Business Law

Opinion No. 72 / 7F

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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 February 1, 1972, has been considered by the Commissioner. Your letter raises the question whether the arrangements between X and the persons referred to by you and and hereinbelow as ā€œdistributorsā€, are franchises within the definition of Section 31005 and subject to the provisions of the Franchise Investment Law. Based upon the assumptions stated below, this question is answered in the negative.

We understand that X, which contemplates changing its name to Y, manufactures a device for counting, measuring and pouring liquor from the bottle into glasses, known as the Z. X is receiving many inquiries and proposes to develop a distribution program for the device. A distributor may purchase only a reasonable inventory relating to the size of his territory.

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.

You have represented that X has no marketing plan except to give sales suggestions on how to demonstrate and present the devices. The question whether Xā€™s distribution program amounts to a prescribed marketing plan or system, within the meaning of Section 31001, calls for a determination which must be based on all of the facts and circumstances surrounding the arrangements made by X with the distributors from time to time. It is appropriate to point out that a sales program suggested, recommended, or otherwise originated by X, through noncompulsory, might attain the force of a ā€œprescribedā€ plan or system, if as a matter of fact it were to be substantially adhered to by the distributors.

Therefore, we can only advise that if sales by distributors as a matter of fact are not made pursuant to marketing plan or system prescribed by X, its arrangements with the distributors would not be ā€œfranchisesā€ within the definition of Section 31005, and would not be subject to the provisions of the Franchise Investment Law. Otherwise, they may be ā€œfranchisesā€ and subject to the provisions of the Law because, although distributors do not pay royalties or other fees, if the price which they pay to X for the devices exceeds the bona fide wholesale price, such excess under Section 31011 is a franchise fee. Section 31153 places the burden of proof upon the person claiming an exemption from a definition; therefore X has the burden of establishing that the price charged to distributors, does not exceed the bona fide wholesale price of the devices.

Some of the material submitted by you suggests that X may propose to use a multi-level distributorship system of sales representatives and dealers, in addition to distributorships. In this connection, your attention is called to Section 31009 of the Law which defines a ā€œsubfranchisorā€ as a person to whom an area franchise is granted. Section 31008 defines ā€œarea franchiseā€ 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 franchisors. Since under Section 31010, the word ā€œfranchiseā€ in Section 31110 includes ā€œarea franchiseā€, if in a multi-level distributorship system, a franchise is sold to the persons on the lower level, the franchisor, in this instance X, also would be required to register any area franchise offered or sold to persons on a higher level of the system.

We have noted your representation that Xā€™s advertising for distributors has come to the attention of the Department. In this connection, please understand that the views expressed in this connection, please understand that the views expressed in this letter do not have the effect of an interpretive opinion under Sections 31510 and 31511 of the Franchise Investment Law with respect to past action on the part of X since such opinions are issued for the principal purpose of providing a means 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 of course such reliance is not possible when the transaction has already taken place (See Dept. of Corp. Rel. No. 2-F).

Dated: San Francisco, California
March 15, 1972

By order of 
Commissioner of Corporations

By __________________ 
Assistant Commissioner 
Office of Policy

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