Business Law

Opinion No. 73 / 28F

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. Sam Rosen
Attorney at Law
Shannon, Gracey, Ratliff & Miller
2700 Continental National Bank Building
Fort Worth, TX 76102

Dear Mr. Rosen:

The request for an interpretive opinion contained in your letter dated February 23, 1973 has been considered by the Commissioner. Your letter raises the question whether the agreement between Property Damage Appraisers , Inc., a Texas corporation ( “PDA”), and persons referred to therein and hereinbelow as “licensees”, are subject to the registration requirement of Section 31110 of the Franchise Investment Law. This question is answered in the affirmative.

You have represented that PDA is engaged in the business of providing itemized physical damage estimates on vehicles. to various .interested parties under the trademarks and/or trade names of “Property Damage Appraisers” and “P.D.A” Pursuant to the agreement, the licensee is granted a so-called “franchise” to use PDA’s trademarks and/or trade names in operating a damage appraisal service in a specified territory, using good and legitimate business procedures so as to further such trademarks or trade names. PDA furnishes the licensee a standard manual of operations, procedures, practices, correspondence, advertisements, estimate and invoice forms and other printed matter. Licensees are required to charge fees as set forth in an attachment to the agreement, subject to changes on 30 days’ notice by PDA.

You have further represented that the licensee agrees to pay to PDA as consideration for the granting of the franchise a specified sum represented in your letter to never have exceeded $10. In addition, the licensee pays to PDA 20% of the gross service charges collected for services performed by him.. If the total of such charges for any calendar quarter is less than $2,400, the licensee is entitled to a partial refund on a scheduled percentage basis.

“Franchise” is defined in Section 31005 of the Franchise Investment Law 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. We concur in the opinion, which we understand you to express in your letter, that the agreements between PDA and the licensees are “franchises”.

Section 31101 of the Franchise Investment Law provides that there shall be exempted from the disclosure and registration requirements of Chapter 2 of Part 2 of the Law, and especially from the registration requirement of Section 31110, the offer and sale of a franchise if the standard as to financial condition, as set forth in Subdivision (a), and the standard as to scope of operations, as set forth in Subdivision (b) of the Section are met, and provided further that the franchisor complies with the disclosure requirements specified in Subdivision (c) of the Section.

In this connection, you have represented that, although PDA can fully comply with Subdivisions (b) and (c) of Section 31101 of the Law, it cannot meet the standard as to financial condition of Subdivision (a). Therefore, we cannot express the opinion that the agreements between PDA and the licensees are exempt from the registration requirement of Section 31110 by virtue of Section 31101 of the Law.

You have requested that PDA be granted an exemption from the registration requirement of Section 31110 pursuant to the provisions of Section 31100 which permits the Commissioner by rule to exempt from the registration requirement of the Law, transactions, the registration of which he finds is not necessary or appropriate in the public interest or for the protection of the investors. You have argued that registration of PDA’s franchises is not necessary, because in your judgment, it requires only a nominal cash outlay on the part of its franchisees; it is virtually impossible for franchisees to suffer a substantial loss; PDA’s franchisees always will be provided with full information; and they are currently able to deal with PDA in an equal status.

However, even if we could join in your appraisal of these factors, the Law does not authorize the Commissioner on that account or at all to grant exemptions from its requirements in individual cases. Rather, as stated in Comm. Op. No. 72/29F, the authority of the Commissioner to grant exemptions is limited in Section 31100 to granting exemptions by rule, meaning a published regulation or standard of general application issued by the Commissioner (Section 31017, Corp. Code). No exemptive rule applicable to the facts represented by you, has been adopted by the Commissioner.

Accordingly, it is our opinion that the agreements between PDA and the licensees are subject to the registration requirement of Section 31110, as well as the other 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
July 9, 1973

By order of 
Commissioner of Corporations

By __________________ 
Assistant Commissioner 
Office of Policy

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