Business Law

Opinion No. 73 / 34F

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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. Robert A. Gaston
Attorney at Law
Dunne and Gaston
100 Wilshire Boulevard
Santa Monica, CA 90401

Dear Mr. Gaston:

The request for an interpretive opinion, contained in your letter dated May 24, 1973, as supplemented by your letter dated August 9, 1973, has been considered by the Commissioner. Your letters raise the question whether the distributorships proposed to be entered into between Jet-Products Co., Inc., a Washington corporation (“Jet”), and persons referred to by you and hereinbelow as “hosts” and “hostesses” are franchises within the definition of section 31005 so as to be subject to the provisions of the Franchise Investment Law. This question is answered in the affirmative. The questions also raised in your letters whether the distributorships, as well as the travel points and memberships, offered by Jet Trim and Travel Club (“Club”) are securities within the meaning of Section 25019 of the Corporation Securities Law of 1968, and subject to the qualification requirements of that Law is answered in a separate opinion issued under that Law contemporaneously herewith.

You have represented that Jet is engaged in the business of manufacturing dietary foods, including “Jet Shakes” and “Jet Letts”, which are distributed through various Clubs operated by authorized hosts and hostesses in protected territories. The material submitted with your letter, dated May 24, 1973, states that “although the Club Plan approach of sale is by far the most successful because of its captive audience feature, sales of products cannot be limited to this one method, but may be sold to anyone who hears of it through members or through the hosts or hostesses.” In this connection we understand that the hosts and hostesses receive specified training to become familiar with Jet products and Clubs; “new member” booklets; information on organizing Clubs, recruiting new members and collecting payments; recommendations on limiting the size of each Club; and detailed-instructions on how to conduct Club meetings, including procedures for weighing in members, reviewing progress, giving information, answering questions about the “Jet Diet Plan” and the Club, and suggestions for programs and social hours.

The aforementioned material also states that Club members receive travel points in the form of cheques for attending meetings, purchasing and using Jet products, sponsoring new members and encouraging sponsored members to attend subsequent meetings. Hosts and hostesses also earn travel points; however, a host or hostess may receive cash in lieu of forty travel points for sponsoring a new member. Travel points may be redeemed for travel tickets only through Jet. Members wishing to take trips costing more than the total worth of their points may purchase additional points at a cost of $.07 per point. Travel points may be transferred to recognized nonprofit organizations which may redeem them for cash at $.05 per point.

Jet sells only on a “cash-with-order basis”, namely, all payments must be made by cash, cashiers’ checks or money orders. Initially, we understand that Jet requires hosts and hostesses to purchase from it Jet products for resale, brochures and sales aids, a sample blender, calorie counter, weight and measurement charts, various types of cards and books, trophies and plaques. Hosts and hostesses are also required to remit to Jet $3.50 of the $6.00 member’s initiation fee and $1.50 of the $2.50 weekly dues which they collect from members.

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 basis, does not exceed $100.

In our opinion, the distributorship contain all of the essential elements of a “franchise” within the definition of Section 31005 of the Franchise Investment Law. Especially, it is our opinion that the provisions for training and detailed instructions as to how hosts and hostesses may distribute Jet products through Clubs, referred to in the aforementioned material as “The Jet Products Marketing Plan”, leads to the conclusion that Jet is prescribing a marketing plan in substantial part.

As indicated above, the hosts and hostesses are not required to use Clubs as their only means of distributing Jet products. In this connection, the Commissioner has stated that a marketing plan or system may be “prescribed” within the meaning of Section 31005, although there is no obligation on the part of the franchisee to observe it, where a specified sales program is outlined, suggested, recommended or otherwise initiated by the franchisor. Thus, a sales program may be “prescribed” by the franchisor where he supplies the franchisee with sales aids or props, such as demonstration kits or detailed instructions for personal information or presentation of the product, possibly including edited text of sales pitch, especially where such program is supported by elaborate training material, courses, or seminars (Dept. of Corps. Rel. No. 3-F, p. 3).

As to the requirement of a “franchise fee”, the Commissioner has stated that a “franchise fee” may be payable in a lump sum or in installments. The amount of installment payments may be made to depend on gross receipts in the form of a royalty or it may be charged on units of merchandise ordered or sold by the franchisee (Dept. of Corps. Rel. No. 3-F, p. 8). It is our opinion that the aforementioned amounts of the membership fees and weekly dues collected by hosts and hostesses and remitted by them to Jet constitute a “franchise fee”.

In addition, Section 31153 of the Franchise Investment Law provides that the burden of proving an exception or an exception from a definition is upon the person claiming 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 letters and the material submitted therewith, which state jet hosts and hostesses earn 20 percent to 45 percent profit on Jet product sales and $.01 for each travel point sold, we are unable to conclude that the payments made by hosts and hostesses for products 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 sales aids and other items which hosts and hostesses are required to purchase are “goods” within
the meaning of Section 31011 (a) , in which case payments therefor would constitute payments for the right to engage in the franchised business and thus a “franchise fee” (Dept. of Corps. Rel. No. 3-F, p. 9 and Comm. Op. No. 73/32F).

As indicated above, hosts and hostesses are required to make initial purchases of Jet products. 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 starting 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 constitutes a “franchise fee” (see Comm. Ops. Nos. 73/7F and 73/32F).

In conclusion, therefore, it is our opinion that the distributorships are “franchises” within the meaning of Section 31011 and subject to the provisions of the Franchise Investment Law.

Your letters do not request our opinion, nor do they and the material submitted therewith contain sufficient information for us to express the opinion, as to whether the travel points are “trading stamps” within the meaning of Section 17750, Bus. & Prof. Code.

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
September 19, 1973

By order of 
Commissioner of Corporations

By __________________ 
Supervising Corporations Counsel
Office of Policy

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