Business Law

Opinion No. 72 / 41F

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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. Richard K. Livett
Attorney at Law
1020 Prospect Street
Suite 415
La Jolla, CA 92037

Dear Mr. Livett:

The request for an interpretive opinion contained in your letter dated August 25, 1972, as supplemented by your letter dated October 20, 1972, has been considered by the Commissioner. Your letters raise the question whether the proposed agreements between, Mr. Robert H. Lawrence and persons referred to hereinbelow as ‚ÄúSubdistributors‚ÄĚ, are franchises within the definition of Section 31005 and subject to the provisions of the Franchise Investment Law. This question is answered in the affirmative.

You have represented that Mr. Lawrence under an agreement with Baby-Tenda Corporation, a Missouri corporation, has exclusive distributorship rights for the Counties of San Diego, Riverside and San Bernardino, for a line of infant furniture, equipment, and products known under the trademarks ‚ÄúBaby-Tenda‚ÄĚ and ‚ÄúBabee-Tenda‚ÄĚ manufactured by the Missouri corporation. Mr. Lawrence proposes to enter into agreements with subdistributors substantially in the form of his agreement with the Missouri corporation but adding some language to protect himself in the event that Baby-Tenda should stop manufacturing.

The agreement between Mr. Lawrence and the Missouri corporation requires Mr. Lawrence to pay $3,750 for the exclusive right granted therein to sell the trademarked items in the aforementioned territory and requires him to purchase at least 20 ‚ÄĚBaby-Tenda‚ÄĚ units monthly during the term of the agreement. If he fails to purchase this minimum number for three consecutive months, the Missouri corporation may terminate the agreement. Mr. Lawrence may handle other noncompetitive items but except with the approval of the Missouri corporation, he may not sell outside his territory. He is required to maintain a place of business .and display room, satisfactory to the Missouri corporation which has the right of inspection. Mr. Lawrence is also required to maintain liability insurance with the Missouri corporation as additional insured and to hold it harmless from liability. He may not assign his rights or delegate performance of his duties under the agreement without the prior written approval of the Missouri corporation. We assume he will obtain such approval prior to entering into the subdistributorship agreements.

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 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 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 proposed agreements between Mr. Lawrence and the subdistributors which, as above stated, will be substantially similar to his agreement with the Missouri corporation, prescribe a marketing plan or system. In making this determination, it is necessary to keep in mind the objective of the Law to deal with a multiplicity of business establishments created by the franchisor for all of which he ostensibly assumes responsibility by causing them to be operated with the appearance of some centralized management and uniform standards as regards the quality and price of the goods sold, services rendered, and other material incidents of the operation. The marketing plan or system is prescribed by the franchisor as one of the important means by which the appearance of centralized management and uniform standards is achieved (Dept. of Corps. Release No. 3.-F, p. 5)

In the instant case, the provisions of the proposed agreements requiring Mr. Lawrence‚Äôs approval for sales outside the subdistributor‚Äôs assigned territory, prohibiting the sale of competitive items, requiring his prior written consent for assignment of rights or delegation of duties, and prescribing maintenance of a satisfactory place of business and display room, are indicative of a prescribed marketing plan or system. Accordingly, it is our opinion that, under the circumstances described by you, as outlined above, the proposed agreements between Mr. Lawrence and the subdistributors are ‚Äúfranchises‚ÄĚ within the definition of Section 31005 and subject to the provisions of the Franchise Investment Law.

As we understand it, although under Mr. Lawrence‚Äôs agreement with the Missouri corporation its prior written approval is required and will be obtained before Mr. Lawrence may enter into the distributorship agreements, the rights and duties under these agreements, for all that appears, will not be extended to the subdistributors in the name or on behalf of the Missouri corporation, but by Mr. Lawrence in his own name and on his own behalf, and he will receive and retain whatever consideration the subdistributors are required to provide under their agreements with him. For that reason, on the basis of the information furnished, we do not regard Mr. Lawrence as a ‚Äúsubfranchisor‚ÄĚ within the meaning of Section 31009, and the rights granted to Mr. Lawrence by the Missouri corporation are not an ‚Äúarea franchise‚ÄĚ within the meaning of Section 31008. Therefore compliance by that corporation with the registration requirement of Section 31110 of-the Law as to its agreement with Mr. Lawrence would not extend to Mr. Lawrence‚Äôs subdistributorship agreements and would not relieve him of his duty to register these agreements under the Section.

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
December 27, 1972

By order of 
Commissioner of Corporations

By __________________ 
Assistant Commissioner
Office of Policy

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