Business Law

Opinion No. 73 / 30F

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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. Samuel C. Alhadeff
Attorney at Law
Asaro, Featherman & Keagy
304 Kalmia Street
San Diego, CA 92101

Dear Mr. Alhadeff:

The request for an interpretive opinion, contained in your letter dated May 16, 1973, has been considered by the Commissioner. Your letter raises the question whether the Distributorship Agreements between Don Moody and Tom Mandle, dba Spray-N-Peel, a General Partnership, and persons referred to therein and hereinbelow as ā€œdistributorā€, are franchises within the meaning of Section 31005, and subject to the provisions of the Franchise Investment Law. This question is answered in the affirmative.

We understand that Spray-N-Peel is engaged in the business of manufacturing, packaging and selling under the trade name of ā€œSpray-N-Peelā€ a liquid substance used in the removal of wallpaper. Pursuant to the agreement, Spray-N-Peel grants distributor, a sole proprietor, the exclusive right to distribute said products in a specified territory, using the aforementioned trade name provided that he does not attempt to form any corporation under that name, or similar name, and provided further that he will comply with laws relating to the publication of any fictitious business name statement.

Distributor is required to meet minimum purchase requirements; to maintain adequate inventory and application tanks to service accounts in the territory; not to engage in the sale, distribution or promotion of products competitive to products which Spray-N-Peel manufactures and distributes; and to use his best efforts to promote the distribution, sales, and use of the products in the specified territory. In addition, he is required to sell all Spray-N-Peel products at prices specified in the then current price list furnished by Spray-N-Peel, which is subject to change from time to time. Spray-N-Peel will at distributorā€™s request furnish to him a reasonable quantity of catalogs and other advertising material at cost for display or mailing in the advertising of Spray-N-Peel products. Distributor may not prepare any catalogs, brochures or advertise.

Spray-N-Peel products unless the contents thereof have been first approved by Spray-N-Peel. Spray-N-Peel has the right of first refusal to purchase a distributorship on the same terms and basis contained in any written offer presented to distributor by a third party.

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.

In our opinion, the agreement Between Spray-N-Peel and distributor contains all of the essential elements of a ā€œfranchiseā€ within the aforementioned definition. Especially, it is our opinion that the limitations on territory, use of the trade name and sales of competitive products; the requirement with respect to use of Spray-N-Peelā€™s price list; and the requirement of Spray-N-Peelā€™s prior consent to advertising constitutes a marketing plan or system ā€œprescribedā€ in substantial part by Spray-N-Peel.

As regards the requirement of a franchise fee, you have represented that the distributor agrees to pay the sum of $1.00 per month for each and every tank in its inventory. In our opinion, such a payment, referred to in your letter as a royalty, constitutes a ā€œfranchise feeā€ within the definition of Section 31011 (see Dept. of Corps. Rel. No. 3-F, P.8). As to payments for advertising material which distributor may, at his request purchase, the Commissioner has expressed the opinion that payments for such advertising also constitute ā€œfranchise feesā€ (see Policy Letter 38F and Comm. Op. No. 73/17F). Moreover, as stated in Comm, Op. No. 73/7F, while the definition of a franchise feeā€ in Section 31011 contemplates a payment required of the franchisee, and, whereas, an optional payment which a distributor might make for sales aids or literature would not be a ā€œfranchise feeā€; nevertheless, if sales aids are essential to the successful operation of a distributorship or if they are suggested or recommended to distributors, payment therefor, in our opinion, is ā€œrequiredā€ within the meaning of Section 31011 for the right to enter into the business and is a ā€œfranchise feeā€.

In reaching the aforementioned conclusion, please understand that we express no opinion as to whether distributors purchase Spray-N-Peel products at their bona fide wholesale price. The Commissioner will not resolve this question in an interpretive opinion, since such opinions are limited to interpretation of, and the determination of legal questions arising under, the Franchise Investment Law {Dept. of Corps. Rel. No. 2-F). Section 31153 of the Law provides that the burden of proving the availability of an exception or exemption, such as that provided by Section 31011(a) or Rule 011, is upon the person claiming it.

As indicated above, distributors are required to make minimum purchases. In this connection, the Commissioner has stated in Comm. op. No. 73/7F, that to the extent that persons under an agreement are required to purchase specified amounts of products or to purchase specified amounts within a specified period, the exceptional provisions of Section 31011(a) in our opinion is not available, if the amount so required to be purchased exceeds the quantity which a reasonable business man normally would purchase by way of a starting inventory or to maintain a going inventory. Payment for such excessive purchases is made by the franchisee not because he has a present need for or wants to acquire the goods; it is understandable only as intended to secure the right of selling them under the franchise agreement and for that reason it constitutes a ā€œfranchise feeā€.

In conclusion, therefore, it is our opinion that the agreements between Spray-N-Peel and distributor are ā€œfranchisesā€ within the meaning of Section 31005 and subject to the registration requirement of the Franchise Investment Law.

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
July 18, 1973

By order of 
Commissioner of Corporations

By __________________ 
Supervising Corporations Counsel
Office of Policy

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