Business Law

Opinion No. 72 / 5F

State of California Department of Corporations

Brian R. Van Camp, Commissioner 
In reply refer to: File No. _____

This interpretive opinion is issued by the Commissioner of Corporations pursuant to section 31510 of the franchise investment law. It is applicable only to the transaction identified in the request therefor, and may not be relied upon in connection with any other transaction.

The request for an interpretive opinion contained in your letter dated January 10, 1972, has been considered by the Commissioner. Your letter raises the question whether the agreements between A, a California corporation (“A”), and persons referred to herein and hereinbelow as “dealers”, are “franchises” within the definition of Section 31005 of the Franchise Investment Law and subject to the registration requirement of that Law. This question will be answered in this opinion. The question also raised in your letter whether these agreements are “securities” within the meaning of Section 25019 of the Corporate Securities Law of 1968, is answered in a separate opinion issued under that Law contemporaneously herewith.

You have represented that A is engaged in the business of importing, wholesaling, and retailing bicycles and bicycle supplies. It owns and operates two retail outlets under the name of B Shops, and it has also entered into joint venture agreements with two or three other persons for the operations of similar shops.

We understand that A proposes to form additional joint ventures by obtaining suitable store locations and then soliciting individuals referred to by you and hereinbelow as “dealers” to enter into a joint venture agreements. The joint ventures will be between A and the dealers and will be formed for the purpose of conducting a retail bicycle sales and service business at the particular location obtained by A under the name ” B Shop No.____”

The joint venture agreement provides that the dealer shall make a $5,000 cash contribution which shall constitute the initial working capital of the joint venture. A’s contribution is its commitment to sell bicycles, accessories, parts, and supplies to the joint venture at competitive prices not higher than charged to retailers not in joint venture with it. The agreement gives A two-thirds and the dealer one-third of the assets and profits of the joint venture. Liability for debts and expenses is shared in the same proportion. Moreover the agreement provides for payment of a salary to the dealer in the amount of $500 per month.

The agreement provides, moreover, that A is to have general control of the operations of the joint venture, including but not limited to, the right to determine and control the inventory, pricing, trade-in and warranty policy, design, and advertising, and that it shall designate the banking institution in which all joint venture funds are to be deposited promptly. It is stated that this provision is designed to protect its corporate good will and the value of its trade name. A’s signature will be required for disbursement and other evidences of obligation of the joint venture. The joint venture may not deal in competitive products without A’s express written consent.

The agreement also provides that A’s to adopt a program pursuant to which all dealers in joint ventures with it, shall have an option to acquire a 5% interest in future joint ventures at a price based on the capital contributions to such future joint ventures. It is not clear how such multiple 5% promises are to be realized in the event that more than a certain number of joint venture agreements are concluded, even if A were willing to yield all of its interest in these ventures.

Section 31005 of the Franchise Investment Law defines “franchise” to include an agreement, whether 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’s business pursuant to such plan or system is substantially associated with the franchisor’s trade name or other commercial symbol, and the franchisee is required to pay, directly or indirectly, a franchise fee.

The agreements between A and the dealer in addition to providing for the creation of a joint venture composed of both parties, contemplates the granting by A to the joint venture of the right to engage in the retail bicycle sales and services business under the trade name “B”, a trade name already in use by A and evidently adopted by it for agreement, as reflected above, moreover makes detailed provisions as to how the joint venture business of marketing bicycles is to be conducted. It is fair to say that a marketing plan or system for the operation of the joint venture business is being prescribed in substantial part by A and, as above stated, that business is substantially associated with the trade name adopted by A.

We are not advised of any proposal for the payment of a franchise fee to A by the joint venture, other than such franchise fee as may be inherent in the purchase by the joint venture from A of, and payment by the joint venture to A for, “an adequate and representative inventory of bicycles, accessories, parts, and supplies carried by” A, as provided in the agreement. Section 31011 of Franchise Investment Law provides that the purchase or agreement to purchase goods at a bona fide wholesale price shall not be considered the payment of a franchise fee. Section 31153 provides in this connection that the burden of proving this exception from the definition of “franchise fee”, as any other exception from a definition, us upon A.

If A is in a position to prove that the price charged by it for the bicycles, accessories, parts, and supplies purchased by the joint venture does not subject to the registration requirement of the Law. Otherwise, in our opinion, the agreement is a franchise and subject to that requirement.

Please understand that the views expressed herein do not have the legally binding effect of an interpretive opinion with respect to agreements which, as you have represented, have been entered into prior to the date hereof, since interpretive opinions under Sections 31510 and 31511 of the Franchise Investment Law are issued for the principal purpose of providing a procedure by which member 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 of course there can be no such reliance where the transaction n question has already taken place (see Dept. of Corps. Rel. No. 2-F).

Dated: San Francisco, California
February 16, 1972

By order of 
Commissioner of Corporations

By __________________ 
Assistant Commissioner 
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