Business Law

Opinion No. 73 / 17F

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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. Peter J. Palm IV
Computerized Real Indoor Golf
200 Huntington Ave, Suite 1607
Alexandra, VA 22303

Dear Mr. Palms:

The request for an interpretive opinion contained in your letter dated March 12, 1973, has been considered by the Commissioner. Your letter raises the question whether the Distributorship Contracts (ā€œcontractsā€) between Computerized Real Indoor Golf Corporation, a Virginia corporation (ā€œCRIGā€), and persons referred to therein and hereinbelow as ā€œdistributorsā€ constitute a franchise 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 CRIG markets an indoor golf game, consisting of electronic devices and systems and related items which simulate aspects of outdoor golf, referred to as ā€œgolf-inā€. Pursuant to the contract, CRIG grants the distributor an exclusive territory for the sale of golf-ins and related products. Distributor receives a commission of 35% of the sales price on the first ten golf-in units sold and 25% on the units sold thereafter. The contract, which remains in effect for ten years, contains special provisions for sales made by the distributor outside of his territory, for sales to customers purchasing ten or more units and quota requirements.

The contract contains requirements with respect to the distributorā€™s office, supplies, monthly reports, inquiries received from outside of his territory and insurance coverage. The contract further provides that CRIG will supply an engineer to supervise the installation of one golf-in unit at the distributorā€™s office; provide for continuing engineering training to his technicians throughout the term of this contract with respect to installation, maintenance, and repair of the unit; and ā€œimpart to the distributor its marketing methods and operating technique and assistance to the distributor in the proper management of his distributorshipā€.

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, an 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.

We do not concur in the opinion, which we understand you to express, that CRIG does not prescribe a marketing plan or system in substantial part. In making the determination whether there is a prescribed marketing plan or system, 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 centralized management and uniform standards as regards the 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. such a plan or system may be deemed ā€œprescribedā€ by the franchisor where he supplies the franchisee with sales aids or detailed instructions, especially when it is supported by elaborate training material, courses, or seminars (see Dept. of Corp. Release No. 3-F, P, 3-5).

In the instant case, as indicated above, the distributor may take advantage of all of the marketing methods, operating techniques, advice and assistance which CRIG agrees to impart and must abide by certain policies and rules. In our opinion, these arrangements, like the arrangements described in Comm. Op. No. 72/29F, considered as a whole, are indicative of a ā€œmarketing plan or system prescribed in substantial partā€, by CRIG.

We also do not concur in your opinion that the contracts do not require the payment of a ā€œfranchise feeā€. The Commissioner has stated, in his Release No. 3-F, that a ā€œfranchise feeā€ may be payable in a lump sum. In this connection, the contract requires that the distributor pay $17,700 concurrently with the signing of the contract in consideration for the exclusive distributorship.

In addition to the aforementioned $17,700 fee, the distributor agrees that within each quarter year he will purchase $250 of newspaper advertising for each unit of his quota and, concurrently with the execution of the contract, will pay a specified sum representing prepayment of advertising for the initial six months at the rate of $250 per unit of his quota. In this connection, the Commissioner has expressed the opinion that payments for advertising constitute the payment of a franchise fee even though, as in Policy Letter No. 38F, the payments are not made directly to the franchisor, since the payments are made to enhance the business of CRIG and thus made for the account and benefit of CRIG.

Accordingly, it is our opinion that, under the circumstances described by you as outlined above, the contracts between CRIG and the distributors constitute ā€œfranchisesā€ within the meaning of Section 31005 and are subject to the provisions of the Franchise Investment Law.

We have noted your representations that CRIG proposes to establish less than 10 wholesale distributors in California. In this connection, please be advised that the Franchise Investment Law contains no exemption for a ā€œnonpublic offeringā€ such as is contained in the California corporate securities Law of 1968.

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
May 1, 1973

By order of 
Commissioner of Corporations

By __________________ 
Supervising Corporations Counsel
Office of Policy

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