Business Law

Opinion No. 01 / 1F

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State of California Department of Corporations

Demetrios A. Boutris, Commissioner 
In reply refer to: File No. _____

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

September 7, 2001

Mr. Timothy A. Kunez
Law Offices
Gattis & Kunez
2729 Fourth Avenue, Suite 3
San Diego, CA 92103

Re: Aca Las Tortas

Dear Mr. Kunez:

The request for an interpretive opinion contained in your letter dated November 21, 2000, as supplemented by your letter dated March 27,2001, has been considered by the California Corporations Commissioner (ā€œCommissionerā€). Your letters raise the question of whether the proposed license agreement to be entered into between Aca Las Tortas International Corporation (ā€œALTā€) and Mr. Alex Cienfuegos is a franchise within the definition of Section 31005 of the Corporations Code and, therefore, subject to the provisions of the Franchise Investment Law (ā€œFILā€).

In order for an agreement to constitute a ā€œfranchiseā€ within the definition of Corporations Code Section 31005(a), all of the following four elements must be met:

1. a right must be granted to the franchisee to engage in the business of offering, selling or distributing goods or services;

2. the right must be granted to engage in the business under a marketing plan or system prescribed in substantial part by the franchisor;

3. the operation of the franchiseeā€™s business must be substantially associated with an advertising or other commercial symbol designating the franchisor or an affiliate of the franchisor, such as a trademark, service mark, trade name or logotype; and

4. the franchisee must be required to pay, directly or indirectly, a fee or charge (known as a ā€œfranchise feeā€) for the right to enter into the business.

You have acknowledged that the proposed agreement may be construed to satisfy. the first, third and fourth elements of the definition. Therefore, the focus of your question is whether the second element (marketing plan or system prescribed in substantial part by franchisor) is met by the proposed license agreement. This question is answered in the affirmative.

You have represented that ALT, a California corporation, operates a restaurant in Chula Vista, California under the trade name and trademark ā€œAca Las Tortasā€ and in connection therewith uses related trade names and trademarks, including the menu items identified on the menu attached as an exhibit to the license agreement, all of which are collectively referred to as the ā€œMark.ā€ Mr. Cienfuegos desires to acquire a license to use the Mark in connection with the operation of a restaurant to be established and operated by him in San Diego County. In addition, Mr. Cienfuegos will be given the right to prepare tortas (Mexican style sandwiches) in accordance with ALTā€™s proprietary recipes, to the extent such proprietary rights exist. You have further represented that ALT currently operates no other restaurants in the United States besides its Chula Vista location and that the principals of ALT, through Mexican affiliates, operate approximately eleven restaurants doing business under the Mark in various locations in Mexico.

As regards the requirement of a marketing plan or system prescribed in substantial part by the franchisor, you have represented that, under the proposed license agreement, Mr. Cienfuegos will be entirely free to operate his business according to his own marketing plan or system and his own policies and procedures; will not be required to purchase products or materials from ALT or from ALTā€™s sources; and will not be supplied with sales aids or props. You further represented that the proposed license agreement imposes no policies regarding the price of goods sold, services rendered, hours of operation or other material incidents of business operation; does not limit or otherwise dictate the menu items which may be offered at the restaurant; imposes no restrictions concerning the appearance of the licenseeā€™s business premises, the fixtures and equipment utilized therein, uniforms of employees, housekeeping or decorations; and does not subject the licenseeā€™s business to any sort of inspection or examination by the licensor. Based thereon, it is your opinion that the second element of the definition is not met in this case.

In making the determination whether there is a prescribed marketing plan or system, it is necessary to keep in mind the objective of the FIL to deal with a multiplicity of business arrangements created by the franchisor and presented to the public as a unit or marketing concept, and for all of which the franchisor ostensibly assumes responsibility by causing these arrangements to be operated with the appearance of some centralized management and uniform standards regarding the quality and price of the goods sold, services rendered, and other material incidents of the operation. The marketing plan or system prescribed by the franchisor is one of the important means by which the appearance of centralized management and uniform standards is achieved. Furthermore, significance attaches to provisions imposing a duty of observing the licensorā€™s directions or obtaining the licensorā€™s approval with respect to the selection of locations, the use of trade names, advertising, signs, sales pitches, and sources of supply, or concerning the appearance of the licenseeā€™s business premises and the fixtures and equipment utilized therein, uniform of employees, hours of operation, housekeeping, and similar decorations. (See Commissionerā€™s Release No. 3-F (Revised), dated June22, 1994, pages 3 and 4.)

In our opinion, several requirements and restrictions set forth in the proposed license agreement and representations contained in your letters, when taken together, are sufficient to create an appearance of uniformity of operation and appearance and centralized management and control so as to amount to a marketing plan or system prescribed in substantial part by ALT. As examples, the proposed licensing agreement of ALT:

(1) requires Mr. Cienftiegosā€™ restaurant to be operated under the name and logo of the licensor, i.e., ā€œAca Las Tortasā€;

(2) requires the use of ā€œtrade dressā€ by licensee, i.e., the distinctive color scheme (bright red and white) which is used by the licensor is the operation of its restaurant;

(3) requires the use of certain specified menu, menu items, and prices;

(4) prohibits licensee from changing the location of the restaurant without the licensorā€™s prior consent;

(5) prohibits licensee from using, directly or indirectly, the Mark at or in connection with any other location, or in connection with any other business without the prior written consent of the licensor;

(6) grants exclusive or protected territory to licensee;

(7) prohibits the Mark, which includes menu, logo, etc., from being changed or partially used without the licensorā€™s prior consent;

(8) prohibits the use of the Mark in conjunction with any other name or logo without the licensorā€™s prior consent;

(9) grants licensor the right to require prior approval on any and all use of the Mark by the licensee and any and all advertising, publicity and promotional material concerning any use of the Mark;

(10) grants licensor the right to request, prior to production, sale or distribution of any products under the Mark or any advertising or promotional material for use in any media, the furnishing by licensee of a complete set of artwork, sketches, photographs, and prototype samples; and

(11) requires food products to be of such style, appearance and quality as to be similar to those food products marketed by licensor.

We do not concur in your opinion that, in many respects, the proposed license agreement is similar to that which was the subject of Commissionerā€™s Opinion No. 93/1F, which was determined not to provide for a ā€œmarketing plan or system.ā€ The facts are distinguishable. Unlike this case, Commissionerā€™s Opinion No. 93/1F involved an arran
gement where: (1) the licensee would not operate his restaurant under the same name and logo of the licensor, i.e., the licensee would merely be allowed to utilize the licensorā€™s trade name 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 licenseeā€™s restaurants, (2) there were no trade dress or color scheme requirements, and (3) there were no restrictions or limitations that required the prior approval of licensor such as with respect to change of location, use of trade name and logo, advertising, or promotion.

In our opinion, this case is more analogous to Commissionerā€™s Opinion No. 72/45F, wherein it was determined that the subject license agreement constituted a franchise, There were several primary factors present in Commissionerā€™s Opinion No. 72/45F, as in the present case, that were determinative in concluding the presence of a marketing plan or system prescribed in substantial part by the franchisor. These analogous factors included the following: (1) the licensee would be operating its business under the licensorā€™s service mark name, (2) the prior written consent of licensor was required to provide any other service, (3) the prior written consent of licensor was required to carry out licensed services at any other location, and (4) the prior written approval of the licensor was required for the use of signs, advertising, and other material bearing the service mark.

Accordingly, it is our opinion that the proposed license agreement constitutes a franchise as that term is defined under Corporations Code Section 31005 and is therefore subject to the provisions of the FIL.

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: September 7, 2001
Sacramento, California

By order of 
California Corporations Commissioner

By __________________ 
Assistant Commissioner
Office of Law and Legistion

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