the purpose of manufacturing and selling "Altainer loose-fill." In addition, the agreement grants licensees the right to use Altainer's trademarks and service marks and provides that Altainer will furnish licensees with technical information, technical training in the production process and technical equipment. Altainer has the right to establish quality control and standards for the production of "Altainer loose-fill" which all licensees shall adopt and maintain. For this purpose, licensees are required to use only such raw materials as shall conform to the quality standards established by Altainer and to adopt and follow all instructions from Altainer concerning the quality of "Altainer loose-fill." Irrespective of the trade-mark, trade name or service mark used by licensees, the product of licensees shall disclose that the source of information is "licensed for loose-fill by Altainer, Inc. under patent nos. 3,961,000 and 3,400,037."

You have further represented that licensees agree to pay Altainer a flat sum of $10,000 at the time of execution of the agreement and an annual royalty of five percent based upon net sales of loosefill packing materials. In addition, licensees agree to pay a consulting fee.

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, since the license agreement grants licensees the right to use Altainer's trademarks and service marks and requires the above-referred-to disclosures in connection with the marketing of the product, the licensees' businesses will be substantially associated with a commercial symbol of Altainer (Department of Corporations' Release No. 3-F {Revised) pp. 6-7). It is also our opinion that the initial fee, royalty payments and consulting fees constitute "franchise fees" (ibid., pp. 7-12). Although the license agreement grants exclusive territory and Altainer is to provide licensees, with consultation, information and advice, it does not prescribe the manner by which licensees may solicit sales of these products. The agreement provided does not contain idicia that Altainer is prescribing a marketing plan in substantial part within the meaning of Section 31005(b) such as through sales training sessions, operating manuals or required displays (ibid., pp. 2-6 and Comm Ops. Nos. 75/SF and 76/4F). Rather, the provisions in the agreement, as outlined above, generally are designed to protect the alleged patent rights of Altainer and to maintain high quality for the product to be sold by licensees. (See Comm Ops. Nos. 73/2F and 73/35F.)

In conclusion, it is our opinion that the license agreement between Altainer and licensees, under the circumstances described above, does not constitute a "franchise" within the definition of Section 31005 and is not subject to the provisions of the Law.

Dated: Sacramento, California
February 3, 1977

By order of
WILLIE R. BARNES
Commissioner of Corporations

By __________________
ROBERT E. LA NOUE
Assistant Commissioner
Office of Policy
(916)322-3633