Commissioner's Opinion No. 93 / 1F

State of California Department of Corporations

Brian A. Thompson, 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.

Harry J. Proctor, Esq.
Friedman, Jay & Cramer
One Eleven Elm Street, Suite 400
San Diego, CA 92101-2683

Re: Q & S Management, Inc. dba Mountain Mike's
Newcorp, and Damon Siskin

Dear Mr. Proctor:

The request for an interpretive opinion contained in your letter dated February 26, 1993, as supplemented by your letter dated May 21, 1993, has been considered by the Commissioner of Corporations. Your letters raise the question of whether the proposed license agreement to be entered into between Q & S Management, Inc. dba Mountain Mike's ("Mountain Mike's"), a California corporation, and Newcorp, a corporation to be formed of which Damon Siskin ( "Siskin" ) will be the controlling principal, is, a franchise within the definition of Section 31005 of the Corporations Code and, therefore, subject to the provisions of the Franchise Investment Law.

You represent that the proposed license agreement is to incorporate the following material terms and provisions:

(1) The agreement is to be for a term of 20 years.

(2) Newcorp will be allowed to utilize Mountain Mike's tradename and logo solely as a featured product which would be part of an inventory or menu item of other food products to be offered by Newcorp restaurants. No other use of the Mountain Mike's trade name and logo will be permitted.

(3) Newcorp will be given the right to prepare pizza in accordance with Mountain Mike's proprietary recipe. Mountain Mike's will make a partial assignment, or will cooperate with Newcorp towards the end of allowing Newcorp to purchase raw materials directly from its manufacturers at the same prices, and upon the same terms, as are made available to Mountain Mike's. Newcorp, however, will not be required to purchase its raw materials from Mountain Mike's sources, or from Mountain Mike's. Unless required by a given manufacturer or supplier, Mountain Mike's will not place the orders, nor will it be required to handle or subcontract the purchase of products for or on the account of Newcorp. There will be no handling, administrative or similar charge or fee for such cooperative efforts.

(4) Newcorp will not be entitled to open up a franchise operation which utilizes Mountain Mike's pizza as a featured product within a specified number of miles of a then existing Mountain Mike's franchise. As a reciprocal protective provision, Mountain Mike's will not establish or franchise a restaurant within a specified number of miles of a Newcorp franchise so long as it carried Mountain Mike's pizza as a product on its menu.

(5) A mutual indemnification and hold harmless clause.

You further represent that other than the use of the trade name, logo and recipe for the Mountain Mike's pizza by Newcorp, there will be no significant similarities between the marketing systems; the layout and fixturing of the restaurants will be significantly different; the menus will be substantially different (i.e., Mountain Mike's offers mostly pizza, and to a lesser extent, a salad bar and sandwiches; Newcorp will also offer pizza but will instead feature and emphasize pasta dishes and similar menu items); fixtures and trade dress and colors will be different (Mountain Mike's utilizes a color scheme of yellow on brown and Newcorp will utilize a color scheme of yellow on blue); the operating procedures and accounting system will be significantly different; Newcorp will be entirely free to operate its business according to its own marketing plan or system; there will be no standards or policies imposed by Mountain Mike's regarding the quality and price of goods sold, services rendered, hours of operation, housekeeping, and other material incidents of Newcorp's operations; and Newcorp will not be subject to inspection by or reporting to Mountain Mike's.

Additionally, you represent that there will be no fees, charges, or monetary payments whatsoever in connection with the granting of the license. The only consideration involved will be the relinquishment by Siskin and Newcorp of their assigned rights to purchase certain franchises of Mountain Mike's and the mutual covenants and conditions contained within the proposed license agreement.

Subdivision (a) of Section 31005 defines "franchise" as follows:

"Franchise" means a contract or agreement, either expressed or implied, whether oral or written, between two or more persons by which:

(1) 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; and

(2) The operation of the franchisee's business pursuant to such plan or system is substantially associated with the franchisor's trademark, service mark, trade name, logotype, advertising or other commercial symbol designating the franchisor or its affiliate; and

(3) The franchisee is required to pay, directly or indirectly, a franchise fee.

The represented provisions of the proposed license agreement indicate that Newcorp is almost entirely free to conduct the operations of its business as it chooses, save for the limited, restricted use of the Mountain Mike's trade name and logo. Thus, based on the "representations contained in the February 26, 1993, and May 21, 1993, letters, it is our opinion that the proposed license agreement does not provide for a marketing plan or system prescribed in substantial part by Mountain Mike's, as required by paragraph. (1) of subdivision (a) of Section 31005. Therefore, it is our opinion that the proposed license agreement does not constitute a franchise as that term is defined under Section 31005.

Since we have already reached the conclusion that the proposed license agreement is not a franchise because of the absence of a marketing plan or system prescribed by Mountain Mike's, we deem it unnecessary to address the questions of whether the operation of Newcorp's business is substantially associated with Mountain Mike's commercial symbol and whether there is a franchise fee.

Dated: August 3, 1993
Sacramento, California

By order of
BRIAN A. THOMPSON
Acting Commissioner of Corporations

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