Business Law

Opinion No. 72 / 18F

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State of California Department of Corporations

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

This letter is not an Interpretive Opinion for the reasons stated below.

Mr. Jerald A. Infantino
Attorney at Law
Carroll, Breen, Paixotto
& Infantino 
P.O. Box 712
Santa Clara, CA 95050

Dear Mr. Infantino:

The request for an interpretive opinion contained in your letter dated April 5, 1972, has been considered by the Commissioner. Your letter raises the question whether the agreements between Neal’s Earpiercing (“Neal’s”) and various beauty shops, salons and/or boutiques, referred to therein and hereinbelow as “distributors”, constitute “franchises” within the meaning of Section 31005 and are subject to the provisions of the Franchise Investment Law. This question is answered in the affirmative.

We understand that Neal’s, pursuant to the agreements, grants to the distributors a non-exclusive distributorship for the sale of earrings, earpiercing devices and techniques, instruction manuals, accounting and related items, all referred to as “products”, and for the sale of Neal’s earpiercing services and methods. The distributors purchase the products from Neal’s at stipulated discount prices, “subject to change according to current gold standard”, They are required to maintain minimum sales volumes as set forth in Neal’s manual, to devote such time and effort as will be necessary, to promote customer interest in and effect the sale of Neal’s products, and to abide by rules and regulations as from time to time adopted by Neal’s and set forth in the manual.

Distributors also agree to submit written reports of activities in connection with all sales of products, and to remit to Neal’s 40% of the net profits from sales of products each month. Moreover they are obligated to maintain suitable business quarters and to pay all costs and expenses of the distributorship, including all rentals, salaries, taxes, licenses, permits, telephone, telegraph, traveling expense, and expense of transporting products. Neal’s promises in the agreement, to supply forms and other sales aids used by distributors at the then current price, to furnish information and training to the distributor or his sales manager, to provide local and national advertising, and, to allow the distributor to employ and discharge such salesmen, earpiercing operators and assistants as distributor deems necessary. Neal’s also at its own expense will employ salesmen or representatives to develop and promote sales and customer interest.

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 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, and the franchisee is required to pay a franchise fee. Section 31011 defines “franchise fee” 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, payment for goods and services.

In our opinion, Neal’s agreements with the distributors contain all the essential elements of a “franchise” as so defined. You have suggested that the agreements do not establish ”a new and separate business” but merely allow Neal’s to use rental space of the distributors. However, as indicated above, the agreements provide that distributors are responsible for the sale of Neal’s products, services, and methods. They bear the cost of salesmen and earpiercing assistants as well as other expenses incurred in the operation of their business. We conclude therefore that the distributors are granted the right to engage in the business of offering, selling, and distributing Neal’s goods and services. For this right they are required to make payments to Neals’ including 40% of their profits from sales of Neals’ products. There can be no question therefore but that the agreements require payment of a franchise fee.

We also are of the opinion that the operation of the distributors’ business is substantially associated with Neal’s trade name since they are granted the right to advertise the earpiercing services as “Neal’s Method”.

Accordingly, it is our opinion that, under the circumstances described by you, as reflected above, the agreements between Neal’s and the distributors, constitute “franchises” within the meaning of Section 31005, and are 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 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 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
May 15, 1972

By order of 
Commissioner of Corporations

By __________________ 
Assistant Commissioner
Office of Policy

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