Commissioner's Opinion No. 78 / 2F

State of California Department of Corporations

Willie R. Barnes, Commissioner
In reply refer to: File No. _____

This letter is not an Interpretive Opinion for the reasons stated below.

Mr. K. Randall Kenworthy
Attorney at Law
P.O. Box 351
Samta Rosa, CA 95402

Dear Mr. Kenworthy:

The request for an interpretive opinion, contained in your letter dated March 13, 1978, has been considered by the Commissioner. The question raised in your letter as to whether the offer and sale of franchises by Homeowners Corporation of America, a California corporation ("Homeowners"), also constitutes the offer and sale of "area franchises" within the definition of Section 31008 and is subject to the provisions of the Franchise Investment Law ("Law") is answered herein. The question also raised in your letter as to whether the franchise also constitutes a "security" within the meaning of Section 25019 of the Corporate Securities Law of 1968 is answered in a separate opinion issued under that Law contemporaneously herewith.

You have represented that the franchise, for which an application is presently pending before the Department, grants to the franchisee the right to engage in the business of real estate brokerage and of offering and selling of additional Homeowners' franchises under specific conditions prescribed by Homeowners. The franchise provides that after it has been in effect for a period of months, the franchisee may circulate or cause to be published notices, circulars or other communications advertising the availability of Homeowners' franchises, using the franchisee's name, address and telephone number as a source of further information, and as a person from whom an offering circular may be obtained. The franchisee is not the agent of Homeowners and has no authority to bind Homeowners to enter into any franchise on its behalf with a prospective franchisee. The sole and exclusive authority to enter into a franchise and to accept or reject any proposed franchise agreement, or to bind Homeowners in any way, remains solely, exclusively, and at all times, with Homeowners.

Upon acceptance by Homeowners of an application for a franchise from a prospective franchisee, the franchisee responsible for the submission of the application will be entitled to receive a referral commission of 40% of the initial franchise fee and 33 1/2% of the monthly service fee actually paid under the resulting new franchise.

The franchisee's right to receive these fees will continue only so long as its franchise with Homeowners is in effect and so long as the franchisee continues to actively operate a Homeowners' franchise under the terms of its franchise agreement. No representations may he made by a prospective franchisee with regard to the availability of the office location areas unless specific authorization is given in writing by Homeowners.. The final determination of the prospective franchisee office location areas will be made solely by Homeowners.

Section 31008 of the Law defines "area franchise" to mean "any contract or agreement between a franchisor and a subfranchisor whereby the subfranchisor is granted the right, for consideration given in whole or in part for such right, to sell or negotiate the sale of franchises in the name or on behalf of the franchisor." (Emphasis added.) A "subfranchisor" is defined in Section 31009 to mean a person to whom an area franchise is granted.

In the instant case, the franchisees, for consideration paid to Homeowners, receive the right to circulate material regarding the availability of Homeowners' franchises and may be identified as a source of additional information. Thus, pursuant to the agreement with Homeowners, the franchisee has a right, for consideration, to negotiate the sale of the franchise notwithstanding the fact that the sole and exclusive authority to accept or reject a prospective franchise agreement remains with Homeowners. This right is an integral part of the franchise and is in addition to the right to engage in the business of real estate brokerage using Homeowners' marketing plan and commercial symbol. Under these circumstances, it is our opinion that the Homeowners' franchise also constitutes an "area franchise" within the definition of Section 31008 of the Law.

In reaching the conclusion that the franchise is also an "area franchise", we have taken into consideration the provisions of Section 31210 of the Law which provides that it is unlawful for any person to effect or attempt to effect a sale of a franchise in this state, except in exempted transactions, unless the person is identified in the application or amended application filed pursuant to the Law, licensed by the California Department of Real Estate as a real estate broker or real estate salesman, or licensed by the Commissioner as a broker-dealer or agent pursuant to the Corporate Securities Law of 1968. In our opinion, the persons referred to in Section 31210 of the Law are not persons to whom a "franchise", as defined in Section 31005 of the Law, has been granted and who, as part of the total franchise agreement, receives the right to sell or negotiate the sale of additional franchises for consideration given in whole or in part for such right.

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: Sacramento, California
July 10, 1978

By order of
WILLIE R. BARNES
Commissioner of Corporations

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