Business Law

Opinion No. 72 / 4F

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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. Vincent A. Muzzi
Attorney at Law
Law Office of William F. Kenney
520 El Camino Building
San Mateo, CA 94402

Dear Mr. Muzzi:

The request for an interpretive opinion contained in your letter dated November 16, 1971, as supplemented by your letter dated November 29, 1971, has been considered by the Commissioner. Your letters raise the question whether the agreements between Dry-Tone Industries, Inc., a California corporation (“Dry-Tone”), and persons referred to therein and hereinbelow as “distributors”, 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.

It appears from the form of agreement submitted to us that Dry-Tone wishes to promote the distribution of certain electronic and enuresis equipment, referred to therein and hereinbelow as “units”, as an independent business enterprise. Accordingly the agreement provides for the lease of units to the distributors at an annual rental of $200 per unit. After the initial year’s rental on each unit the distributor may return to Dry-Toner, postpaid, all or as many of the units that he desires or pay in advance one year’s rental for each unit. The distributor then rerents the units to individuals in the community, pursuant to a “placement contract” , in a form provided by Dry-Tone. ·

The agreement further provides that the distributor will, within seven days after the procurement of each placement contract, deliver to Dry-Tone executed copies in duplicate of such contract together with a payment of $99.50, to cover costs of counseling fees for the user and a new pad for each unit rented to a user, history chart on the user, and a notation of the serial number of the unit placed. In addition, distributor agrees to leave with the user seven progress cards provided by Dry-Tone and pick up the units placed by him when instructed in writing by Dry-Tone. In all advertising or marketing, the distributor agrees to strictly adhere to terms and conditions set forth in the agreement “in order to assure the highest degree of professional and business standards in the conduct of advertising or marketing of the equipment ana prevent misleading of .the public”.

The distributor may advertise and market the units anywhere in the United States, unless another distributor has been granted an exclusive territory, but he is assigned an area in which he has the exclusive right to place advertising in newspapers or other media. All advertising material must include the clause “When not due to organic defect or disease”. You have represented that the distributor may use the trade name “Dry-Tone” but he is not required to do so.

Dry-Tone will loan to the distributor at the execution of the agreement one complete Sales Aid Kit without charge and an additional kit upon the rental of each 15 units thereafter. Also it will supply kits to the distributor for $65. The distributor agrees to use Dry-Tone units only in the manner and for the purpose intended, to exercise due diligence and care in the handling and treatment thereof and to allow only Dry-Tone representatives to repair same. If another person attempts to repair the units, the distributors are required to indemnify Dry-Tone for any damages resulting therefrom.

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. Section 31011 defines “franchise fee” to mean any fee or charge that a franchisee or subfrarichisor 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 purchases or agrees to purchase goods at a price other than the bona fide wholesale price, if the total payment in excess of the bona fide wholesale price computed on an annual basis does not exceed $100.

In our opinion, the agreements between Dry-Tone and the distributors contain all of the elements indicative of a “franchise” according to these provisions. Especially, the provisions requiring the distributor to use a “placement contract” in a form prescribed by Dry-Tone, to distribute progress cards to users, to adhere to Dry-Tone’s terms and conditions in all advertising and marketing, not to advertise or sell in a territory exclusively granted to another distributor and. include the aforementioned cautionary clause in all advertising, indicate that Dry-Tone is prescribing, in substantial part, the marketing place under which the distributor operates. The fact that he may use the trade name “Dry-Tone” which trade name moreover may appear on the units, indicates that the operation of the distributor’s business is substantially associated with Dry-Tone’s commercial symbol. Furthermore, the rental and counselling fee which the distributor is required to pay to Dry-Tone under the agreement, constitute “franchise fees” within the definition of Section 31011.

Accordingly, it is our opinion that, under the circumstances described by you, as reflected above, the agreements between Dry-Tone and the distributors are franchises within the meaning of Section 31005 and are 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 under the Corporate Securities Law 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
February 17, 1972

By order of 
Commissioner of Corporations

By __________________ 
Assistant Commissioner
Office of Policy

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