Business Law

Opinion No. 72 / 34F

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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. C. L. Sutton
Union Discount Company of
1600 Third Avenue 
San Diego, CA 92101

Dear Mr. Sutton:

The request for an interpretive opinion contained in your letter dated September 7, 1972, has been considered by the Commissioner. Your letter raises the question whether the agreements between Udisco, a Nevada corporation (“Udisco”), and persons referred to therein and hereinbelow as “affiliates”, are franchises within the definition of Section 31005 and subject to the provisions of the Franchise Investment Law. This question is answered in the affirmative.

You have represented that Udisco is engaged in the business of selling memberships in Union Discount Club (“Club”). Members of Club are entitled to purchase from participating merchants at discount prices.

Udisco for a sum of money specified in the agreement grants to the affiliate the right to use the name “Union Discount Company’ and exclusive operating rights in a specified state, including the production and protection of cards and names.

Udisco agrees to provide the affiliate initially with 100 participating merchants and to issue 5,000 Club memberships in the affiliate’s territory at no additional cost to the affiliate. It also conducts a national advertising campaign. It assists in the training of the affiliate’s personnel, including training of one of affiliate’s employees at Udisco’s San Diego office. It provides the affiliate with an initial supply of decals, “take-one” displays, application forms, and merchant agreement forms. Supplementary supplies of these items are available to affiliates at scheduled prices.

The agreement requires the affiliate to open an office with a telephone listed under the name “Union Discount Company”, to answer the phone during normal office hours, and to maintain a TWX system. The affiliate must forward copies of participating merchant agreements to Udisco.

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 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.

In our opinion, the agreements between Udisco and the affiliates contain all of the essential elements of a “franchise”. The agreement calls for payment of a franchise fee and the provisions contained therein with respect to training, supply of material, maintenance of office and telephone facilities, and forwarding of merchant agreements to Udisco, are characteristic of a “prescribed” marketing plan or system, which in this case is associated with Udisco’s trade name.

Accordingly, it is our opinion that under the circumstances described by you, as outlined above, the agreements in question are “franchises” within the definition of Section 31005 and are subject to the provisions of the Franchise Investment Law.

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
October 20, 1972

By order of 
Commissioner of Corporations

By __________________ 
Assistant Commissioner
Office of Policy

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