Business Law

Opinion No. 74 / 7F

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State of California Department of Corporations

Robert L. Toms, Commissioner 
In reply refer to: File No. _____

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

Mr. Jerome M. Bame
Attorney at Law
Coen and Bame
Town & Country Center
18582 Beach Boulevard, Suite 213
Washington Beach, CA 92648

Dear Mr. Bame:

The request for an interpretive opinion, contained in your letter dated March 8, 1974, has been considered by the Commissioner. Your letter raises the question whether the arrangements between Jay-Rock Sales, Inc., a California corporation ( ā€œJay- Rockā€) and persons referred to by you and hereinbelow as ā€œowner/operatorsā€ constitute 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 Jay-Rock is primarily engaged in the food catering and servicing business, using a fleet of catering trucks to service construction and other sites. Jay-Rock also contracts to supply lunches and food service to local school children and to employees of industrial and manufacturing plants. In addition, it does individual party catering.

You have further represented that Jay-Rock proposes to engage in a new ā€œprogram and contractual arrangementā€, whereby it will obtain separate Service Contracts with industrial and manufacturing plants setting forth a commitment on the part of Jay-Rock and the plant to install an in-plant food servicing unit to feed plant employees, which unit Jay-Rock will then purchase. This contract or arrangement will be cancellable by the plant at any time upon 30-90 days notice. Jay-Rock will ā€œadvertiseā€ for an owner/operator to purchase the in-plant food servicing unit and operate it in the particular plant. Jay-Rock will then assign (with the consent of the plant) Jay-Ā·Rock interests in the Service Contract to the owner/operator. Title to the unit will vest immediately in the owner/operator upon the making of an initial down payment to Jay-Rock and signing an appropriate agreement; however, the ā€œsame equipment in the unitā€ will serve to secure a promissory note which will be filed for the public record. If the plant cancels the Service Contract, Jay-Rock will repurchase the unit and reimburse the owner/operator based on a predetermined depreciation schedule.

In addition to paying Jay-Rock an initial down payment and signing a promissory note for the balance of the purchase price evidencing monthly payments over a specific term, the owner/operator will pay to Jay-Rock a monthly sum as a ā€œService Chargeā€, based on the number of employees in the particular plant, and for Jay-Rockā€™s continual set up and supplying of food to the units. The owner/operator will also sign an agreement with Jay-Rock in which he promises to purchase exclusively from Jay-Rock those food products manufactured, processed and delivered by Jay-Rock. You have represented that products so purchased will amount to only 8% by volume and 30% by dollar amount of the total products used by the owner operator in the particular units. The balance will be purchased by the owner/operator from other vendors.

Section 31005 of the Franchise Investment Law defines ā€œfranchiseā€ 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 franchiseeā€™s business pursuant to such plan or system is substantially associated with the franchisorā€™s commercial symbol, such as its trade name or trademark, and the franchisee is required to pay a franchise fee.

We understand you to concede that an owner operator will pay a franchise fee, and limit your questions as to whether Jay-Rock is prescribing a marketing plan or system in substantial part and whether the businesses of the owner/operators will be substantially associated with Jay-Rockā€™s commercial symbol.

In our opinion, for the reasons set forth below, Jay-Rock is prescribing a marketing plan or system in substantial part. As indicated above, owner/operators will be assigned Service Contracts entered into between Jay-Rock and the plants. In accepting these assignments owner/operators will be obligated to operate their in-plant food service businesses pursuant to the commitments made by Jay-Rock and thus will be following a marketing plan or system prescribed in substantial part by Jay-Rock. Moreover, you have represented that Jay-Rock will suggest, and possibly teach, instructions and methods for efficient operation of the units. In this connection, the commissioner has stated that a marketing plan or system may be ā€œprescribedā€ within the meaning of Section 31005, although there is no obligation on the part of the franchisor to observe it, where a specific sales program is outlined, suggested, recommended, or otherwise originated by the franchisor (Dept. of Corps. Release No. 3-F (Revised) p. 4).

As regards your question whether the business of the owner/operator will be substantially associated with the commercial symbol of Jay-Rock, the Commissioner has stated that for the operation of the franchiseeā€™s business to be substantially associated with the symbol of the franchisor, it must be communicated to the customers of the franchisee (Dept. of Corps. Release Ho. 3-F (Revised) p. 7). In this connection, it is our opinion that the various plants with which Jay-Rock enters into Service Contracts, which are later assigned to owner/operators, are ā€œcustomersā€ of owner/operators to whom the name ā€œJay-Rock Sales, Inc.ā€ is communicated. Moreover, you have represented that the food articles may have a ā€œstick-on label which identifies the food and containsā€ Jay-Rockā€™s name. Thus Jay-Rockā€™s commercial symbol is communicated to the employees purchasing food from the owner/operator, who, in our opinion, are also customers of owner/operator.

Accordingly, it is our opinion that, under the circumstances described by you as outlined above, the arrangements between Jay-Rock and owner/operators constitute ā€œfranchisesā€ within the definition of Section 31005 and 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
May 3, 1974

By order of 
Commissioner of Corporations

By __________________ 
Supervising Corporations Counsel
Office of Policy

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