Business Law

Opinion No. 74 / 2F

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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. Joseph L. Strabala
Attorney at Law
Fryer, Tjensvold, Phillips &
250 Sansome Street
Suite 1310
San Francisco, CA 94111

Dear Mr. Strabala:

The request for an interpretive opinion, contained in your letter dated October 9, 1973, as supplemented by the material received in this office on December 20, 1973, has been considered by the Commissioner. Your letter raises the question whether the distributorship agreement (“agreement” ) between Supercharger Oil Corporation (“Supercharger”) and persons referred to therein and hereinbelow as “distributors” are franchises and/or area franchises within the definitions of Section 31005 and 31008, respectively, and subject to the provisions of the Franchise Investment Law.

We understand that supercharger is engaged in the business of manufacturing and developing a product line consisting of various fuel and engine conditioners and other chemical products. Pursuant to the agreement, supercharger grants to distributor a primary and non-transferable distributorship to market at wholesale and promote the sales of its products throughout a specified territory.

The manual submitted with your letter, dated October 9, 1973, specifies that “experience indicates one highly successful plan is to split the territory by population or number of service stations into ten roughly equal areas” , known as “Wagon Master areas”. A section entitled “Marketing Plan” states “that each distributor should hire 10 men who in turn service and sell Supercharger products to service stations, parts houses, new and used car dealers and bulk products to industrial accounts.” A “Wagon Master’s Agreement”, for use by the distributor in hiring the 10 men, is attached to the agreement. The “Marketing Plan” section further states that to the back of each can of Supercharger sold in service stations is attached a small gummed label called a “Spiff” which, we understand, is a premium or coupon entitling the service station attendant who sells the can to an amount ranging from $.10 to $.50 per can. Supercharger will have an “all out campaign directed toward” the various purchasers of its products emphasizing the “Spiffs”. The manual also contains suggested sales programs, including a section entitled “Wagon Master Training” which sets forth a sample introduction between a Wagon Master wearing a “Supercharger Racing Team jacket” and a service station owner.

Upon execution of the agreement, distributor purchases as initial inventory a minimum dollar amount of products pursuant to the price schedule set forth in the “Manufacturer’s Pricing Schedule”. According to the manual the initial purchase is $15,000 which represents over $41,000 of product when sold at Supercharger’s suggested retail price. During each six-month period, distributor agrees to purchase a dollar amount of Supercharger products equal to 1% of the population of his territory. Supercharger will forward to the distributor a monthly price schedule of the minimum costs and suggested retail prices. From time to time, Supercharger will furnish distributor a reasonable amount of advertising material designed for display or mailing for which the distributor will be charged only a shipping cost. In addition, training material designed to promote the sale of Supercharger products will be made available to distributor at his option.

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.

We have noted various provisions in the “distributorship agreement” and the “Wagon Master Agreement” that no franchise is being created and that Wagon Master is an independent contractor and not an employee or agent of Supercharger or distributor. In this connection, the Commissioner has stated that provisions in the agreement to the effect that the franchisee is to be considered an independent contractor, in and of itself is inconclusive, because though an independent contractor, if he is required by the agreement to observe the marketing plan or system prescribed in substantial part, the agreement, if other requirements of the definition are satisfied, is a franchise. (Dept. of Corps. Release No. 3-F, p. 4).

In our opinion, the above referred to the provisions regarding exclusive territory, the use of Wagon Master’s suggested retail prices, training and advertising tend toward the conclusion that Supercharger is “prescribing” a marketing plan in substantial part (Dept. of Corps. Release No. 3-F, pp. 3-5).

In connection with the requirements of a franchise fee, you have represented that distributors, in addition to a possible charge for training and the cost of shipping advertising material, purchase products pursuant to the price schedule set forth in Manufacturing Pricing Schedule. Whether the prices which distributors under the agreement are required to pay for Supercharger products exceed a bona fide wholesale price (or exceeds it by an amount in excess of the allowance tolerated by Rule 011) is a question of fact which we will not resolve in an interpretive opinion, since such opinions are limited to interpretations of, and the determination of legal questions arising under, the Law (Dept. of Corps. Release No. 2-F).

Section 31153 imposes the burden of proving an exemption or an exception from a definition upon the person claiming such exemption or exception. Accordingly, the burden of establishing that Supercharger is selling its products at their bona fide wholesale price is upon Supercharger and, in our opinion, your letter and the manual furnished does not enable us to conclude whether the burden of proof has or has not been met. Moreover, as the Commissioner stated in Comm. Op. No. 73/7F, the exception in Section 31011(a) is based on the rationale that no substantial prejudice will come to a person buying a business and paying only the bona fide wholesale price for merchandise which he proposes to sell in that business, since he can readily turn goods of established value into cash, should the franchisor fail, in any way, to provide the promised support. Well-known trademarked goods, of course, can be liquidated much easier than little-known products manufactured by a new franchisor not having a substantial market identity.

Therefore, in considering the availability of the exception and in comparing what Supercharger may assert to be the bona fide wholesale price of its products to other item in the field, the relative value of the respective trademarks, trade names, and market identification must be considered. It is reasonable to assume that Supercharger products wit
h little or no market identification, have a lower bona fide wholesale price than items, though of comparable quality, which have a marketing history and a ready identity in the market. In this connection, sales to distributors who are all within the common enterprise or marketing system, do not suffice to substantiate the ultimate marketability and market identification of the products being sold.

In addition, to the extent that distributors under their agreement with Supercharger are required to purchase specified amounts of products or to purchase such specified amounts within a specified period, the exceptional provision of Section 31011 (a) in our opinion is not available, if the amount so required to be purchased, exceeds the quantity which a reasonable businessman normally would purchase by way of a starting inventory or to maintain a going inventory. Payment for such excessive purchases is made by the franchisee not because he has a present need for 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 it constitutes a franchise fee (Comm. Ops. Nos. 73/7F and 73/20F).

The Commissioner has also expressed the opinion that payments for advertising and training are “franchise fees” within the meaning of Section 31011 and are not subject to the exemption of Section 31011 (a) (see Comm. Ops. Nos. 73/7F and 73/22F)

Accordingly, it is our opinion that the agreement between Supercharger and distributor, under the circumstances described by you as outlined above, are “franchises” within the definition of Section 31005, and subject to the provisions of the Franchise Investment Law.

As indicated above, distributors are urged to enter into “Wagon Master Agreements” pursuant to which Wagon Masters agree to buy from distributors Supercharger products at a “mutually agreeable discount from the Manufacturer’s suggested retail price”. In our opinion, since the price paid by Wagon Master is a “mutually agreeable discount price”, it is probable that various Wagon Masters will pay varying “mutually agreeable discount prices.” Therefore, it cannot be established that Wagon Masters will purchase goods from distributors at their bona fide wholesale price.

Accordingly, it is our opinion that, since Wagon Masters are exposed to the aforementioned factors tending to the conclusion that Supercharger is “prescribing” a marketing plan in substantial part, the “Wagon Master Agreements” are also “franchises” within the meaning of Section 31005, and subject to the provisions of the Franchise Investment Law.

Moreover, since distributors are granted the right to enter into the “Wagon Master Agreement”, it is our opinion that the “distributorship agreements” are also “area franchises”, defined in Section 31008 of the Law to mean any contract or agreement between a franchisor or a subfranchisor whereby the subfranchisor is granted the right for consideration given in whole or in part for such right to sell or negotiate the sale of a franchise in the name or on behalf of the franchisor. A “Subfranchisor” is defined in Section 31009 of the Law as a person to whom an area franchise is granted.

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
January 24, 1974

By order of 
Commissioner of Corporations

By __________________ 
Supervising Corporations Counsel
Office of Policy

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