Business Law

Interpretive Opinion No. 71 / 48F

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State of California Department of Corporations

Brian R. Van Camp, Commissioner 
In reply refer to: File No. _____

This interpretive opinion is issued by the Commissioner of Corporations pursuant to section 31510 of the franchise investment law. It is applicable only to the transaction identified in the request therefor, and may not be relied upon in connection with any other transaction.

Mr. B. Thomas Banard
Attorney at Law
Rhodes, Banard & Maloney
1244 Sixth Street
Santa Monica, CA 90406

Dear Mr. Banard:

The request for an interpretive opinon [sic] contained in your letter dated August 10, 1971, has been considered by the Commissioner. Your letter raises the question whether the agreements proposed to be entered into by Donald R. Walsh and William. A. Terrell (hereinbelow referred to as ā€œDistributorsā€ ) with persons referred to by you and hereinbelow as ā€œDealersā€, are franchises within the definition of Section 31005 and subject to the provisions of the Franchise Investment Law. Based upon the assumption stated below, this question is answered in the negative.

You have represented that Distributors are about to enter into an agreement with Nurnberger Hercules-Werke GMB, of Germany, ( ā€œNurnbergerā€ ) which will authorize Distributors to sell bicycles manufactured by Nurnberger, represented to be the largest manufacturer of bicycles in Western Europe.

Distributors will sell Nurnberger bicycles to the Dealers who will either be established businesses in the bicycle sporting goods, or allied trade, or will be establishing a new business. Dealerships will be on a nonexclusive territorial basis.

You have further represented that Nurnbergerā€™s bicycles are comparably priced to the Schwinn line of bicycles. The Dealers will have a mark-up from 10% to 20%, or an average of 18%, over Nurnbergerā€™s price to Distributors. This mark-up is larger than in the case of the Schwinn line.

You have further represented that the Dealers will be required to purchase and pay for an initial supply of bicycles at a cost of approximately $15,000, but will not be required to pay any other fees or charges, or to make cash deposit or advance upon application for dealership. After the initial order dealers will purchase goods from the inventory of warehoused goods maintained by Distributors.

We assume that the bicycles will bear the Nurnberger trademark and that Distributors will prescribe a marketing plan or system for the Dealers.

Section 31005 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 of 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 trademark, and the franchisee is required to pay a franchise fee. Section 31011 defines ā€œfranchise feeā€ 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. The purchase or agreement to purchase goods at a bona fide wholesale price is not considered the payment of a ā€œfranchise feeā€ pursuant to Section 31011(a), and Rule 011 of the Commissioner exempts from the registration requirement of Section 31110 of the Law, any offer or sale of a franchise which would be subject to registration solely because the franchisee purchases or agrees to purchase goods at a price other than the bona fide wholesale price, if the total payment in excess of the bona fide wholesale price computed on an annual basis does not exceed $100.

You have represented that in the opinion of Distributors the prices charged to the Dealers for the bicycles are the bona fide wholesale prices of such merchandise considering the volume and customary mark-up in the industry. We make no determination concerning the factual question whether the prices charged by the distributors of the bicycles sold to the Dealers do or do not exceed the bona fide wholesale price of these goods, inasmuch as a determination of such a factual question would not be an appropriate part of interpretive opinions as authorized by Section 31510 of the Law. Assuming that the prices charged by Distributors to the Dealers for the bicycles do not exceed the bona fide wholesale price of these goods, we are of the opinion that the agreements between Distributors and the Dealers do not constitute franchises within the definition of Section 31005, and are not subject to the provisions of the Franchise Investment Law, because on this assumption, the essential element of a franchise fee is lacking.

If as a matter of fact, prices charged by Distributors exceed the bona fide wholesale price of the bicycles sold, such excess amounts to a franchise fee, even though it may represent amounts designed to reimburse Distributors for advertising or other expenses or services rendered to Dealers. Such a franchise fee, on assumptions stated above, would characterize the agreements as franchises subject to the Franchise Investment Law, and unless the excess is within the tolerance provided by Rule 011 mentioned above, would subject the agreements to the registration requirement of that Law.

Dated: San Francisco, California
September 1, 1971

By order of 
Commissioner of Corporations

Assistant Commissioner
Office of Policy

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