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CA state law specifically says that mix can be added to milk if the milk is pasteurized and the labelling requirements are met.
Also, I wasn't able to find anything in the Santa Clara Ordinances that addresses methods of making frozen yogurt.
I've been reading the statutes, and it doesn't say that frozen yogurt can't be made with mix - it specifically says that frozen yogurt CAN be made with mix, as long as the milk is pastuerized first.
Here is an article on Pinkberry that might be helpful - it sounds like what you've heard is just a rumor. http://www.starling-fitness.com/archives/2007/05/08/is-pinkberry-really-frozen-yogurt/