Business Law

Interpretive Opinion No. 71 / 60F

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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. James G. Engler
3903 W. Legion Lane
Los Angeles, CA 90039

Dear Mr. Engler:

The request for an expression of our opinion contained in your letter dated October 22,. 1971, has been considered by the Commissioner. Your letter raises the question whether the agreements between Prestige Industries, Inc., a Georgia corporation (ā€œPrestigeā€), and persons referred to therein and hereinbelow as ā€œDistributorsā€, 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 you are a manufacturerā€™s representative for Prestige, which is engaged in the business of selling and distributing certain products, including cosmetics under the trade name of ā€œScents and 4 Seasonsā€ and fire extinguishers under the trade name ā€œAdvanceā€. Prestige proposes to establish exclusive distributorships in Southern California. Pursuant to the form of agreement enclosed with your letter, Prestige grants to the Distributor exclusive selling rights for its products under the aforementioned trade names within a specified territory, and the Distributor agrees to purchase a specified supply of these products upon signing the agreement at the prices stated therein, and a specified additional supply monthly thereafter. In the event the Distributor desires to become a ā€œPrestige Wholesale Warehouse Distributorā€, he is required to purchase an additional supply. In the event the Distributor fails to make these purchases for a period of 50 days, the agreement terminates without notice.

Distributor agrees to use its best efforts to sell and promote Prestige products within his territory. The agreement provides that the Distributor is free to develop and establish, at his own expense, such sales organization as he deems necessary. All advertising must be approved by Prestige which agrees to give an advertising and demonstration bonus of one free case of merchandise for each case ordered on all orders subsequent to the initial order.

Section; 31005 of the Franchise Investment Law 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, or 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 trade name or 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 not informed us of any agreement or practice expressly imposed which might have the effect of Distributors offering Prestige products under a marketing plan or system prescribed in substantial part by Prestige. A marketing plan or system suggested, recommended, or otherwise originated by Prestige, though noncompulsory, might attain the force of a ā€œprescribedā€ plan or system within the meaning of Section 31005, if as a matter of fact it were to be substantially adhered to by the Distributors. Therefore, the aforementioned provision of the agreement that Distributors shall be free to develop and establish a sales organization, does not preclude the possibility that the Distributorā€™s business is, in fact, operated pursuant to a marketing plan or system prescribed in substantial part by Prestige within the meaning of the statutory definition of ā€œfranchiseā€; and we are not in a position on the basis of the information furnished us, to make a finding that, as a matter of fact, Distributors will not sell Prestige products under a marketing plan or system prescribed in substantial part by Prestige.

If as a matter of fact sales are not made pursuant to such a plan or system, the agreements between Prestige and the Distributors are not ā€œfranchisesā€ within the definition of Section 31005, and are not subject to the provisions of the Franchise Investment Law. Otherwise the agreements, in our opinion, are ā€œfranchisesā€ and subject to the provisions of the Law, because the payments required to be made by the Distributors in the amount of $200 for training school literature and material and school expenses constitute a ā€œfranchise feeā€ within the meaning of Section 31011 of the Law. The provision of Section 31011(a) that the purchase or agreement to purchase goods at a bona fide wholesale price is not to be construed the payment of a franchise fee, is inapplicable to these charges. This exceptional provision is based on the rationale that no substantial prejudice will come to a person buying a business and paying only the bona fide wholesale price for merchandise which he proposes to sell and equipment which he will use in that business. The word ā€œgoodsā€ used in the exceptional provision therefore must be given a meaning commensurate with this rationale, and does not include payments for training, instructional literature, and other school expenditures.

Please understand that we make no determination as to whether certain other charges payable by Distributors on account of items provided for their use and not for resale, are payments for goods, nor as to whether any of the charges are not in excess of the ā€œbona fide wholesale priceā€, so as to be excluded from the definition of ā€œfranchise feeā€ by Section 31011(a). These are questions of fact which the Commissioner cannot resolve in an interpretive opinion, since such opinions are limited to the interpretation of the Law and to the determination of legal questions arising thereunder (Dept. Corps. Rel. No. 2-F).

Dated: San Francisco, California
December 14, 1971

By order of 
Commissioner of Corporations

By __________________

Assistant Commissioner
Office of Policy

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