Business Law

Opinion No. 72 / 25F

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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. A. James Scholz
Attorney at Law
1366 El Camino Real
Milbrae, CA 94030

Dear Mr. Scholz:

The request for an interpretive opinion contained in your letter dated September 15, 1971, as supplemented by your letter dated May 22, 1972, has been considered by the Commissioner. Your letter raises the question whether the distributorship agreements between Margar Enterprises, Inc., a California corporation ( ā€œMargarā€), 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. In our opinion, the agreements are franchises within the definition of Section 31005 and are subject to the provisions of the Franchise investment Law. In a separate opinion, issued pursuant to Corporations Code Section 25618, we shall answer the question also raised by you, whether the agreements are subject to the Corporate Securities Law of 1968.

You have represented that Margar is the West Coast representative of a line of infant furniture, equipment and products known as ā€œBaby Butlerā€ It proposes to grant to each distributor an exclusive territory in which to sell ā€œBaby Butlerā€ products and the right to sell outside this territory only when authorized in writing by Margar. Margar does not restrict distributors in the handling of other merchandise provided it is not competitive with ā€œBaby Butlerā€ products.

The distributor has authority to employ salesmen at salaries and on conditions he deems proper. He must agree to purchase each month a specified quantity of ā€œBaby Butlerā€ products and to place his orders not later than the first day of each month. If the distributor violates any provision of the agreement, including the minimum purchase requirement, or becomes insolvent or bankrupt, Margar may, on written notice, terminate the agreement. The distributor is required to pay a specified sum, depending on the size of the territory, as compensation for the exclusive rights granted under the agreement. Upon execution of the agreement, he is also required to make a performance deposit from which Margar may deduct the purchase price of products sold and delivered, but not paid for, at its termination. In addition, at distributorā€™s expense, Margar provides him with projectors, display items, slides, and other sales equipment.

You have further represented that Margar has a marketing plan and system which it prescribes to its distributors. We understand that Margar advertises in nationally published magazines, for the purpose of obtaining leads for its distributors. Margar has guidelines and recommendations which it makes to its distributors and does train them in order to assist them in their operations. Normally, the distributors are in the business of selling the ā€œBaby Butlerā€ products exclusively.

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 is required to pay, directly or indirectly, a franchise fee which, on an annual basis, does not exceed $100.

In our opinion, the specified sum which the distributor is required to pay for the exclusive rights granted under the agreement is a ā€œfranchise feeā€ within the meaning of Section 31011 since this sum is not a payment for goods at a bona fide wholesale price. In addition, the performance deposit is a ā€œfranchise feeā€ since it represents a charge to the distributor for the right to enter into the business. Since we have determined that the payment for the exclusive territory and the performance deposit are ā€œfranchise feesā€, we express no opinion as to whether the payments for the projectors, display items and sales aids are ā€œfranchise feesā€.

Nothing contained in your letter indicates that the aforementioned ā€œfranchise feesā€ are within the amount tolerated by Rule 011. In this connection, we call your attention to Section 31153 of the Law which places the burden of proof for an exception or an exemption upon the person claiming it. Accordingly, it is our opinion that under the circumstances described by you as outlined above, the agreement between Margar and distributors are ā€œfranchisesā€ within the meaning 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 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
August 9, 1972

By order of 
Commissioner of Corporations

By __________________ 
Assistant Commissioner
Office of Policy

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