Business Law

Opinion No. 73 / 46F

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. Peter J. Palms IV
Computerized Real Indoor Golf
200 Huntington Ave., Suite 1607
Alexandria, VA 22303

Dear Mr. Palms:

The request for an interpretive opinion, contained in your letter dated July 30, 1973, as supplemented by your letter dated August 22, 1973, requesting reconsideration of the views expressed in Commissionerā€™s Opinion No. 73/29F, has been considered by the Commissioner. Your letter raises the question whether the Distributorā€™s Purchase Agreement (ā€œAgreementā€) between .Computerized Real Indoor Golf Corporation, a Virginia Corporation (ā€œCRIGā€), and persons referred to therein and hereinbelow as ā€œdistributorsā€, as submitted with your letter dated August 22, 1973, constitutes a ā€œfranchiseā€ within the definition of Section 31005, and subject to the provisions of The Franchise Investment Law. This question is answered in the affirmative.

The agreement, submitted with your letter dated August 22, 1973, requires the distributor to purchase a minimum initial quantity of electronic devices at the cost set forth in the device price schedule, together with an advance payment against additional devices to be purchased by the distributor. If the distributor fails to purchase additional devices within a period of 12 months, CRIG at its sole option has the right to refuse to sell additional devices to the distributor. The distributor may use CRIG promotional literature, brochures, and direct mail materials and is obligated to sell and distribute devices purchased under the trademark and trade name ā€œGOLF-INā€. Collateral use of the trade name requires the approval of CRIG and the trade name may not be used on any product or service not directly associated with the devices described and provided by CRIG. At the request of the distributor, CRIG will provide, at no charge, up to two consecutive working days of initial training, to not more than two individuals designated by the distributor. Such training includes instruction in device maintenance and repair and in proper handling, installing of the device and use of additional items, if any.

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 submitted with your letter dated August 22, 1973 contains all the essential elements of a ā€œfranchiseā€ within the definition of Section 31005. As stated in Commissionerā€™s Opinions No. 73/17F and No. 73/29F, the arrangements set forth in the agreement constitute a ā€œmarketing planā€. Even though the agreement states that ā€œthe distributor may use promotional literature, brochures and direct mail materialsā€, we are of the conclusion that such materials are essential to the operation of the franchisee, a determination we made in a prior opinion issued to you. Further, the collateral use of the trade name requires the approval of CRIG and the CRIG trade name cannot be used on items other than those purchased through CRIG. In addition, there is an optional training feature which, for the proper operation of the franchiseeā€™s business, would appear to be essential to determine the method of installation and repair of the devices.

With respect to the question of the franchise fee, it has previously been noted in opinions issued to you that the advance payment of funds against additional devices is construed as a ā€œfranchise feeā€. Further, the purchase of the first unit involves the payment for the complete installation and erection, maintenance and repair facilities which services cannot be construed to come within the exclusion of Section 31011(a) since such exclusion is limited to the purchase of goods and does not include services for installation and maintenance. Since this payment for services and installation is in excess of the $100 minimal amount set forth in Rule 011, a franchise fee is established. In addition, no determination has been made as to whether the purchase price of the devices could be considered to be a purchase at ā€œbona fide wholesale priceā€. Section 31153 imposes the burden of proof for an exemption or exception upon the person claiming it.

Accordingly, it is our opinion that, as determined in our prior Commissionerā€™s Opinions No. 73/17F and No. 73/129F, the agreements between CRIG and distributors are ā€œfranchisesā€ within the meaning of Section 31005, and subject to the provisions of the Franchise Investment Law.

Inasmuch as interpretive opinions are issued for the 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
November 12, 1973

By order of 
Commissioner of Corporations

By __________________ 
Supervising Corporations Counsel
Office of Policy

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