Commissioner's Opinion No. 88 / 1F

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.

Rauer L. Meyer
Bushkin, Galms, Gaines & Jonas
2121 Avenue of the Stars
Los Angeles, CA 90067

Dear Mr. Meyer:

The request for an interpretive opinion contained in your letter dated April 6, 1988 has been considered by the Commissioner. Your letter raises the question whether the offer and sale of franchises by Budget-Rent-a-Car of Southern California, a California general partnership ("Budget"), is exempt from the provisions of Chapter 2 (commencing with Section 31110) of the Franchise Investment Law ("Law") by virtue of Section 31101.

You have represented that Budget, as a franchisee of Budget Corporation, subfranchises others in the southern California area to operate car rental businesses under the "Budget" trademark. We understand you to concede that the subfranchises are "franchises" within the meaning of Section 31005(a) and subject to the registration requirement of Section 31110 of the Law, unless an exemption is available. Section 31101 of the Law provides an exemption from the provisions of Chapter 2 (commencing with the registration requirement of Section 31110) if the franchisor meets the net worth requirements of subdivision (a), the standards and scope of operation tests of subdivision (b), the disclosure requirements of subdivision (c) (or in the case of material modification, subdivision (d)), and the notice requirement of subdivision (e) of that section.

In this connection, you have represented that Budget has a net worth (called "partners capital") on a consolidated basis, according to its most recent financial statement as of December 31, 1987, of more than $5,000,000. In addition, you recognize that Budget must comply with the notice and disclosure requirements of Section 31101. Therefore, the only question raised by your letter is whether Budget meets the scope of operations tests required by subdivision (b) of Section 31101.

The tests of Section 31101(b), as you point out, may be satisfied by compliance with one of the following two requirements, among others:

"[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 less than five years preceding the offer or sale;..." (Emphasis added)

With respect to these requirements, you represent that Budget founded the "Budget" rent-a-car business in 1958 in Los Angeles, California; that Budget conducted several retail rent-a-car businesses, which is the subject of the franchise it offers to others, continuously for approximately 27 years, from 1958 through 1985; that during this period, Budget directly owned and operated as many as five different retail operations; and that many of the persons involved in those operations remain active in the franchising activities in which Budget now engages on the other hand, you represent that Budget has had over 35 franchises in the past, but at present, only has 23 franchises.

As emphasized in the above-quoted language of Section 31101(b) of the Law, the scope of operations test may be met by complying with one of two alternative requirements. The first requirement is that the franchisor have had at least 25 franchisees conducting business "at all times during the five-year period immediately preceding" the offer and sale of a franchise. The second alternative requires that the franchisor have "conducted business which is the subject of the franchisee continuously for not less than five years preceding the offer and sale" of a franchise. Thus, while the first alternative regarding the number of franchisees conducting business specifically refers to the five-year period "immediately preceding" the offer and sale of a franchise, the second alternative regarding the number of years during which the franchisor has conducted business which is the subject of the franchise merely requires that the franchisor has conducted business "continuously for not less than five years preceding the offer and sale" of a franchise. You suggest, therefore, that the "legislature has drawn a clear and deliberate distinction in the subsection (and in the balance of the subsection which is not quoted above) between activity 'during the five-year period immediately preceding' and activity 'five-years preceding' the offer of a franchise".

We are unable to concur in your suggestion that the legislature has drawn a "clear and deliberate distinction" between the two alternative scope of operations tests in Section 31101(b) insofar as those tests refer to time periods preceding the offer and sale of a franchise. The use of the word "continuously" in the second alternative, the one regarding the period during which the franchisor has conducted business, could be read as meaning "continuously" for the five years preceding the offer and sale of a franchise, thus making it unnecessary to insert "immediately" before "preceding". This lack of clarity necessitates us to consider the policy underlying Section 31101(b), namely, that the franchisor have significant experience in the business which it is franchising so that franchisees are protected. Such a policy consideration must be made on a case by case basis. In the instant case, Budget had continuously operated the retail rent-a-car business for approximately 27 years, ending its direct engagement in such business in 1985. This leaves a gap of only three years prior to the present contemplated sale of franchises. It is also significant that Budget did not entirely divorce itself from the retail rent-a-car business. Rather, it continues to franchise others in this business and currently has a significant number of retail rent-a-car franchisees. In addition, many of the persons involved in Budget's retail operations remain active in its franchising activities. Therefore, in our opinion, the cumulative effect of these facts indicate that Budget meets the scope of operations test set forth in Section 31101(b) of the Law.

Accordingly, assuming that Budget, in fact, meets and continues to meet the other requirements of Section 31101, it is our opinion that the offer and sale of franchises by Budget, under the circumstances described in your letter, is exempt from the registration requirement of Section 31110 of the Law by virtue of Section 31101.

Dated: May 11, 1988
Sacramento, California

By order of
CHRISTINE W. BENDER
Commissioner of Corporations

By __________________
WILLIAM KENEFICK
Assistant Commissioner
Office of Policy
(916)322-3553