Business Law

Opinion No. 72 / 42F

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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. C. William Carlson, Jr.
Attorney at Law
18080 Beach Boulevard
Huntington Beach, CA 92648

Dear Mr. Carlson:

The request for an interpretive opinion contained in your letter dated August 29, 1972, has been considered by the Commissioner. Your letter raises the question whether the so-called Manufacturer’s and Agent’s Agreements (“agreement”) between Green Rain, Inc., a California corporation (“Green Rain”) , and persons referred to therein and hereinbelow as “agents”, are franchises within the meaning of Section 31005 and subject to the provisions of the Franchise Investment Law. This question is answered in the affirmative.

You have represented that Green Rain is engaged primarily in the business of manufacturing and selling a liquid additive dispenser, described in the agreement as “Liquid Fertilizer Controlled Metered Dispensing Injection System”, and referred to therein and hereinbelow as the “probe”. This is a patented device for dispensing liquid fertilizer, plant foods, and soil conditioners through sprinkler systems.

The agreements have an initial term of three years and will be automatically renewed for three additional yearly periods, unless terminated in writing 60 days prior to the end of any year. The agent will lease probes for a rental fee per probe of $2.50 payable upon delivery plus $.25 per month payable in advance on the first day of each month following delivery. The agent may sublease the probe to any person for use, but for further sublease only with Green Rain’s consent.

The agent is required to use the probes in a careful and proper manner, to keep them in good repair, condition and working order at his own cost and expense, to assume and bear the risk of loss and damage and the cost of replacement, and to comply with and to conform to all laws relating to the possession, use and maintenance of the probes. Without the prior written consent of Green Rain, the agents may not make any alterations, additions or improvements to the probe, and such additions and improvements become the property of Green Rain on the expiration, or earlier termination, of the agreement.

You have represented that fertilizer as well as certain additional items are needed in connection with the use of the probe, such as a 1/2 gallon bottle, a flow control device. According to your representations, agents are under no obligation to, and it is not anticipated they will purchase these items from Green Rain, and it is unlikely that Green Rain would supply them if an agent were to request them. It is contemplated that agents will be advised as to other sources of supply.

Section 31005 of the Franchise Investment Law defines “franchise” 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’s business pursuant to such plan or system is substantially associated with the franchisor’s commercial symbol, such as its trade name or trademark, and the franchisee is required to pay a franchise fee.

You have represented that Green Rain will provide agents with a manual which contains a suggested outline of office procedures and includes a brochure which sets forth the benefits of the probe and recommends various types of marketing plans, indicating which plans are the most effective. From time to time, Green Rain will offer sales material which agents may purchase if they so choose. In addition, agents will receive some assistance from Green Rain by way of a training session dealing with both the business aspects of marketing and the technical aspects of the item. There is no requirement that agents follow Green Rain’s suggestions or attend training sessions.

A marketing plan or system within the meaning of Section 31005 may be “prescribed” within the meaning of that Section, although there is no obligation on the part of the franchisee to observe it, where a specific sales program is outlined, suggested, recommended, or otherwise originated by the franchisor. Thus a sales program may be “prescribed” by the franchisor where he gives instructions for presentation of the product, especially where such action is supported by training material, courses, or seminars. By these or similar means, a non-mandatory program may attain the force of a “prescribed” one (Dept. of Corps., Release No. 3-F, p.3). On the basis of your representations, as reflected above, we are of the opinion that Green Rain is prescribing a marketing plan or system within the meaning of Section 31005.

You have advised us that agents are not required to associate their business with the name “Green Rain”, although they may do so if they so desire. The agreement provides that if at any time Green Rain supplies the agent with labels, plates or other markings stating that the probes are owned by Green Rain the agent must display the prominently on the equipment. This requirement coupled with the right granted to agents to use the name “Green Rain”, leads us to conclude that the agent’s business will be substantially associated with Green Rain’s trademark.

It also appear that the agent is required to pay a “franchise fee”, 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 price is not considered the payment of a “franchise fee” 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 a franchise fee which, on an annual basis, does not exceed $100. Section 31153 of the Law provides that the burden of proof for any exemption or exception from a definition is upon the person claiming it.

Rental fees, such as the payment of $2.50 per probe initially and $.25 per month, are not payment for goods and therefore the exception provided by Section 31011(a) is unavailable (see Dept. of Corps., Release No. 3-F, p.9). since we understand from the brochure that agents may have at least 100 customers, the payments also do not appear to be within the limits set forth by Rule 011.

We note that Green Rain contemplates arrangements whereby agents may have “subdealers”. In this connection, your attention is called to Section 31009 of the Law which defines a “subfranchisor” as a person to whom an area franchise is granted. Section 31008 defines “area franchise” to mean any contract or agreement between a franchisor and a subfranchisor whereby the subfranchisor is granted the right, for consideration given in whole or in part for such right, to sell or negotiate the sale of franchises in the name or on behalf of the franchisor. Under Section 31010, “franchise” in Section 31110 includes “area franchise”. Therefore Green Rain will be required to register the area franchises granted to agents as well as the franchises granted by agents to subdealers in Green Rain’s name or on its behalf.

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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