Business Law

Interpretive Opinion No. 71 / 52F

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. Joseph E. Nida
Attorney at Law
Schramm, Raddue & Seed
Post Office Box 1260
Santa Barbara, CA 93102

Dear Mr. Nida:

The request for an interpretive opinion contained in your letter dated September 21, 1971, has been considered by the Commissioner. Your letter raises the question whether the agreements between Nimbus Water Systems (ā€œNimbusā€) and persons referred to by you as ā€œfranchiseesā€ and hereinbelow as ā€œdistributorsā€ require the payment of a franchise fee as defined in Section 31011 of the Franchise Investment Law, so as to classify these agreements as franchises within the definition of Section 31005, and subject them to the provisions of the Law. On the assumption stated below, this question is answered in the negative.

You have represented that Nimbus proposes to enter into agreements for distribution of reverse osmosis water purification systems for household and commercial uses. Each distributor will be granted a territory for the sale or leasing of such systems and will execute an agreement, referred to by you as a ā€œfranchise agreementā€, delineating the rights and obligations of the parties.

You have further represented that, at the execution of the agreement, the distributor will deposit a sum equal to his projected purchases for one month at the ā€œbona fide wholesale priceā€ established by the agreement, which will be applied to purchases as they are made. You have represented that Nimbus is requiring this deposit as a method of credit control. It intends to sell to the distributors on open book accounts, unless they do not pay their invoices. The deposit will be reviewed every 90 days to insure that it reflects the level of purchases and will be increased or reduced accordingly. It will be returned to the distributor at the termination of the agreement .

Section 31011 of the Franchise Investment Law 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.

For the payment by the distributor of the purchase price of merchandise sold to him by Nimbus not to constitute a ā€œfranchise feeā€ within the meaning of Section 31011, that price may not be in excess of the bona fide wholesale price of the merchandise sold to the distributor, We do not concur in the assumption stated in paragraph 2 on page 2 of your letter that the phrase ā€œbona fide wholesale priceā€ means the price at which the franchisor offers to sell the goods to those purchasing the goods for resale. In our opinion, ā€œbona fide wholesale priceā€ within the meaning of Section 31011, is the price at which comparable merchandise is sold in bona fide transactions at the place and time in question. If Nimbus charges more than that price, the excess is a franchise fee subjecting the agreements to the provisions of the Franchise Investment Law, and if that excess computed on an annual basis exceeds $100, the exemption provided in Rule 011 from the registration requirement of Section 31110, is not available.

Assuming that in accordance with the connotation placed in the preceding paragraph on the phrase ā€œbona fide wholesale priceā€ , all goods sold by Nimbus to the distributors are sold to them at a price not exceeding their ā€œbona fide wholesale priceā€, payment of such price in our opinion does not constitute a franchise fee, and the agreements consequently are not to be considered as franchises.

The fact that purchasers are required to make an advance deposit in an amount equal to their estimated purchases, does not, in our opinion, characterize the deposit as a franchise fee, since such deposit is merely a form of security reserved by Nimbus in connection with the extension of a form of credit to distributors on an open book account basis.

Your letter raises the additional question as to whether discounts based upon quantity purchases or prompt payment affect the ā€œbona fide wholesale priceā€. Please understand that we cannot express an opinion as to whether the usual or the discounted price charged by Nimbus for its merchandise is a ā€œbona fide wholesale priceā€ within the meaning of Section 31011, since such a factual determination is not a proper subject for an interpretive opinion issued pursuant to Sections 31510 and 31511 of the Franchise Investment Law which authorize interpretive opinions only on questions of law.

Dated: San Francisco California
August 26, 1971

By order of 
Commissioner of Corporations

Assistant Commissioner
Office of Policy

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