Business Law

Opinion No. 73 / 26F

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.

Mr. Antonio J. Gaudio
Attorney at Law
405 Grand Avenue, Room 208
South San Francisco, CA 94082

Dear Mr. Gaudio:

The request for an interpretive opinion, contained in your letter dated February 28, 1973, as supplemented by your letters dated March 7, March 12 and April 3, 1973, has been considered by the Commissioner. Your letters raise the question whether the arrangements between Russell S. Howard, d.b.a. Midget Ice Cream Sales, which sole proprietorship proposes to incorporate under that name ( “Midget” ) , and persons referred to by you and hereinbelow as “independent contractors” are franchises within the meaning of Section 31005 and subject to the provisions of the Franchise Investment Law.

You have represented that Midget is a licensed distributor of milk and milk products (“products”) sold through the use of mini-buses and trucks displaying thereon the name and logo of “Midget Ice Cream Sales”. Midget conducts its business either city-wide or county-wide with employees operating the aforementioned vehicle owned by Midget.

You have further represented that Midget also enters into two types of oral arrangements with the independent contractors. Pursuant to the first arrangement, the independent contractor is given an area in which to sell products and rents a vehicle for $6 per day, except during winter months when the fee is reduced to $3 per day, excluding weekends and holidays when the fee remains $6 per day. The vehicles are picked up at Midget’s offices and returned to that location each day. The rental charge, you have advised us, is to cover the actual cost of maintenance, repairs and insurance at Midget’s expense. Midget sells products to these independent contractors at the wholesale price as published by the producing creamery. There is no sharing of profits and losses and, except for the aforementioned rental fees and cost of products, all revenues are retained by the independent contractor who is responsible for the operating expenses of the vehicle. This arrangement is not obligatory for any stated period of time and is conducted on a day-to-day basis at the sole election of the independent contractor.

The second arrangement contains the aforementioned factors, except the independent contractor owns his own vehicle and equipment with the privilege of using Midget’s trade name thereon. He agrees to purchase the required products from Midget at “vendors’ prices” as posted by the producing creamery which, you have advised us, are less than the “going wholesale prices” for such products. The independent contractor arranges his own purchases and, if necessary, financing of the vehicle.

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 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 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.

The Commissioner has stated that a provision in the agreement to the effect that the franchisee is to be considered as an independent contractor in and of itself is inconclusive, because, though all independent contractor, if he is required by the agreement to observe a marketing plan or system prescribed in substantial part by the franchisor, the agreement, if other requirements of the definition are satisfied, is a franchise (Dept. of Corps. Rel. No. 3-F, p. 4).

A marketing plan or system may be “prescribed” within the meaning of Section 31005, although there is no obligation on the part of the licensee to observe it, where a specific sales program is outlined, suggested, recommended, or otherwise originated by the licensor. 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 quality and price of the goods sold, services rendered, and other material incidents of the operation.

In this context provisions contemplating a nation or area-wide distribution grid on an exclusive or semi-exclusive basis, possibly with multiple levels of jurisdiction, such as regional and local distributors, and arrangements designed to establish uniformity of prices and marketing terms are significant. Control reserved over terms of payment by customers, credit practices, warranties and representations in dealings between franchisees and their customers, suggest a uniform marketing plan (Dept. of Corps. Rel. No. 3-F, pp. 3, 5).

In this connection, we understand you to represent that Midget prescribes the area of the independent contractor’s operations. Midget does not distribute any material with respect to methods of operation or sales promotion nor does it solicit independent contractors through any form of advertising. Midget carries certain types of insurance, and the independent contractors may, at their option, secure additional insurance on the basis that Midget prescribes an area of operations together with the uniformity of operation and appearance which is achieved through the use of mini-buses and trucks displaying the name and logo of “Midget Ice Cream Sales”, it is our opinion that Midget is prescribing a marketing plan or system prescribed in substantial part by Midget within the meaning of Section 31005.

We are also of the opinion that the agreements whereby the independent contractor rents a vehicle for $6 per day, except for a weekday rate of $3 per day during winter months, constitutes the payment of a Franchise fee, even if we assume, as a matter of fact, that all of the products furnished to the independent contractor by Midget are at prices not exceeding the bona fide wholesale price, because, in our opinion, the amounts to be paid by Midget for the rental of the vehicle amounts to a franchise fee. You have not submitted any information from which it could be determined that the lease payments by the independent contractors would be less than the allowable payments under Rule 011.

With respect to the second arrangement where the independent contractor owns his own vehicle and equipment and purchases required products from Midget at “vendor’s prices” which you state are less than the “going wholesale prices” for such products, Section 31153 provides in this connection that the burden of proving this exception from a definition, is upon Midget. If Midget is in a position to prove that the products purchased do not exceed the bona fide wholesale price, the payment for the product does not constitute a franchise fee and the agreement, under the second arrangement, is not a franchise 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 have a legal binding effect of an Interpretive Opinion only with respect to future arrangements between Midget and independent contractors since such opinions pursuant to Section 31510 of the Franchise Investment Law 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, of course, there can be no such reliance where the transactions in question have already taken place (Dept. of Corps. Rel. No. 2-F).

Dated: San Francisco, California
June 26, 1973

By order of 
Commissioner of Corporations

By __________________ 
Supervising Corporations Counsel
Office of Policy

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