Business Law

Opinion No. 74 / 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. Marsh V. Racine, President
Dimensional Housing Division
3270 Cherry Avenue
Long Beach, CA 90807

Dear Mr. Racine:

The request for an interpretive opinion, contained in your letter dated September 27, 1973, has been considered by the Commissioner. Your letter raises questions regarding the so-called ā€œAssociate Distributorship Agreementā€ (ā€œagreementā€) between Racine Homes, Inc., a California corporation (ā€œRacineā€), and persons referred to therein , and hereinbelow as ā€œPrimesā€, and persons referred to therein and hereinbelow as ā€œdistributorsā€.

We understand that Racine, a wholly-owned subsidiary of Future Communities, Inc., has developed a concept of building homes and other structures by utilizing wood components into a large number of home styles and other structural configurations. Racine is instituting a ā€œtotal marketing concept to encompass advertising and the establishment of packaging and/or marketing plantsā€, and appoints Primes throughout the United states, who, in turn, establish a network of distributors and dealers. The development of all business forms, product brochures, advertising layout-and copy, sales training methods, research and development on new designs, application of new materials, manufacturing and packaging techniques and material acquisition are the continuing function of Racine on behalf of Prime and their distributors and dealers.

We further understand that Prime is an independent entity granted an exclusive right by Racine to market, package, sell and otherwise distribute Racine homes within one of approximately 50 trading areas in the united States and to appoint and service distributors and their dealers within these areas. Distributors, pursuant to the agreement, are appointed and authorized by Prime and/or Racine to sell Racine homes at retail to customers for delivery anywhere in the world pursuant to the provisions of the agreement; to establish and service dealers within the area covered by the agreement; to purchase products from Prime and/or Racine at 20% from their published American price list; and to utilize the name(s) of the product (Racine Homes) and/or Racine in connection with the sale of products, provided that any such use clearly identifies distributor as a separate entity from Prime or Racine. Prime (upon request) will supply distributor Racine business forms, material display samples, price lists, catalogs, special printed materials photographs, etc. at cost, plus 10%. Distributor is prohibited from distributing, reproducing, or causing to be reproduced any classified data supplied or produced by Racine and supplied by Prime without prior written consent of Racine and Prime.

Dealer is an independent entity appointed and serviced by distributor or by Prime, if no distributor is established in the area. Dealer is a non-exclusive sales agent who processes all orders through his local distributor or Prime and receives a commission ranging from five to ten percent on the then current retail price. He has no geographic area assigned to him, and purchases all literature and business forms and collects his commission directly from distributor. Distributors are required to appoint a specific minimum number of dealers within the first 90 days of the agreement and another minimum number of dealers within the balance of the first two years.

Upon execution of the agreement, distributor agrees to make a 20 percent deposit with Prime on distributorā€™s first order. Said deposit shall apply to orders on a pro-rata basis of $200 per home until the entire deposit has been used. The deposit may not be applied to ā€œplan orders or to the cost of plans.ā€ If distributor does not attain his desired sales goal or otherwise withdraws from the agreement, Prime agrees to apply the remaining balance of the deposit to the purchase price of any standard Racine home at the then current retail price. In addition, distributor agrees to purchase and erect a specified minimum number of homes to be used as display models which shall be opened by a specified day. Distributor will forward to Racine or Prime all but 20% of the funds received with an order and all funds received thereafter. If distributor discounts a sale to his customer, said discount will be deducted from the funds which distributor normally retains. A minimum of 20% of the retail price is required to begin processing an order, and the entire balance (less distributorā€™s discount) must be paid to Prime or Racine prior to manufacturing or delivery. The agreement also sets forth a payment schedule if only plans are required; contains provisions with regard to advertising, quantity sales and non-competition by distributor; and is renewable, if the distributor attains sales quotas set forth therein.

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 agreements between Racine, Prime and distributors contain all of the essential elements of a ā€œfranchiseā€ within the definition of Section 31005. Especially, the provisions in the agreement regarding the institution and responsibility by Racine of a total marketing concept to encompass advertising and the establishment of packaging and/or marketing plants; the network of Primes, distributors and dealers; and the ā€œpublished American price listā€ tends toward the conclusion that Racine is prescribing a marketing plan in substantial part (Dept. of Corps. Release No. 3-F, pp. 3-5).

In connection with the requirement of a franchise fee, we understand that Prime will supply distributor, upon request, various printed forms and advertising materials at cost, plus 10%. Any charges for such material constitutes a ā€œfranchise feeā€ within the meaning of section 31011 (see Comm. Op. No. 73/22F). It is also our opinion that the 20% deposit which distributors are required to make with Prime constitutes a ā€œfranchise feeā€. As stated in Policy Letter 16F, the determination of whether a ā€œfranchise feeā€ is being paid must be made at the time of the initial payment. While denominated a ā€œdepositā€ on the purchase price of merchandise, this payment in reality may represent a charge to distributors for the right to enter into the business of marketing Racine Homes, which, although it may be applied to the subsequent purchases of Racine Homes at $200 per home until the entire deposit has been used, at best deprives distributors of the use of the funds for an indefinite period (see Policy Letter 16F and Comm. Ops. Nos. 72/3F and 73/15F). Moreover, if distributor does not purchase sufficient homes, the balance of the deposit will be appl
ied to the purchase of a home at the then current retail price.

In addition, to the extent that distributors under their agreement Mr. Marsh v. with Racine and Prime are required to purchase minimum amounts of Racine Homes in order to renew their agreements, 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 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 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).

As indicated above, Prime is a party to the agreement between Racine and distributors, and dealers are sales agents who process orders through distributors or Racine. In this connection, we do not have sufficient information to express an opinion as to whether the arrangement with Prime and/or distributors are ā€œarea franchisesā€ , defined in Section 31008 of the Law to mean any contract or agreement between a franchisor or 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 ā€œsubfranchisorā€ is defined in Section 31009 of the Law as a person to whom an area franchise is granted. Further we express no opinion as to whether the agreement with dealers constitute a ā€œfranchiseā€.

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 25, 1974

By order of 
Commissioner of Corporations

By __________________ 
Supervising Corporations Counsel
Office of Policy

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