Business Law

Opinion No. 73 / 29F

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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 May 14, 1973, requesting reconsideration of the views expressed in Comm. Op. 73/17F, 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€, in the revised form submitted with your aforementioned letter, constitute franchises within the definition of Section 31005, and subject to the provisions of the Franchise Investment Law. This question is answered in .the affirmative.

As stated in Comm. Op. No. 73/17F, 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 purchases Golf-ins at a whole sale price of $6,700, which price is subject to change by CRIG upon thirty daysā€™ written notice provided such change is made uniformly for all sales, The revised contract, which remains in effect for ten years, does not contain special provisions for sales made by distributor outside his territory or sales to customers purchasing ten or more units, such as contained in the contract submitted with your letter dated March 12, 1973. However, the contract does contain requirements with respect to quotas, distributorsā€™ business quarters and the assignment of the contract. We also note references in the contract to printed material supplied to distributor by CRIG.

In return for the granting of the exclusive distributorship, the distributor is required to pay CRIG concurrently with the signing of the agreement the sum of $17,700. This sum represents $6,700 for a demonstrator unit at wholesale price, plus $1,000 for installation; a $2,000 payment for the cost of imparting repair, installation and maintenance knowledge to a local, independent service company selected by the distributor to install, maintain, and erect units sold by him; and an $8,000 nonrefundable deposit of $800 on each of the first ten units purchased by distributor. The distributor may, at his option, elect not to receive the assistance of the independent service company, in which event the $2,000 charge, referred to in the breakdown as a charge for ā€œtrainingā€ is not required. Moreover, we understand that in lieu of the $8,000 nonrefundable deposit, distributor may purchase ten units for inventory.

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 Sect:ion 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.

We do not concur in your opinion that CRIG does not prescribe a marketing plan or system in substantial part. We have noted paragraph 3.b of the contract which states: ā€œNothing contained herein in any way imposes any obligation upon the distributor to abide by any policies or rules of CRIG nor does CRIG prescribe any specific marketing methods, operating techniques nor in any other way ostensibly assume responsibility by causing any distributorship to be operated with the appearance of centralized management or uniform standards as regards material incidents of the operation. All distributors are encouraged to develop innovative entrepreneurial management along decentralized lines without any prescribed plan of operations from the company.ā€ In this connection, the Commissioner has stated that a provision in the agreement that a manufacturer is not concerned with the means implied by the distributor to make sales, or the manner in which the business of the distributor is conducted, does not preclude the possibility that the distributorā€™s business is, actually and in fact, pursuant to a marketing plan or system prescribed in substantial part by the manufacturer.

A marketing plan or system may be ā€œprescribedā€ within the meaning of Section 31005 although there is no obligation on the part of the franchisee to observe it, where a specific sales program is outlined, suggested, recommended, or otherwise originated by the franchisor. 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 materials, courses, or seminars. Significant factors in making this determination include provisions contemplating a nation or area-wide distribution grid on an exclusive or semi-exclusive basis, as well as the appearance of the licenseeā€™s business premises and the fixtures and equipment utilized therein, housekeeping, and similar decor (Dept. of Corps. Rel. 3-F, pp. 3-5}.

On the basis that CRIG prescribes an area of operation, furnishes printed material, makes available through local service companies knowledge with regard to installation, maintenance and erection of the units together with the uniformity of operation and appearance which is achieved through the use of the trade name and logo of ā€œGolf-inā€, it is our opinion that CRIG is prescribing a marketing plan or system in substantial part within the meaning of Section 31005.

We also do not concur in your opinion that distributors are no required to pay a ā€œfranchise feeā€ within the meaning of Section 31011. While the definition of a ā€œfranchise feeā€ contemplates a payment required of the franchisee, and while, therefore, an optional payment which a distributor might make for sales aids or literature, would not be a ā€œfranchise feeā€, nevertheless of sales aids or literature are essential to the successful operation of a distributorship or if they are suggested or recommended to distributors, payment therefore is ā€œrequiredā€ within the meaning of Section 31011 for the right to enter into the business
and is a ā€œfranchise feeā€ (see comm. op. No. 73/7F). In our opinion, the aforementioned conclusion is also applicable to optional payments for assistance by local independent service companies and, therefore, the $2,000 which distributor may pay under the contract for such assistance constitutes a ā€œfranchise feeā€ within the meaning of Section 31011.

In addition, the $8,000 which distributors will pay as a deposit for the first ten units purchased is also a ā€œfranchise feeā€. While denominated a ā€œdepositā€ on the purchase price, this nonrefundable payment in reality represents a charge to distributors for the right to enter into business which at best deprives them of the use of the funds prior to the time, if any, they might order ten units (see Comm. Op. No. 72/3F). As regards the alternative of purchasing ten units rather than making the aforementioned deposit, payment for merchandise which exceeds the quantity which a reasonable man normally would purchase by way of starting inventory is made by the franchisee, not because he has a present need for or wants to acquire the goods, but is understandable only as intended to secure the right of selling them under the franchise agreement and for that reason it constitutes ā€œfranchise feeā€ (see Comm. Op. No. 73/7F).

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

Inasmuch as interpretive opinions are issued for the 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
July 18, 1973

By order of 
Commissioner of Corporations

By __________________ 
Supervising Corporations Counsel
Office of Policy

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