Business Law
Opinion No. 72 / 18F
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 Nealās Earpiercing (āNealāsā) and various beauty shops, salons and/or boutiques, referred to therein and hereinbelow as ādistributorsā, constitute āfranchisesā 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 Nealās, 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 āproductsā, and for the sale of Nealās earpiercing services and methods. The distributors purchase the products from Nealās at stipulated discount prices, āsubject to change according to current gold standardā, They are required to maintain minimum sales volumes as set forth in Nealās manual, to devote such time and effort as will be necessary, to promote customer interest in and effect the sale of Nealās products, and to abide by rules and regulations as from time to time adopted by Nealās 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 Nealās 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. Nealās 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. Nealās 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 āfranchiseā 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 franchiseeās business pursuant to such plan or system is substantially associated with the franchisorās commercial symbol, such as its trade name, and the franchisee is required to pay a franchise fee. Section 31011 defines āfranchise 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, payment for goods and services.
In our opinion, Nealās agreements with the distributors contain all the essential elements of a āfranchiseā as so defined. You have suggested that the agreements do not establish āa new and separate businessā but merely allow Nealās to use rental space of the distributors. However, as indicated above, the agreements provide that distributors are responsible for the sale of Nealās 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 Nealās goods and services. For this right they are required to make payments to Nealsā including 40% of their profits from sales of Nealsā 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 distributorsā business is substantially associated with Nealās trade name since they are granted the right to advertise the earpiercing services as āNealās Methodā.
Accordingly, it is our opinion that, under the circumstances described by you, as reflected above, the agreements between Nealās and the distributors, constitute āfranchisesā 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
BRIAN R. VAN CAMP
Commissioner of Corporations
By __________________
HANS A. MATTES
Assistant Commissioner
Office of Policy