Business Law

Opinion No. 74 / 6F

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. Donald F. Krank
Attorney at Law
Krank and Notturno
1101 Park City Center
Lancaster, PA 17601

Dear Mr. Krank:

The request for an interpretive opinion, contained in your letter dated July 30, 1973, has been considered by the Commissioner. Your letter raises the question whether the agreements between Protection Plus International, Limited, a Pennsylvania corporation with its home office in that state (“Protection”), and persons referred to therein and hereinbelow as “service directors”, are franchises within the meaning of Section 31005, and whether the agreements with persons referred to by you and hereinbelow as “area directors”, are area franchises within the meaning of Section 31008 of the Franchise Investment Law.

You have represented that Protection has developed and is engaged in the business of nationwide marketing under the registered service mark “Protection Plus”, an exclusive system and materials for fast and efficient degreasing, cleaning and flame retarding of exhaust systems, exhaust fans, chimneys and ductwork; and for servicing fire estinguisher [sic] systems in exhaust systems.

Protection grants nonexclusive territories to service directors to service accounts some of which are set up by or referred by Protection. Pursuant to the agreement the Protection the service director is required to make an initial payment of $5,000 for which he receives the initial equipment (exclusive of automotive transportation) needed by him to perform work orders, and two years of training for himself and one of his key personnel in exhaust systems, safety procedures, and bookkeeping methods as more fully described in Protection’s operating manual. Protection agrees to perform all research, development, bookkeeping and collection of accounts, and to pay the service director for his work 65% of its gross collections, exclusive of taxes.

The service director agrees to attend training sessions, to perform all work orders in a workman-like manner in accordance with the operating manual, to carry adequate liability and workman’s compensation insurance, to conduct himself and his affairs in an ethical manner and to obey all federal, state and local laws.

The technical information contained in the manual and customers names are disclosed to the service director in confidence and may not be used for purposes other than those set forth in the agreement without Protection’s written permission.

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. Section 31011 defines “franchise fee” to mean any fee or charge that a franchisee or subfranchisor is required to pay or agrees to pay for the right to enter into a business under a franchise agreement, including, but not limited to, any such payment for goods and services. The purchase or agreement to purchase goods at a bona fide wholesale price is not considered the payment of a ” franchise fee” pursuant to Sections 31011(a).

As regards the question whether Protection is prescribing a marketing plan or system in substantial part, the Commissioner has stated that in making this determination, 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 centralized management and uniform standards as regards the material incidents of the operation. The marketing plan or system is prescribed by the franchisor as one of the important means by which the appearance of centralized management and uniform standards is achieved.

Therefore, which arrangements for the protection of a patent or trademark as normally imposed in license agreements, such as accounting and record keeping requirements and limitations on the use of the commercial symbol in connection with the patented or trademarked article, would not amount to a “prescribed marketing plan or system” within the meaning of Section 31005 such a plan or system may be deemed “prescribed” within the meaning of the Section, where the licensor supplies his licensees with detailed recommendations or suggestions as to the manner in which contacts with the public are to be conducted and business carried out or where sales aids, promotional material or training furnished the licensees, results in uniformity of their business operations, even if no binding instructions or directions are given by the licensor as to observance of specific methods or programs, and even where the licensees are not subject to discipline or supervision by the licensor and transact their business as independent contractors. Typical in the category of arrangements designed to create the appearance of a uniform chain of franchised business establishments also are provisions in the agreement contemplating a nation or area-wide distribution grid, or which deal with the appearance of the licensee’s business or the personnel or equipment utilized therein (Dept. of Corps. Rel. No. 3-F, pp. 3-5).

Considered in the light of these guidelines, the provisions outlined above in the agreements between Protection and its service directors tend toward the conclusion that Protection is prescribing a marketing plan or system in substantial part within the meaning of Section 31005. Protection’s agreements are distinguishable from the license agreements discussed in Commissioner’s Opinion No. 73/2F, where the State licensed lathing and plastering subcontractors who were the licensees, received no training in safety procedures or bookeeping [sic] methods, and were responsible for billing and collecting payments which included their customary profits. The minimal restrictions placed upon the licensees in the case considered in that opinion were within the limitations normally imposed in license agreements, as above mentioned, and were not part of an overall plan to make the licensees a link in a chain of business establishments.

As regards the “franchise fee”, you have represented that service directors are required to pay an initial fee of $5,000 for which they receive two years of training, as well as other benefits. This payment is a “franchise fee” and not within the exemptive provision of Section 31011(a) (Comm. Op. No. 72/36F).

Accordingly, it is our opinion that the agreements between Protection and the service directors are “franchises” within the definition of Section 31005, and are subject to the provisions of the Franchise Investment Law.

Your letter states that Protection also licenses “area directors”. In this connection, we call your attention to Section 31008 of the Franchise Investment Law which defines “area franchise” to mean any contract or agreement between a franchisor and a subfranchisor whereby the subfranchisor is granted the right, for consideration given in whole or in part for such right, to sell or negotiate the sale of franchises in the name of or on behalf of the franchisor. Section 31009 of the Law defines a “subfranchisor” as a person to whom an area franchise is granted.

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, advise to that effect, as contained in this letter, does not constitute an interpretive opinion.

Dated: San Francisco, California
October 25, 1973

By order of 
Commissioner of Corporations

By __________________ 
Assistant Commissioner 
Office of Policy

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