Business Law

Opinion No. 75 / 6F

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State of California Department of Corporations

Willie R. Barnes, Commissioner 
In reply refer to: File No. _____

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

Mr. Vernon W. Haas
Attorney at Law
21 Arcade Drive
Ventura, CA 93003

Dear Mr. Haas:

The request for an interpretive opinion, contained in your letter dated April 28, 1975, as supplemented by your letters dated May 1, 1975 and May 12, 1975, has been considered by the Commissioner. Your letters raise the question whether the Agreements between Engineering Corporation of America, a California corporation (“ECA”), and persons referred to therein and hereinbelow as “Engineering Job Shops” (“Job Shops”) are “franchises” within the definition of Section 31005 and subject to the provisions of the Franchise Investment Law (“Law”).

You have represented that EGA proposes to sell a payroll, bookkeeping and mailing service directly to the Job Shops, which service is especially suited for a Job Shop’s use. The persons employed by the Job Shop using the ECA services will be placed on the ECA payroll. We understand that the customers of the Job Shop will be invoiced by ECA. Upon payment of the invoiced amount. ECA will retain a sum equal to its expenses plus a sum of 8% of the invoiced amount. If a customer fails to pay the invoiced amount within four weeks an additional 1% fee will be charged. After providing services for eight weeks EGA will charge 8% of the actual amount invoiced or 8% of $2,000 per week, which ever is larger. EGA reserves the right to refuse or discontinue service to any customer, If, Job Shop wishes to continue service, Job Shop must pay ECA 8% of the gross volume of business.

You have further represented that, in addition to the payroll and bookkeeping services, Job Shops using said services will also be granted the use of ECA files of the technical capabilities of engineers and other technical persons. Job Shops will not have direct access to the files nor will they be given any list from the files. Rather, a Job Shop will request ECA to select persons from the files possessing specific qualifications. After ECA has “retrieved” the names and addresses of such persons, ECA will mail a letter to such persons informing them that a particular Job Shop has a job opening, stating the qualifications for the job and requesting that a resume be sent directly to the Job Shop. A charge of two cents per letter plus postage will be made for the use of said services. The resumes received by the Job Shop will be property of ECA and may be used only by that Job Shop. The Job Shop will be required to send a copy of the resume or other information to ECA on the date it receives same.

The Agreement contains provisions prohibiting any Job Shop or any individual affiliated therewith from engaging in activities other than those processed through ECA or any other similar business, unless ECA is notified. Furthermore, Job Shop is prohibited from engaging in a similar business to that which is created by the Agreement within 150 miles of Job Shop’s location for a period of one year following termination of the Agreement. In addition, the Agreement contains prohibitions against Job Shop or persons affiliated therewith engaging in activities in competition of those of ECA. The Agreement requires Job Shop to pay $15,000 upon signing the Agreement and to deposit $15,000 with ECA, which deposit shall be a performance guarantee for a period of five years.

Section 31005 of the 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.

In bur opinion, the provisions in the Agreement regarding ECA’s ability to disapprove a customer as well as prohibiting a Job Shop or any individual affiliated therewith from engaging in activities other then those processed through ECA without notifying ECA, engaging in a similar business within 150 miles of Job Shop’s location for a period of one year and engaging in activities in competition with ECA tend toward the conclusion that ECA is prescribing a marketing plan or system in substantial part (Dept. of Corps. Release No. 3-F (Revised) pp. 2-6). It is also our opinion that, since ECA will send out the invoices and collect the fees from customers, the Job Shops’ businesses will be substantially associated with ECA’ s commercial symbol (ibid. pp. 6-7).Moreover, the $15,000 deposit constitutes a “franchise fee” (ibid. pp. 7-10 and Comm. Op. . No. 73/15F).

In conclusion, it is our opinion that the Agreements between ECA and Job Shops are “franchises” within the meaning of Section 31005 and subject to the provisions of the Law.

You have not requested our opinion, and we express no opinion, as to whether the Agreements are “securities” within the meaning of Section 25019 of the Corporate Securities Law of 1968 and subject to the qualification requirements of that 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: Sacramento, California
October 10, 1975

By order of 
Commissioner of Corporations

By __________________ 
Assistant Commissioner
Office of Policy

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