Business Law

Opinion No. 72 / 19F

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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. Larry E. Miller
Vice President
EO Building
8040 Cedar Avenue
Minneapolis, MN 55420

Dear Mr. Miller:

The request for an interpretive opinion contained in your letter dated March 20, 1972, has been considered by the Commissioner. Your letter raises the question whether the contracts between Employers Overload, a Minnesota corporation (ā€œOverloadā€), and persons referred to by you and hereinbelow as ā€œlicenseesā€, require the payment of a franchise fee within the meaning of Section 31011 of the Franchise Investment Law. This question is answered in the affirmative.

You have represented that Overload, through its Office Division, supplies temporary office personnel to businesses on a national basis. In order to offer its services, Overload contracts with the licensees to open offices in various areas under Overloadā€™s name and to solicit businesses and supply temporary personnel, all of whom are employees of Overload and not of the licensees overload proposes to enter into such contracts with licensees in California. After reviewing Dept. of corps. Release No. 3-F, you have expressed the opinion that Overloadā€™s contracts contain three of the four elements of a ā€œfranchiseā€ within the definition of Section 31005 of the Franchise Investment Law, but not the fourth element, the franchise fee.

ā€œFranchise feeā€ is defined in Section 31011 of the Law 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. prices 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 is required to pay, directly or indirectly, a franchise fee which on an annual basis does not exceed $100.

In this connection, you have represented that licensees of Overload pay no initial fee or continuing royalty. customers procured by a licensee make payments directly to Overload, and Overload compensates the licensee by paying him a fixed percentage of the gross profit depending on the number of temporary hours sold by him during a given week, deducting, however, (1) Overloadā€™s out-of-pocket expenses for training the licensee, (2) its costs (plus 10% and cost, of freight and mailing) for advertising supplier stationary and other office materials furnished to the licensees, (3) a prorata share of the cost of the comprehensive liability insurance maintained by Overload covering the temporary employees, and (4) 1% of all sums due as a bad debt reserve. The licensee is charged with 85% of the loss from bad debts. You have represented that licensees may purchase advertising supplies, stationary and materials from sources other than Overload provided the articles so purchased meet with Overloadā€™s standards.

We do not deem it necessary to inquire whether the various articles mentioned are sold by Overload to licensees at a price not exceeding their bona fide wholesale price, and whether payment therefor constitutes a ā€œfranchise feeā€ within the meaning of Section 31011. From the information contained in your letter, as set forth above, we conclude that the payment of expenses for training, even though such payment is reimbursement for direct out of socket expenses, the payment of a pro rata share of the comprehensive insurance liability and the establishment of a bad debt reserve are not payments for the purchase of goods at a bona fide wholesale price, but are payments for the right of the licensee to open an office. This payment must, therefore, be concluded to be a ā€œfranchise feeā€ within the meaning of Section 31011. Since your letter does not set forth the amount paid for training, insurance and bad debt reserve, we are unable to determine that the ā€œfranchise feeā€ does not exceed the $100 amount under Rule 011. Therefore, we cannot conclude that the exception from the definition of ā€œfranchise feeā€ provided by Section 31011(a) is available.

Accordingly, it is our opinion that under the circumstances described by you, as outlined above, the contracts between Overload and its licensees require the payment of a ā€œfranchise feeā€ within the meaning of Section 31011 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 a legal requirement is applicable, advice to that effect, as contained in this letter, does not constitute an interpretive opinion.

Dated: San Francisco, California
June 7, 1972

By order of 
Commissioner of Corporations

By __________________ 
Assistant Commissioner
Office of Policy

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