Commissioner's Opinion No. 78 / 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. J. Lorin Yeates
Vernon, Sartore and Hoyt
Empire Park Suite 612
1385 South Colorado Blvd.
Denver, CO 80222

Dear Mr. Yeates:

The request for an interpretive opinion, contained in your letter dated April 6, 1978, has been considered by the Commissioner. Your letter raises the question whether the commercial symbol of American Tool and Grinding Company, Inc. ("American") will be substantially associated with the business of "distributors" so as to bring the "agreement" between American and distributors within the definition of a "franchise" as set forth in Section 31005 of the Franchise Investment Law ("Law").

We understand from the copy of the agreement attached to the letter from Peter A. Scognamillo dated March 23, 1978, that American is in the business of producing, merchandising and distributing tools and other grinders and related tools, products and the equipment processor know-how and training regarding such products. For an initial purchase price of $17,500, American grants and sells to distributors machinery, tools and equipment and agrees to provide training, instruction and know-how for the use thereof. In addition, American will provide consulting advice; offer various types of instruction and advice regarding types and uses of equipment; discuss promotional plans, marketing ideas, specific opportunity and general marketing goals; and utilize its best efforts to recommend retail accounts for distributors.

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.

We understand you to concede that American will prescribe a marketing plan or system in substantial part and that the distributors will be required to pay a franchise fee. We therefore limit our opinion to the question of whether the operation of the distributor's businesses will be substantially associated with a commercial symbol of American. In this connection, Mr Scognamillo has represented that no commercial symbol will be affixed by a distributor on any products so as to be communicated to any customers. In addition, you have represented that the only time a customer of a distributor will see the name "American Tool and Grinding Company, Inc.", is when a distributor gives the customer a catalog. However, you have emphasized that this catalog will be distributed to customers together with catalogs of over 15 other companies.

In Release No. 3-F (Revised) the Commissioner stated at page 7 that in resolving the question whether there is substantial association between the licensee's business and the licensor's commercial symbol, it is necessary. to consider whether the commercial symbol is brought to the attention of the licensee's customers to such an extent that they would regard the licensee's establishment as one of a chain identified with the licensor.

Assuming that the only communication of an American commercial symbol to a customer of a distributor is when an American catalog is given to a customer along with numerous other catalogs, it is our opinion that the commercial symbol of American is not substantially associated with the distributor's business so as to bring the "agreement" between American and distributors within the definition of a "franchise" as set forth in Section 31005 of the Law.

Dated: Sacramento, California
May 9, 1978

By order of
WILLIE R. BARNES
Commissioner of Corporations

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