Commissioner's Opinion No. 78 / 3F

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. Evan A. Santell
Atlantic Richfield Company
Legal Division
515 South Flower Street
Los Angeles, CA 90051

Dear Mr. Santell:

The request for an interpretive opinion, contained in your letter dated January 11, 1978, and supplemented by your letter dated September 26, 1978, has been considered by the Commissioner. Your letters raise the question whether the offer and sale of an automotive tune-up service system franchise providing quick service, "while-you-wait", warrantied automotive tune-up and emissions control services emphasizing convenience to the customer (referred to by you as the "Award Tune-Up Concept") by Atlantic Richfield Company ("Atlantic") is exempt from the registration requirements of Section 31110 of the Franchise Investment Law ("Law") by virtue of Section 31101.

You have represented that Atlantic has developed the Award Tune-Up concept which it intends to franchise to its service station dealers affording them an opportunity to specialize in the performance of automotive tune-up services. Atlantic does not propose to offer the Award Tune-Up concept to all petroleum franchisees (new and existing). It does not presently intend to limit the offer of the concept to existing dealers, nor is it anticipated that all existing dealers will be offered the concept. As currently structured, the concept is intended to be and to continue as a business relationship separate from the petroleum "supplier/retailer dealer" relationship. Atlantic has not conducted the Award Tune-Up concept during the last five years. Prestige Stations, Inc., a wholly owned subsidiary of Atlantic, has operated the concept in Tustin, California and one other location for approximately six to eight months.

Section 31101 provides an exemption from the registration requirement of Section 31110 of the Law for any offer or sale of a franchise if the franchisor meets the net worth test of Subdivision (a) and the scope of operations test of Subdivision (b) and makes the disclosures required by Subdivision (c) or (d) of that section. In this connection, you have represented that Atlantic, according to its most recent audited financial statement, has a net worth of four billion dollars and thus meets the requirements of Subdivision (a) of Section 31101. Atlantic will continue to disclose, in writing to each prospective franchisee the information required by Subdivision (c) of Section 31101.

The scope of operations test under Subdivision (b) of Section 31101 is satisfied if the franchisor "has had at least 25 franchisees conducting business at all times during the five year period immediately preceding the offer or sale; or has conducted business which is the subject of the franchise continuously for not loss than five years preceding the offer or sale". It is significant that the legislature merely required that the franchisor have at least 25 franchisees conducting business during the preceding five year period but required, as an alternative, that the franchisor have conducted business which is the subject of the franchise continuously for not less than the preceding five years. It is reasonable to assume that the legislature considered five years experience in the granting of franchises as a sufficient basis for meeting the scope of operations test under Subdivision (b) of Section 31101 (see Comm Ops. 72/35F and 72/46F).

In this connection, you have represented that Atlantic has had more than 25 franchisees conducting business during the preceding five year period. Based upon this representation, as well as the other representations contained in your letters, it is our opinion that the offer and sale of the Award Tune-Up concept is exempt from the registration requirement of Section 31110 of the Law by virtue of Section 31101.

Dated: Sacramento, California
November 13, 1978

By order of
WILLIE R. BARNES
Commissioner of Corporations

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