Business Law

Opinion No. 73 / 33F

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. Paul Conforti
Attorney at Law
Law Offices of Donald C. Kemby
115 East Foothill Boulevard
Glendora, CA 91740

Dear Mr. Conforti:

The request for an interpretive opinion, contained in your letter dated June 1, 1973, has been considered by the Commissioner. Your letter raises the question whether the “Exclusive Management Agreements” (“Agreements”) between M&M Trailer Sales Inc., a California corporation (“M&M”), and persons referred to therein and hereinbelow as “branch managers”, are franchises within the definition of Section 31005, and subject to the provisions of the Franchise Investment Law. This question is answered in the affirmative.

It appears that M&M has the exclusive right to use the name “M&M Trailer Sales, Inc. ” , and related trademarks and logos. It proposes to enter into the Agreements with two or three branch managers to open up so-called “branch offices” for the sale of mobile homes. Pursuant to Article 2 of the Agreement, entitled “Management system”, M&M grants to the branch manager an exclusive nontransferable right and license to establish and operate a sales agency on land owned or leased by it within a specified territory under the name “M&M Mobile Home Branch of _____” and using the M&M plan, methods, systems and sales tools.

M&M will provide the branch manager with intensive training in the operation and conduct of his business, including a complete course with additional specified services and material. The branch manager is prohibited from using any advertising or promotional material, signs, forms, or other documents M&M furnished by M&M for any purpose other than to promote the sale of M&M products, and he may not copy them without M&M’s permission. He may not without such permission purchase supplies necessary to list or sell mobile homes, from sources other than M&M. All purchase agreements must be made on M&M stationary. All deposits must be turned over to the home office. The facilities and equipment of the branch office must meet certain requirements; and especially a sign at least 20″ X 36″, professionally constructed, must be purchased and approved by M&M. Except for a specified period after operation begins, the branch manager is required to maintain a minimum of 15 listings on used coaches and sell a minimum of two units per month.

The Agreement further provides that the branch manager shall pay M&M. for the rights and privileges granted, materials furnished, and undertakings extended, 20% of all listing profits on used mobile homes, a processing fee of $25 per contract, and the full sales price of new mobile homes sold, subject to retention by the branch manager of not less than half the profit net of certain expenses. M&M may require the branch manager annually to expend a specified percentage of gross sales for advertising supplied or approved by M&M.

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 franchisee 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 basis, does not exceed $100.

In our opinion, the Agreements contain all the essential elements of a “franchise” within the definition of section 31005. Especially, the provisions and limitations described above with regard to the use of M&M’s plan, system, methods, sales tools, training, use of materials, purchase of supplies, advertising and signs, tend toward the conclusion that M&M is prescribing a marketing plan or system in substantial part for the guidance and direction of branch managers (see Dept. of Corps. Rel. No. 3-F, pp. 3-5). Moreover, in our opinion, the payments required of branch managers, as outlined above, including the expenditures required of them for advertising, constitute “franchise fees” within the meaning of Section 31101 of the Law. (Ibid. pp. 7-11.)

Accordingly, it is our opinion that, under the circumstances described by you, as outlined above, the Agreements between M&M and branch managers are “franchises” within the definition of Section 31005, and are subject to the provisions 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
August 15, 1973

By order of 
Commissioner of Corporations

By __________________ 
Assistant Commissioner 
Office of Policy

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