Business Law

Opinion No. 74 / 10F

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State of California Department of Corporations

Robert L. Toms, Commissioner 
In reply refer to: File No. _____

This letter is not an Interpretive Opinion for the reasons stated below.

Mr. Phillip A. Putnam
Attorney at Law
Andress, Block, Putnam
& Ronayne 
8409 Westminister Avenue
Westminister, CA 92683

Dear Mr. Putnam:

The request for an interpretive Opinion, contained in your letter dated June 27, 1974, has been considered by the Commissioner. Your letter raises the question whether the ā€œSupplier Agreementsā€(ā€œAgreementsā€). between Maxi Lift International, Inc., a Nevada corporation (ā€œMLIā€), and persons referred to therein and hereinbelow as ā€œoperatorsā€, are ā€œfranchisesā€ within the meaning of Section 31005, and subject to the provisions of the Franchise Investment Law. The question also raised in your letter whether the agreements are ā€œsecuritiesā€ within the meaning of Section 25019, and subject to the qualification requirements of the Corporate Securities Law of 1963, is answered in a separate opinion under that Law issued contemporaneously herewith.

You have represented that MLI manufactures and sells cosmetic products on a unit basis. Pursuant to the agreements, an operator, who either presently operates a salon, or intends opening and operating a salon, is entitled to various services as requested by operators from MLI, including training sessions in the use and application of its product for the operator and employees for a period of up to 30 days at no cost to operator. Operator is also entitled to the nonexclusive use of the name ā€œMaxi Life International, Inc.ā€ or the words ā€œSpecializing in MAXI LIFT PRODUCTSā€ in conjunction with some other name during the term of the agreement or until notified in writing by MLI. In addition, operator may participate in regional advertising programs on a pro rata share basis provided only that operator shall spend on its own behalf a specified minimum amount per month on the average in some advertising media. MLI will provide operator, at no cost, from time to time, advertising materials, sales scripts, management information and other such materials as used in other market areas and will use its best efforts to assist operator in building and conducting a successful and profitable salon by rendering advice, expertise, suggestions and literature at no cost to operator. Operator is required to maintain a policy of malpractice and liability insurance which will name MLI as insured; provide all facilities, equipment, employees, furniture, fixtures and any and all supplies of whatever nature at its own expense; and comply with all local state and federal laws applicable to the operation of such salon. The agreement pertains to only one salon location and, if the operator desires additional locations, a separate agreement must be negotiated for each location.

The agreement further requires operator to place an initial order for a specified amount at $50 per unit and buy additional units as set forth therein. However, you have advised us that, although the initial price is basically $50 per unit, MLI sets its prices with operator on a negotiated basis. Moreover, since there is a high markup in the product, some of the initial orders are taken at prices less than $50. ā€œEssentially, the agreements are on a basis of what the market will bear.ā€ Subsequent sales prices per unit are the same for all operators.

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). 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.

Further, Rule 011.1 of the Commissioner exempts from such registration requirement any offer. or sale of a franchise which would be subject to registration solely because the franchisee is obligated to pay, in addition to the payment under Rule 011, a sum not exceeding $1,000 annually on account of the purchase price or rental of fixtures, equipment or other tangible property to be utilized in, and necessary for, the operation of the franchised business, if the price or rental so charged does not exceed the cost which would be incurred by the franchisee acquiring the item or items from other person or in the open market.

In our opinion, the agreements between MLI and operators contain all of the essential elements of a ā€œfranchiseā€. The provisions regarding training, especially for operators who intend to open and operate a salon, sales aids and scripts, advertising material, insurance, advertising and single location tend toward the conclusion that MLI is prescribing a marketing plan or system in substantial part (Dept. of Corps. Release No. 3-F (Revised), pp. 2-6).

We have noted the comment in your letter that title use of the MLI trademark is permissive only and subject to being withdrawn at any time by MLI. In this connection, the Commissioner has stated that if the franchisee is granted the right to use the commercial symbol, the franchise concept is satisfied, even if he is not obligated to display the symbol (Ibid, 7).

We do not concur in your opinion that there is no ā€œfranchise feeā€ required directly or indirectly. You have represented there is no requirement for the purchase of any amount of the product irrespective of the fact that the agreement does provide the mechanics for placing an initial order of the product. As indicated above, the agreement also contains the mechanics for placing subsequent orders. Whether the prices which operators entering the agreement are required to pay for, MLI products exceed a bona fide wholesale price (or exceed it by amounts in excess of the allowances tolerated by Rules 011 or 011.1) is a question of fact which we will not resolve in an interpretive opinion, since such opinions are limited to interpretation of, and the determination of, legal questions arising under the Law. (Dept. of Corps. Release No. 2-F)

Section 31115 places the burden of proving an exemption or an exception from a definition upon the person claiming such exemption or exception. In our opinion, when the sales price is negotiable, as in the instant case, the sellers are unable to contend that sales are being made at the bona fide wholesale price, since sales prices will vary according to the ability of the purchaser to negotiate. In addition, to the extent that operators under the agreement which MLI are required to purchase specified amounts of goods or to purchase such amounts within a specified period, the bona fide wholesale price exemption is not available if the amount so required to be purchased exceeds the quantity which a reasonable business man normally would purchase by way of starting inventory or supply or to maintain a going inventory or supply. Since payment for such excessive purchases is made by the franchisee not because he has a need for 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 (Ibid, p. 10).

Accordingly it is our opinion that the payments required by operators are not within the exceptional provision of section 31011(a) of the Law or Rule 011. Moreover, since the payments are not for fixtures, equipment or other tangible property to be utilized in, or necessary for, the operation of the franchised business, the payments are not within the exemption provided by Rule 011.

In conclusion, therefore, it is our opinion that the agreements between MLI and operators constitute ā€œfranchisesā€ within thee 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
July 19, 1974

By order of 
Commissioner of Corporations

By __________________ 
Supervising Corporations Counsel
Office of Policy

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