Business Law

Opinion No. 76 / 2F

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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. John F. Hoover
Vice President – Legal Affairs
Love’s Enterprise, Inc.
International Industries, Inc.
6464 Sunset Boulevard
Los Angeles, California 90028

Dear Mr. Hoover:

The request for an interpretive opinion, contained in your letter dated July 25, 1975, as supplemented by letters dated October 3, 1975 and December 23, 1975, and the materials submitted therewith, has been considered by the Commissioner. These letters raise the question whether the amendment by Love’s Enterprises, Inc. (“Love’s”) of existing franchise agreements between Love’s and persons referred to by you as “franchisees,” in the manner described by you, is subject to the registration requirement of Section 31110 of the Franchise Investment Law (“Law”).

You have represented that nearly all of the existing franchise agreements were entered into prior to the effective date of the Law. We understand you to concede that both the existing agreements and the Amended Franchise Agreements (“Amended Agreements”) are “franchises” within the definition of Section 31005 of the Law. However, you raise the question as to whether the presentations and executions of the Amended Agreement constitute offers and sales subject to the registration requirement imposed by Section 31110 of the Law on any person offering or selling a franchise in this state. Section 31018 (b) excludes from the definition of a “sale” and “offer” as defined in Section 31018(a) and (b), respectively, “the renewal or extension of an existing franchise where there is no interruption in the operation of the franchised business by the franchisee.”

You have further represented that the Amended Agreements include the following changes in the rights and obligations of the parties: a conditional right of renewal; “extended term conditions” including an “administrative charge” to franchisees of up to $500 and charges for increased rent, taxes, and other expenses; a reduction of 1 percent of the royalty on gross sales; increased insurance coverage; and mandatory participation in, and contributions to, a regional advertising cooperative, if established. Love’s has no further duty to provide accounting services, in consideration of a reduction in royalty payments by .4 percent of weekly gross sales.

The Commissioner has previously stated that if a franchise previously granted is to be changed in relation to its material terms with the result that, in effect, a new franchise is created; the registration requirement of Section 31110 is applicable. Whether the change is a material change for the purpose of the application of Section 31110 must be determined from case to case with a view to the effect which the change has on the rights and obligations of the parties to the agreement and considering their ability to evaluate the consequences of the change. (See Comm. Ops. Nos. 72/15F, 73/19F and 73/37F.)

In the instant case, the Amended Agreements contain material changes, with the result that executions of the Amended Agreements do not constitute mere “renewals” or “extensions” of existing franchises within the meaning of Section 31018(b). Accordingly, it is our opinion that presentations and executions of the Amended Agreements constitute “offers” and “sales” of franchises by Love’s and are subject to the registration requirement of Section 31110 of the 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
March 30, 1976

By order of 
Commissioner of Corporations

By __________________ 
Assistant Commissioner
Office of Policy

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