Commissioner's Opinion No. 82 / 3F

State of California Department of Corporations

Geraldine D. Green, 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. Daniel Cooperman
McCutchen, Doyle, Brown & Enersen
Three Embarcadero Center
San Francisco CA 94111

Dear Mr. Cooperman:

The request for an interpretive opinion, contained in your letter dated October 4, 1982, has been considered by the Commissioner. Your letter raises the question whether the arrangements between California Canners and Growers, a California. agricultural nonprofit association, ("CC & G") constitutes a "franchise" within the meaning of Section 31005 of the Franchise Investment Law ("Law").

You have represented that CC & G has marketed certain diet food products under the Diet Delight label since 1946. CC & G proposes to expand its line of diet food products by adding a number of other diet food products. As part of this planned expansion, CC & G intends to enter into a Selling Agreement and a License Agreement with each of a number of third party manufacturers ("Suppliers") whereby Suppliers would manufacture and package the products and deliver them to CC & G for marketing under the Diet Delight label. Under the terms of the Agreements, CC & G will deliver to Suppliers a forecast of the product quantities that it expects to sell and a schedule for the delivery of the products to CC & G. Supplier will then deliver manufactured and packaged products to warehouses designated by CC & G on a consignment basis in the quantities set forth in the forecast. Suppliers will not be permitted to distribute the products to anyone other than CC & G.

Under the Agreements, CC & G, and not Suppliers, will market, distribute and sell the products manufactured by Suppliers, as well as advertise and promote the products to retail establishments and to consumers. Suppliers will determine the retail price of the products, but CC & G will be responsible for billing purchasers and making a reasonable effort to collect all amounts due. Thus, only CC & G will deal with, and be recognized by, the public in regard to the products, and suppliers' existence and identity will not be public knowledge.

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.

As stated in Commissioner's Opinion 74/11F, the definition of a "franchise" includes the granting of the right to engage in the business of offering, selling or distributing goods or services and that the operation of the franchisee's business be substantially associated with the franchisor's commercial symbol. The Commissioner has expressed the opinion that for the operation of the franchisee's business to be substantially associated with the symbol, it must be communicated to the customers of the franchisee (Dept. of Corps. Release No. 3-F (Revised) p.7). In reaching this conclusion, the Commissioner referred to the objective of the Law which is "to deal with a multiplicity of business establishments created by the franchisor which he presents to the public as a unit or marketing concept and for all of which he ostensibly assumes responsibility by causing them to be operated with the appearance of some centralized management and uniform standards as regard the quantity and price of the goods sold, services rendered, and other material incidents of the operation". (ibid p. 3. Emphasis added) .

In the instant case, as indicated above, you have represented that Suppliers will not be permitted to distribute the product to anyone other than the CC & G and thus, only CC & G will deal with, and be recognized by, the public in regard to the products and Suppliers' existence and identity will not be public knowledge.

Based upon the rationale of Release 3-F (Revised), discussed above, it is our opinion that the arrangements described in and with your letter do not constitute "franchises" within the meaning of Section 31005 of the Law.

Dated: Sacramento, California
November 26, 1982

By order of
GERALDINE D. GREEN
Commissioner of Corporations

By __________________
ROBERT E. LA NOUE
Assistant Commissioner
Office of Policy
(916)322-3553