Business Law

Opinion No. 73 / 32F

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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. John P. Dahl
Attorney at Law
Newlander, Wright, Dorsa & Dahl
1825 De La Cruz Blvd., Suite 8 & 9
Santa Clara, CA 95050

Dear Mr. Dahl:

The request for an interpretive opinion, continued in your letter dated June 1, 1973 has been considered by the Commissioner. Your letter raises the question whether the agreements between GoodLife Industries, Inc. (“Good-Life”), and persons referred to therein and hereinbelow as “dealers” and “distributors” are franchises within the definition of Section 31005, and/or area franchises within the definition of Section 31008, and subject to the registration requirement of the Franchise Investment Law.

You have represented that Good-Life will market certain home products such as vitamins, facial cream arid soap using the name “Good-Life”. These products will be sold in units by a distributor to dealers, and by dealers to retail customers. Each dealer is under the direction and guidance of a distributor.

Pursuant to the agreement, dealer receives the right to purchase Good-Life products at the current listed wholesale price and to sell such products anywhere in the United states. In addition, he receives the right to sponsor other dealers and to earn overrides on their Dealer Purchase Volume (“DPV”) in accordance with the Good-Life sales plan, which is subject to modification from time to time. In addition, dealer receives the right to purchase literature and sales aids at the current listed prices and to attend distributor-sponsored sales and success meetings.

The agreement furthermore provides that each dealer-applicant must purchase from his “direct sponsor” a specified amount of Good-Life products at retail value before submitting the application. In addition, at the time of signing the application, dealer agrees to make an initial wholesale product purchase of a specified amount of DPV and thereafter to maintain a constant monthly minimum of DPV purchases. All the aforementioned purchases of Good-Life products, literature and sales aids must be made from the distributor specified in the application.

Dealer and distributor mutually agree to use only such literature and sales aids as are made available by Good-Life; to comply with all government rules, regulations and laws; to be honest and factual in all representations of Good-Life products; and to conduct their business in a fair and ethical manner.

In your letter, you state “that each complete program will extend through six generations and cease”. We understand this to mean that in addition to the “direct sponsor”, five “sponsors” will earn monthly refund bonuses on sales made by a dealer.

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 is required to pay, directly or indirectly, a franchise fee which, on an annual basin, does not exceed $100.

In our opinion, the agreements between Good-Life and dealers and distributors contain all of the elements of a “franchise” within the aforementioned definition. Especially it is our opinion that the requirement that dealers purchase literature and sales aids from a distributor, the limitations on the use of the literature and sales aids, the provision for attending distributor sponsored sales and success meetings, the use of the trade name and logo “Good-Life” together with the overall character of the sales program referred to in the material submitted with your letter as “Good-Life Marketing Plan” and the “Good-Life Sales Plan” tend toward the conclusion that Good-Life is prescribing a marketing plan or system in substantial part (see Dept. of Corps. Rel. No. 3-F, pp. 3-5).

As regards the requirement of a “franchise fee”, Section 31153 of the Franchise Investment Law provides that the burden of proving an exemption or an exception from a definition is upon the person proving it. Whether the price which the franchisee under an agreement is required to pay for goods, exceeds their bona fide wholesale price (or exceeds it by an amount in excess of the tolerance allowed by Rule 011) is a question of fact which the Commissioner will not resolve in an interpretive opinion since such opinions are limited to interpreting legal questions arising under the Law (Dept. of Corps. Rel. No. 2-F). From your letter and the material submitted therewith, we are unable to conclude that the payments made by dealers and distributors for goods and products, including the initial products purchased by a dealer-applicant at retail value, do not constitute a “franchise fee” within the meaning of section 31011 or are within the amount tolerated by Rule 011. Moreover, we are not in a position to conclude that the literature and sales aids are “goods” within the meaning of Section 31011(a) in which case payments for the literature and sales aids would constitute payments for the right to engage in the franchised business and thus a “franchise fee” (see Dept. of Corps. Rel. No. 3-F, p. 9).

As indicated above, dealers are required to purchase a specified amount of products at the time they sign their application and dealers and distributors are required to continue to purchase specified amounts of products each month. In our opinion, the exceptional provision of Section 31011(a) is not available if the amount so required to be purchased, exceeds the quantity which a reasonable business man would purchase by way of a starting inventory or to maintain a growing inventory. Payment for such excessive purchases is made by the franchisor not because he has a present need 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 “franchise fee” (see Comm. Op. No. 7 3/7F).

We have noted your representations that there is a fifteen-day period during which the dealer can return the product for a 100% refund. In our opinion this provision in the agreement does not enable us to conclude that dealers and distributors are not required to pay a “franchise fee”.

Accordingly, it is our opinion that, under the circumstances described by you as outlined above, the agreements between GoodLife and dealers and distributors are “franchises” within the meaning of Section 31005, and subject to the registration requirements of the Franchise Investment Law.

As indicated above, dealers and distributors may sponsor other dealers. Section 31008 defines ”area franchise” as an agreement between a franchisor and 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 a franchisor. According to Sectio
n 31009, a “subfranchisor” is a person to whom an area franchise is granted. Since pursuant to Section 31010, the word “franchise” in Section 31110 includes “area franchise”, area franchises granted by Good-Life are also subject to the registration requirement. Since Good-Lifers agreements with dealers and distributors constitute franchises, its agreements with dealers and distributors whereby dealers may be sponsored, constitute “area franchises” within the definition of Section 31008 of the Franchise Investment Law.

In your letter you have requested our opinion “on the possibility of criminal liability under section 327 of the Penal Code.” The authority of the Commissioner of Corporations to issue opinions under Section 31510, Corp. Code, is limited to the interpretation of the Franchise Investment Law, and does not extend to the rendering of opinions with respect to questions governed by other provisions of the Corporations Code or by other state or federal laws. For that reason, the Commissioner does not express an opinion concerning the question raised by you. However, we would suggest that you communicate in this regard with the Office of the Attorney General.

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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