Business Law

Opinion No. 72 / 21F

State of California Department of Corporations

Brian R. Van Camp, Commissioner 
In reply refer to: File No. _____

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

Mr. Austin F. Stevens
Attorney at Law
520 South El Camino Real
Suite 428
San Mateo, CA 94402

Dear Mr. Stevens:

The request for an interpretive opinion contained in your letter dated April 28, 1972, has been considered by the Commissioner. Your letter raises the question whether the Design Patent License and Distributorship Agreement (“Agreement”) between systems Building Industries, Inc., an Arizona corporation (“Systems”), and persons referred to therein and hereinbelow as “licensees”, constitute franchises within the definition of Section 31005 or area franchises within the definition of Section 31008 and subject to the provisions of the Franchise Investment Law. This question is answered in the affirmative.

You have represented that Systems owns a patent for a design of a low cost miniature building {“Product”) identified by the trade name “The Burger Shoppe”. The Product is a rectangular base building with a modified mansard roof which is rimmed with a fence of decorative iron; having one walk-up, serve-out window and two drive-thru, serve-out windows, such design is distinctive in appearance and function. Pursuant to the agreement, licensee is granted the right to create and conduct a business employing the Product within a specified territory. In consideration for the payment of a specified sum paid at the time of the execution of the agreement, licensee may either use or sell the Product in his territory provided; provided, however, that such use by him shall be limited to that segment of the restaurant industry commonly associated with the sale of hamburgers, hot dogs, ice cream and related general American foods. Licensee agrees to make no alteration in the Product without the prior written consent of Systems.

You have further represented that licensee agrees to use his “best efforts” to sell the Products, defined as requiring the purchase or sale within this territory of at least 12 Products during the eight year period of the agreement in accordance with the schedule set forth therein. Licensee is required to purchase one Product, equipped as indicated on the exhibit attached to the agreement, at a purchase price of $8,995 within six months of the execution of the agreement. If licensee transmits an order for the Product, which he has solicited, but payment for which is to be made by his purchaser, he may add a commission not exceeding $3,000 to the purchase price embraced in such order.

You further represent that for $500 paid at the time of the execution of the agreement, licensee may purchase from Systems the operating “know-how” developed by it for use in the territory in connection with the Product. This “know-how” includes a “Model Location Owner Agreement”, an “Operating Manual” and at least three days of optional training. We assume that the licensee may use the aforementioned “know-how” in connection with any sales of Products in his territory.

Section 31005 of the Franchise Investment 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 the 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.

We cannot concur in your opinion that the agreements do not grant to licensee the right to engage in a business under a marketing plan or system prescribed in substantial part by Systems. In making the determination whether there is a prescribed marketing plan or system, it is necessary to keep in mind the objective of the Law to deal with a multiplicity of business establishments created by the franchisor 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 regards the quality and price of goods served, services rendered and other material incidents of the operation. In the instant case, the distinctive appearance and functions of the Product and the limitations on the foods which may be served therein, as well as the optional opportunity for the licensee to receive System’s “know-how”, tends to toward the conclusion that System is prescribing a marketing plan or system in substantial part.

Accordingly, it is our opinion that, under the circumstances described by you and assumed by us as outlined above, the agreements between Systems and the licensees constitute “franchises” within the meaning of Section 31005 and subject to the provisions of the Franchise Investment Law.

We are also of the opinion that the agreements constitute “area franchises”, defined in Section 31008 to mean any contract or agreement between a franchisor and a subfranchisor whereby the subfranchisor is given the right, for consideration given in whole or in part for such right, to sell or negotiate the sale of franchises in the name or on behalf of the franchisor. A “subfranchisor” is defined in Section 31009 to mean a person to whom an “area franchise” is sold. The licensee may sell the product in his territory to other purchasers and at a commission not to exceed $3,000 to the purchase price. The commission is paid to Systems and related to the licensee after systems has collected all of the purchase price. Based on these facts, it is our conclusion that Systems is selling an “area franchise” within the meaning of section 31008, and that the licensee is a “subfranchisor” within the meaning of Section 31009. Under Section 31110, the registration requirement of the Law is applicable to the sale of the area franchise.

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: San Francisco, California
June 7, 1972

By order of 
Commissioner of Corporations

By __________________ 
Assistant Commissioner
Office of Policy

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