Business Law

Opinion No. 73 / 24F

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. Robert J. Redington
Attorney at Law
Eadington and Howald
1666 North Main Street, Suite 340
168 North Brent Street
Santa Ana, CA 92702

Dear Mr. Eadington:

The request for an interpretive opinion, contained in your letter dated March 29, 1973, as supplemented by your letter dated April 25, 1973, has been considered by the Commissioner. Your letters raise the question whether the agreements proposed to be offered and sold by Massachusetts Investment Company, a California corporation (ā€œMassachusettsā€), are ā€œfranchisesā€ within the definition of Section 31005 of the Franchise Investment Law. This question is answered in the affirmative. The question also raised in your letter whether these agreements are ā€œsecuritiesā€ within the Meaning of Section 25019 of the Corporate Securities Law of 1968, and subject to the qualification requirements of that Law, is answered in a separate opinion issued under that Law contemporaneously herewith.

You have represented that Massachusetts is engaged in the business of operating a chain of pizza parlors using the name ā€œChicoā€™s Pizza Parlorā€. Massachusetts presently owns and operates three such restaurants and has recently opened a fourth as a joint venture, selling 49 percent interest therein to an individual Massachusetts proposes to form additional joint ventures, one for each new restaurant, using agreements similar to that submitted with your letter, which agreements have previously been used by Indiana Investment Co., a wholly owned subsidiary of Massachusetts.

You have further represented that Massachusetts will contribute to each joint venture all of its rights, title and interest to the building, facilities, and fixtures installed therein as well as the right to the use of the name ā€œChicoā€™s Pizza Parlorā€; however, the aforementioned agreement states that the land and building will not be included in the assets of the joint venture. Moreover, the operation of additional restaurants or investments in additional restaurants by any of the joint venturers will not constitute a part of any other joint venture. Simultaneously with the aforementioned contributions, Massachusetts will sell 49 percent of each joint venture. A manager, trained and employed by Massachusetts, will be required to purchase at least 20 percent of the joint venture and may purchase as much as 49 Percent. If the manager purchases less than 49 percent, the difference between his percentage and the 49 percent will be sold to no more than five individuals. Massachusetts will have the right of first refusal if any joint venturer desires to sell his interest.

The agreement provides that the joint venture will enter into a management and consulting agreement with Massachusetts whereby Massachusetts will supply the joint venture with the manager. The joint venture will pay Massachusetts a specified monthly sum, or such higher amount as Massachusetts may actually pay, as salary to the manager. Such salary will, in part, be based upon gross sales and net profits of the joint venture. In addition, in exchange for services as administrative consultant and other specified services, the joint venture will pay to Massachusetts 3 percent of its gross receipts, with certain exclusions. Massachusetts will sell to the joint venture, at a below market price, foodstuffs and other supplies as well as advertising and promotional material and will also supply bookkeeping, accounting and legal services which the joint venture agrees to use.

The manager, pursuant to an employment agreement as well as the joint venture agreement, will be required to devote full time to the conduct and management of the restaurant. Massachusetts, however, will have the right to determine and control the menu, recipes, prices, design, policy and food quality and, in its capacity as consultant, will have the right to designate the depository bank and to sign all disbursements of the joint ventureā€™s funds.

Section 31005 of the Franchise Investment Law defines ā€œfranchiseā€ to include an agreement, whether 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 franchiseeā€™s business pursuant to such a plan is substantially associated with the franchisorā€™s trade name or other commercial symbol, and the franchisee is required to pay, directly or indirectly, a franchise fee.

The agreement between Massachusetts and the joint venturers, in addition to providing for the creation of a joint venture composed of the parties thereto, contemplates the granting by Massachusetts to the joint venture of the right to engage in the business of operating a restaurant under the name of ā€œChicoā€™s Pizza Parlorā€, a trade name already in use by Massachusetts and evidently adopted by it for a chain of restaurants. The agreement, as reflected above, moreover makes detailed provisions as to how the joint venture business of operating the restaurant is to be conducted, specifying numerous details which will be under the control of Massachusetts. It is, therefore, fair to say that a marketing plan or system for the operation of the joint venture business is being prescribed in substantial part by Massachusetts and, as above stated, that business is substantially associated with the trade name adopted by Massachusetts.

Although Massachusetts will exercise the aforementioned control over the operation and conduct of the business, the agreement is distinguishable from that discussed in Comm. Op. No. 73/4F, because the manager is required to devote full time to the conduct and management of the restaurant, whereas in the aforementioned opinion the limited partner took no part in the conduct or control of the partnership business.

As indicated above, the agreement requires that the joint venture will pay Massachusetts a specified sum to compensate Massachusetts for the managerā€™s salary. In addition, the joint venture will pay Massachusetts 3% of its gross sales, with certain exclusions, for its services. The joint venture will also purchase from Massachusetts foodstuffs and other supplies; advertising and promotional material; and bookkeeping, accounting and legal services. We are, therefore, of the opinion that the agreement between Massachusetts and the joint venture requires that the joint venture pay Massachusetts a franchise fee.

Accordingly, it is our opinion that, under the circumstances described by you as outlined above, the agreement between Massachusetts and the joint venturers is a ā€œfranchiseā€ within the meaning of section 31005 and subject to the requirements 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
May 31, 1973

By order of 
Commissioner of Corporations

By __________________ 
Supervising Corporations Counsel
Office of Policy

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