Business Law

Opinion No. 79 / 2F

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. Donald K. Felt
Attorney at Law
McCutchen, Doyle, Brown
& Enersen 
Three Embarcadero Center
San Francisco, CA 94111

Dear Mr. Felt:

The request for an interpretive opinion contained in your letter dated December 27, 1978, has been considered by the Commissioner. Your letter raises the question whether a proposed general partnership agreement (“Agreement”) together with a proposed supply agreement will involve a “franchise” within the meaning of Section 31005 of the Franchise Investment Law (“Law”).

You have represented that Mr. James G. Thomson (“Thomson”) and Mr. Thomas K. Hawker (“Hawker”) operate two restaurants under the name “Pacific Cafe” pursuant to two separate general partnership agreements. A third restaurant operating under the name “Pacific Cafe” opened in 1976 as a general partnership among Thomson, Hawker and a third partner, Mr. Robert A. Colombo {these three partners are hereafter collectively referred to as “partners”).

Partners propose to establish several restaurants under the name “Pacific Cafe”. Each restaurant business would be in the form of a general partnership such as set forth in Agreement with partners holding an aggregate 75% interest and one or two other individuals holding the remaining 25% interest in the partnership. These latter individuals (“resident partners”) are expected to have a preexisting business relationship with partners and will be experienced in the restaurant business. The resident partners will he responsible for the day-to-day operations of the restaurant and will receive a salary in addition to their share of partnership profits. Partners will each receive a management fee equal to 1% of the gross sales of the restaurant as compensation for their contributions of management, expertise, general supervisory services, advice and counsel to the partnership.

Resident partners will be obligated to manage the restaurant in a manner prescribed by the majority of the partnership. Each restaurant will be entitled to use the name “Pacific Cafe”, though the name will remain the individual property of Thomson and Hawker.

The Agreement requires the partnership to enter a supply agreement with a nonprofit company (“THC”) owned and operated by partners. The supply agreement is terminable at will by either party at any time on 90 days notice. The supply agreement provides for the central purchasing of the restaurant’s food and supplies and the provision of certain accounting, payroll and other administrative services for the restaurant. The overhead of THC shall be allocated among the various restaurants using its services. Partners shall not receive salary or other payment for services from THC.

Section 31005 of the Law defines “franchise” to include an agreement 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 business is substantially associated with the franchisor’s trademark, service mark, trade name, logotype, advertising or other commercial symbol, and the franchisee is required to pay, directly or indirectly, a franchise fee. Section 31011 defines “franchise fee” to mean any fee or charge that a franchisee 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 our opinion, the Agreement contains all the essential elements of a “franchise” with partners as the franchisors and the partnership created by the Agreement as the franchisee. See Comm. Ops. 72/5F and 75/2F.

The Agreement, in addition to providing for the creation of the general partnership, contemplates the granting by partners to the general partnership of the right to engage in the restaurant business under the trade name “Pacific Cafe”, a trade name already in use by the partners. It is of no consequence that partners will also be partial beneficiaries of this grant. That partners are granting this right is additionally evidenced by the fact that partners have caused the preparation of the Agreement without advice of or consultation with resident partners.

We do not concur in your opinion that partners are not prescribing a marketing plan or system in substantial part. In this connection, the Commissioner has stated that, in making the determination whether there is a prescribed marketing plan or system, it is necessary to keep in mind the objective of the Law to deal with a multiplicity of business establishments created by the franchisor which he presents to the public as a unit or marketing concept and for all of which he ostensibly assumes responsibility by causing them to be operated with the appearance of some centralized management and uniform standards as regards to the quality and prices of goods sold, services rendered, and other material incidents of the operation. (Dept. of Corps. Release No. 3-F (Revised), p. 3.) Partners, by virtue of their 75% ownership interest in the proposed partnership, will be in a position to make virtually all of the essential decisions concerning the operation of the business. This control factor, together with the supply agreement, tend toward the conclusion that partners will be prescribing a marketing plan or system in substantial part.

Finally, the management fee that the partnership will be required to pay to each of the partners (except the resident partner) bears no relation to the quantity of services to be provided the partnership by each partner. This management fee, coupled with the requirement that certain goods and services be purchased from THC, precludes us from concluding that the partnership will not be paying partners a “franchise fee”.

Under these circumstances, it is our opinion that the Agreement will involve a “franchise” within the definition of Section 31005 of the Law.

Your letter does not request our opinion, nor do we express any opinion, with regard to questions arising under the Corporate Securities Law of 1968.

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
February 26, 1979

By order of 
Commissioner of Corporations

By __________________ 
Assistant Commissioner
Office of Policy

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