Business Law

Opinion No. 72 / 33F

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. W. Wagner Crim, President
Zapco Distributing Company
470 Alabama Street 
San Francisco, CA 94110

Dear Mr. Crim:

The request for an interpretive opinion contained in your letter dated August 23, 1972, has been considered by the Commissioner. Your letter raises the question whether the agreements between Zapco Distributing Company, a California corporation (‚ÄúZapco‚ÄĚ), and persons referred to therein and hereinbelow as ‚Äúdistributors‚ÄĚ, are franchises within the meaning of and subject to the provisions and requirements of the Franchise Investment Law. This question is answered in the affirmative.

In your letter you have also raised the question whether these agreements conform to the Newspaper Distribution System. This question is not within the jurisdiction of the Department of Corporations and we are unable to express an opinion thereon.

We understand you to represent that Zapco owns the trade name ‚ÄúZapco‚ÄĚ, and has exclusive rights to distribute advertising material for its clients, and to sell distributorships within its territory under that trade name. By the agreement, Zapco grants to the distributor the exclusive right to operate deliveries within a specified area. It supplies the advertising material which distributors are to distribute the ‚ÄúZapco‚ÄĚ way, and for doing so, it pays them a fee at an unspecified rate per 1,000 pieces delivered.

The agreement calls for payment by the distributor of a distributorship fee at the rate of $2.50 per residence in the distributor’s territory which is to include a minimum of 5,000 residences, the maximum to be determined by Zapco and the distributor’s ability. If the agreement is renewed for a period in excess of the original one year period, an annual royalty fee of 5% of the previous year’s gross earnings., is payable by the distributor. If the distributor purchases additional areas, an additional fee is payable to Zapco.

The distributors employ carriers to distribute the advertising material. The carriers place the material in plastic bags and hang it on the doorknobs or residences. You have informed us that the advertising material and the plastic bags are transported by the carriers in bags bearing the name ‚ÄúZapco‚ÄĚ in large letters for identification of the carriers. The agreement gives specific directions as to the manner in which the pickup and delivery of the advertising material is to be effected by the distributors, and it specifies the locations to which advertising material is not to be delivered and provides for the return of undelivered material to Zapco post haste.

Zapco promises to maintain a continuous advertising and sales program to promote advertising material for the distributors. The agreement provides that it shall terminate for stated reasons, including the failure of distributors to meet pickup schedules, to pay carriers or other distributorship debt, or to comply with any obligations under the agreement. Termination of the distributorship ‚Äúresults in loss of investment‚ÄĚ The agreement provides that distributors may not handle competing services during the life of the agreement and for three years after its termination.

Section 31005 of the Franchise Investment Law defines ‚Äúfranchise‚ÄĚ to include an agreement, either oral or written, between two or more persons by which a franchise 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‚Äôs business pursuant to such plan or system is substantially associated with the franchisor‚Äôs commercial symbol, such as its trade name or trademark, and the franchisee is required to pay a franchise fee.

In our opinion, the agreements between Zapco and its distributors contain all of the essential elements of a ‚Äúfranchise‚ÄĚ within the definition of Section 31005 and are subject to the registration requirement of the Franchise Investment Law. We note in particular the provision of the agreement that ‚Äúdistributor is in no way the employee, legal representative or agent of Zapco, for any purpose whatsoever‚ÄĚ. This provision makes clear the intention of the parties that distributors under the agreement are to operate as independent contractors. Therefore, notwithstanding the fact that all income of the distributors appears to be provided by payments of the franchisor, it is our conclusion that the distributors are engaged in a business of their own along the lines set forth in the agreement, as reflected above, and that the right to engage in that business is conferred upon them by the agreement.

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
October 10, 1972

By order of 
Commissioner of Corporations

By __________________ 
Assistant Commissioner
Office of Policy

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