Business Law

Opinion No. 73 / 3F

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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 L. Runft
Attorney at Law
Eberle, Berlin, Xading,
Turnbow & Gillespie, Chartered 
711-1/2 Bannock Street
Post Office Box 1368
Boise, ID 83701

Dear Mr. Runft:

The request for an interpretive opinion contained in your letter dated October 6, 1972, as supplemented by your letter dated October 17, 1972, has been considered by the Commissioner. Your letters raise the question whether the agreement between Zimmerman Enterprises, an Idaho corporation (“Zimmerman”), and the person referred to in the agreement and hereinbelow as “dealer”, is a “franchise” within the definition of Section 31005 and subject to the. provisions of the Franchise Investment Law.

Inasmuch as we understand that the agreement has already been executed, and that Zimmerman does not propose to enter into other agreements with dealers in California, issuance of an interpretive opinion as requested by you would not be appropriate. Such opinions under section 31510 of the Franchise Investment Law 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, of course, there can be no such reliance where the transaction in question has already taken place. (See Dept. of Corps. Release No. 2-F.) Although, under the circumstances, we cannot issue an interpretive opinion, we will herein express our views concerning the agreement in question with the understanding that this letter is not an interpretive opinion and, therefore, does not have the legally binding effect of such an opinion.

We understand that Zimmerman is engaged in the business of selling Zimmerman Enterprises Sound systems (“Systems”) to the dealers. The Systems are new electronic form of sound equipment slightly altering and thereby synchronizing quality equipment of different lines so as to provide conglomerate sound systems featuring the best elements of different systems.

Pursuant to the agreement, a dealer located in Sacramento, California, has been granted an exclusive territory for the sale of “Zimmerman Sound Systems”. He has agreed to pay Zimmerman $15,000, $7,500 of which was payable at the time of the execution of the agreement and the balance on delivery of the initial inventory. Of the $15,000, $8,040 was a “start-up fee” and $6,960 the cost of an initial inventory of 15 systems. Future purchase prices per system vary according to the number of systems ordered.

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 011of 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 understand you to represent that Zimmerman provides the dealer with a “proven method of selling this type of equipment”. This method is also referred to by you as a “standard presentation” or “outline describing the interrelation of the various systems and parts”. It provides dealer with a basis upon which he may present Systems through his own sales methods. Dealer may select such business location, mode of advertising, uniforms, hours of operation, and housekeeping, as he chooses. To insure his status as an independent contractor, he may not use the name “Zimmerman Enterprises”.

Zimmerman will supply dealer or his personnel training in the sales program for a 12 day period, and furnish him with 5 demonstration carrying cases complete with typewritten sales presentation and product presentation book, 1,000 printed customer contact letters, and 120 sound system delivery receipts. Dealer is not required to use these sales aids.

A marketing plan or system be “prescribed” 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. Thus a sales program may be “prescribed” by the franchisor where he supplies kits or instructions for presentation of the product, especially where such action on his part is supported by training material, courses, or seminars. By these or similar means, a non-mandatory program may attain the force of a “prescribed” one (Dept. of Corps., Release No. 3-F).

Despite the representations made by you concerning the relationship between Zimmerman and the Sacramento dealer we are not able to conclude that the outline, training, sales aid, and other assistance provided by Zimmerman, do not constitute a plan or system in effect prescribed by Zimmerman for the marketing of the systems. If this is a marketing plan or system prescribed by Zimmerman, then the agreement between Zimmerman and the Sacramento dealer, in our opinion, would amount to a “franchise”, since it contains all of the other essential elements of a franchise as defined in Section 31005. Especially assuming that the Systems are marketed under the trademark “Zimmerman’s Sound Systems”, the dealer’s business is substantially associated with Zimmerman’s commercial symbol , and of course the $8,040 “start-up-fee” is a “franchise fee” within the definition of Section 31011 of the Law.

Dated: San Francisco, California
January 24, 1973

By order of 
Commissioner of Corporations

By __________________ 
Assistant Commissioner 
Office of Policy

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