Business Law

Opinion No. 72 / 36F

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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. Phillip W. Harry
Attorney at Law
124 Locust Street
Santa Cruz, CA 95060

Dear Mr. Harry:

Your letter dated September 22, 1972, requesting expression of an opinion concerning certain provisions of the Franchise Investment Law, addressed to the Secretary of State and forwarded to us by his office, has been considered by the Commissioner of Corporations. In your letter, you have raised the question whether the arrangements for the operation of retail outlets which Crucible, Studios Inc. (ā€œCrucibleā€) proposes to make with persons referred to by you and hereinbelow as ā€œoperatorsā€, are ā€œfranchisesā€ within the meaning of Section 31005 of the Franchise Investment Law, so as to subject the offer and sale thereof to the registration requirement of Section 31110 of the Law. This question is answered in the affirmative.

You have represented that Crucible to expand retail outlets for its business, contemplates opening such outlets in several neighboring towns. For that purpose, it will enter into a lease for the shop and provide the shop with jewelry inventory and other related items for sale in the shop. Crucible will retain legal title to these goods. You have stated that the wholesale value of the inventory will be approximately $4,000 and the retail value approximately $12,000. All income derived from the sale of the inventory will be forwarded to crucible. Crucible will pay the operator one-third of the net profits after payment of rent, utilities, advertising, and other overhead expenses. You have further represented that as inventory is sold, Crucible will replace it at wholesale cost.

Your letter states that the operator will be required in the day to day business to follow Crucibleā€™s regulations. Moreover, he will be required to pay Crucible $4,000 for the use of the ā€œCrucible Studiosā€ name, for training and expert advice to personnel, for the use of a bookkeeping system set up by Crucible, and for inventory control. This money will be used by Crucible for leasehold improvements and other capital expenditures.

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.

The arrangements between Crucible and the operators, in our opinion, contain all of the essential elements of a ā€œfranchiseā€ as defined in Section 31005. The operators are granted the right by Crucible to engage in the business of selling jewelry and related items at retail at a location selected by Crucible and in a manner which we understand is prescribed by the regulations of Crucible. The operation of the operators business is substantially associated with the ā€œCrucible Studiosā€ trade name, and the operators are required to pay a franchise fee.

As regards the last mentioned point, the operator apparently will handle the merchandise on a consignment basis with all proceeds remitted to Crucible. The $4,000 payment of the operator, you have represented, will be for the use of Crucibleā€™s trade name and for the various services rendered by Crucible to the operator, as described above. Such payment is a ā€œfranchise feeā€ within the meaning of Section 31011.

In accordance with the foregoing, we are of the opinion that the arrangements between Crucible and the operators are ā€œfranchisesā€, and their offer and sale is subject to the registration requirement of Section 31110 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
October 26, 1972

By order of 
Commissioner of Corporations

By __________________ 
Assistant Commissioner
Office of Policy

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