Business Law

Opinion No. 72 / 13F

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. Donald W. Perkal
Attorney at Law
Perkal and Petty
580 Bank of California Building
401 Civic Center Drive West
P.O. Box 324
Santa Ana, CA 92702

Dear Mr. Perkal:

The request for an interpretive opinion contained in your letter dated February 15, 1972, has been considered by the Commissioner. Your letter raises the question whether the arrangements between SubTerrain Corporation, a California corporation {“SubTerrain”), and persons referred to by you and hereinbelow as “dealers” are franchises within the definition of Section 31005 and subject to the provisions of the Franchise Investment Law. On an assumption which will be stated below, this question is answered in the affirmative.

You have represented that SubTerrain has been engaged in the manufacture and sale of water irrigation systems for the past several years. It now proposes to establish dealerships in various California counties. The dealer will be given an exclusive territory indefinitely. Upon obtaining a prospective purchaser, the dealer and a SubTerrain representative will call upon him to demonstrate the irrigation system. Systems will be installed by SubTerrain but thereafter the dealer will monitor and repair them. If after one year the dealer does not produce a minimum number of sales, SubTerrain my terminate the dealership.

You have further represented that the dealer will pay SubTerrain a nonrefundable fee of $5,000 to be allocated partially to the purchase of inventory, i.e., pipes, emitters and valves, and partially for SubTerrain’s expenses of setting up of bookkeeping and record keeping. SubTerrain will keep all books and records concerning sales. The dealer has the right of inspection at any time.

Section 31005 of the Franchise Investment Law defines “franchise” 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 franchisee’s business pursuant to such plan or system is substantially associated with the franchisor’s commercial symbol, such as its trade name or trademark, and the franchisee is required to pay a franchise fee.

Assuming that the systems sold by dealers are identified with a trademark, or other commercial symbol of SubTerrain, such as the trade name “SubTerrain” , the arrangements between SubTerrain and the dealers contain all of the essential elements of a franchise. Especially, we are of the opinion that SubTerrain, in substantial part, prescribes a marketing plan or system. In making the determination whether there is a “prescribed” marketing plan or system within the meaning of Section 31005, it is necessary to keep in mind the objective of the Law to deal with a multiplicity of business establishments created by the franchisor for all of which he ostensibly assumes responsibility by causing them to be operated with the appearance of centralized management and uniform standard in regards to the quality and price of the goods sold, services rendered, and other material incidents of the operation. The marketing plan or system is prescribed by the franchisor as one of the important means by which the appearance of centralized management and uniform standards is achieved (Dept. of Corps. Rel. No. 3-F, p. 5).

The procedure prescribed by SubTerrain by which dealers, upon obtaining a prospective purchaser, are required to contact a SubTerrain representative with whom they call on the prospect to demonstrate the irrigation system, as well as the requirement that the dealer monitor and repair systems after installation, are indicative of a marketing plan or system which is designed and, we presume, reasonably effective to create the appearance of a centrally directed distributing organization.

Moreover, it appears that the dealers are required to pay a “franchise fee” defined in Section 31011 of the Law to include 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 section 31011, par. 2{a) provides that the purchase or agreement to purchase goods at a bona fide wholesale price is not to be considered the payment of a “franchise fee”. However, that portion of the $5,000 fee attributable to SubTerrain’s expenses of setting up bookkeeping and record keeping, is not within this exception, since it is not paid for the purchase of goods. Therefore, it is immaterial whether SubTerrain is in a position to demonstrate that it charges no more than the bona fide wholesale price for the goods sold to the dealers, a fact for which under Section 31153 of the Law, it has the burden of proof.

In conclusion, it is our opinion that, under the circumstances described by you and assumed by us as outlined above, the arrangements between subTerrain and the dealers are “franchises” within the definition of Section 31005 and subject to the provisions of the Franchise Investment Law.

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 under the Franchise Investment Law 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: San Francisco, California
April 17, 1972

By order of 
Commissioner of Corporations

By __________________ 
Assistant Commissioner
Office of Policy

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