Business Law

Opinion No. 74 / 5F

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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. Donald M. Levitz
Vice President, Northern
California Region
4155 E. Jewell Avenue, Suite 616
Denver, CO 80222

Dear Mr. Levitz:

The request for an interpretive opinion, contained in your letter dated November 29, 1973, as supplemented by your letter dated March 1, 1974, has been considered by the Commissioner. Your letters raise the question whether the so-called ā€œSales Associate Agreementsā€ (ā€œAgreementsā€) between Re/Max Inc., a Colorado corporation (ā€œRe/Maxā€) and persons referred to therein and hereinbelow as ā€œAssociatesā€ are ā€œfranchisesā€ within the definition of Section 31005, and subject to the registration requirements of the Franchise Investment Law. This question is answered in the affirmative.

The Agreement submitted with your letter, dated March 1, 1974, refers to licenses issued under ā€œColoradoā€ Law; however, for purposes of this opinion, we shall assume that the Agreement will be amended to substitute ā€œCaliforniaā€ when the Agreement is used in this state. The Agreement states that Re/Max is a duly licensed real estate broker. It has instituted a real estate sales and training program and desires to make such program services, facilities, furnishings, other equipment and office space, and general office services available to Associate, who has been issued or has applied for, a ā€œreal estate salesmanā€™s license.ā€ Re/Max agrees to give Associate the non-exclusive use of the aforementioned programs, services and facilities, together with other Associates and with employees of Re/Max located on the same premises. Associate acknowledges and recognizes Re/Maxā€™s interest and exclusive right to its real estate system, method of operating and distinguishing characteristics, as well as all service marks, trademarks, trade names, copyrights, designs, slogans, logos., or other advertising copy used as part of its business. During the existence of the Agreement, Re/Max has the sole and exclusive right to regulate Associateā€™s use of the above-mentioned characteristics of its system.

The Agreement further provides that Associate will pay Re/Max, in consideration for the services to be rendered, a specified amount at the time of the execution of the Agreement and an additional amount on a specified date, which amounts will be held by Re/Max without interest during the term of the Agreement to secure the full and faithful performance of Associateā€™s obligations and to insure the return to Re/Max, upon termination of the Agreement, all materials, plans, programs, manuals, keys, listings, etc. which may come into the possession of Associate. Re/Max, in its sole discretion, has the right to require Associate to make an additional deposit not to exceed a specified amount, in the event Associate is consistently late in making monthly payments to Re/Max, which payments are required to be made by Associate as consideration for keeping the rights, privileges and services extended him by Re/Max. Associate is also required to make monthly payments for shared office expenses and an additional payment for extra services, such as long-distance telephone calls or extra copying, advertising, personalized stationery and equipment. The Agreement contains provisions for ā€œnonpayment penaltiesā€, if Associate does not pay shared and other expenses within five days of receipt of the Agreement.

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.

ā€˜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 persons or in the open market.

In our opinion, the Agreement between Re/Max and Associate contains all of the elements of a ā€œfranchiseā€ within the definition of Section 31005. Especially, the provisions in the Agreement with regard to Re/Maxā€™s real estate sales and training programs and its sole and exclusive right to regulate Associateā€™s use of its distinguishing characteristics tend toward the conclusion that Re/Max is ā€œprescribingā€ a marketing plan or system in substantial part (Dept. of corps Rel. No. 3-F (Revised) pp 2-7).

As to the requirement of a ā€œfranchise feeā€, as hereinbefore set forth, Associates are required to pay distributor unspecified amounts for deposits. Such deposits, in the opinion of the Commissioner, constitute ā€œfranchise feesā€ because, even if totally refundable, these payments deprive franchisees, such as Associates, of the use of the funds for a period of time. (See Comm. Ops. Nos. 73/3F and 73/15F ) Moreover, these fees are not subject to the exemptive provisions of Section 31011(a) of the Law or Rules 011 and 011.1. Since we have concluded that the aforementioned ā€œdepositsā€ are ā€œfranchise feesā€ , we express no opinion as to whether the monthly payment which Associates are required to make to cover their share of office expenses as well as additional services rendered by Re/Max are ā€œfranchise feesā€ within the meaning of section 31011 of the Law.

In conclusion, therefore, it is our opinion that, the Agreements between Re/Max and Associates are ā€œfranchisesā€ within the definition of Section 31005, and 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
March 26, 1974

By order of 
Commissioner of Corporations

By __________________ 
Supervising Corporations Counsel
Office of Policy

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