Business Law

Opinion No. 75 / 2F

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State of California Department of Corporations

Willie R. Barnes, Commissioner 
In reply refer to: File No. _____

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

Mr. Robert J. Eadington
Attorney at Law
Eadington, Queen, Brewer & O’Harra
First Western Bank Building
1666 North Main Street, Suite 336
Santa Ana, CA 92701

Dear Mr. Eadington:

The request for an interpretive opinion, contained in your letter dated September 20, 1974, has been considered by the Commissioner. Your letter: raises the question whether the arrangements between Bike Barn, a California partnership, and Messrs. Evans and Brantley, its partners, acting in their individual capacity (“Partners”) and persons referred to by you and hereinbelow as “Purchasers” are “franchises” within the definition of Section 31005 and subject. to the provisions of the Franchise Investment Law. This question is answered in the affirmative.

You have represented that Bike Barn is engaged in the business of marketing and distributing bicycles and related products and such activities as are incidental thereto. Partners presently own two retail bicycle sales stores operating under the name of “Bike Barn”, and intend to develop and open additional stores operating under the name “Bike Barn”. Partners will obtain a suitable building or facility for each store in an area in which they believe, either because of lack of competition, population density, traffic flow and/or other factors, will have prospects of doing a “good volume of business”. After such facility is located, Partners will lease the building and, at their own expense, convert and/or remodel same same that it may operate as a bicycle retail sales outlet.

We understand that, when the store is either operating or in a position to commence operations immediately and after Partners have purchased the inventory necessary for operations, Bike Barn and/or Partners will attempt to obtain a Purchaser. Purchaser will purchase 49% and Partners will purchase 25-1/2%, each, of a California corporation which will be formed. Stock in said corporation will be issued in direct proportion to their cash contributions.

Immediately following the formation of the corporation, the corporation will purchase from Partners all of the assets and liabilities of the store as a going concern, including assumption of the lease. The purchase price will be the net asset value of the store “plus a factor for intangible items, including good will. This factor will be determined primarily from the time the store has operated and the results of those operations.” In no event will the total purchase price paid to Partners exceed 130% of the net asset values.

Corporation will enter into a “Distributor Agreement” (“Agreement”) with Bike Barn which provides that corporation will purchase all bicycles and related products of manufacturers’ lines handled by Bike Barn so long as the price is equal to or less than that which the corporation would have to pay to purchase the same lines of bicycles directly from the manufacturer or of the distributor. The corporation may buy and sell lines of bicycles not carried by Bike Barn from any person or entity; however, the Agreement specifies that, in the event at any time during the course of the Agreement less than 50% of the bicycles purchased by corporation are purchased from Bike Barn then, while, this Agreement shall otherwise remain in full force and effect, Bike Barn shall have the option to terminate Corporation’s right to use the name “Bike Barn”, in connection with the operation of the store. The corporation will be granted a nonexclusive territory. .

Although common advertising is anticipated, under the direction and at the expense of Bike Barn, participation in any sales or discounts is entirely within the discretion of the corporation, provided that the corporation does not sell bicycles and related products other than at the manufacturer’s minimum retail Prices. There will be no management, consulting, bookkeeping or accounting fees paid by corporation to Bike Barn or Partners. Corporation will enter into an employment agreement with Purchasers employing him as President of the corporation for a period of not less than two years at a salary of not less than $800 per month. You have advised us that the purchaser in nearly all cases will be a single individual and in no event will involve more than two persons who have a pre-existing business relationship. The corporation will enter into an agreement with itself and each of its shareholders pursuant to which the shareholders will be granted a right of first refusal to purchase the shares of any shareholder who wish’s to sell or transfer his shares.

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). 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 arrangements between Bike Barn and Partners and Purchasers contain all of the essential elements of a “franchise”. We do not concur in your opinion that Bike Barn is not prescribing a marketing plan or system in substantial part. In this connection, the Commissioner has stated that, in making the determination whether there is a prescribed marketing plan or system, it is necessary to keep in mind the objective of the Law to deal with a multiplicity of business establishments created by the franchisor which he presents to the public as a unit or marketing concept and for all of which he ostensibly assumes responsibility by causing them to be operated with the appearance of some centralized management and uniform standards as regards to the quality and prices of goods sold, services rendered, and other material incidents of the operation. (Dept. of Corps, Release No. 3-F (Revised), p. 3.)

In the instant case, it appears that Bike Barn and Partners, in addition to the two stores already in operation under the trade name “Bike Barn”, contemplate the creation of additional stores using that trade name which, by virtue of the fact that Partners will own 51% of the corporation operating each store, will be controlled by the Partners of Bike Barn (see Comm. Op. No. 72/5F). This control factor, together wi
th the provisions in the Agreement with regard to minimum sales prices, common advertising and purchase requirements, tend toward the conclusion that Bike Barn is, in fact, prescribing a marketing plan or system in substantial part. (Ibid. pp. 2-6 ) In addition, the corporations are granted the right to use the trade name “Bike Barn” so long as they purchase the minimum amount of bicycles from Bike Barn.

Moreover, in view of the total transaction by which each corporation will purchase the store for a price based upon the net asset value of the store “plus a factor for intangible items; including goodwill” together with the provision in the agreement regarding the purchase by each corporation of at least 50% of its bicycles from Bike Barn, precludes us from concluding that Purchasers are not paying Bike Barn a “franchise fee” or that the fees are for goods purchased at their bond fide wholesale price or within the amounts tolerated by Rules 011 or 011.1. (Ibid. pp. 7-11.)

Under these circumstances, it is our opinion that the arrangements between Bike Barn and Partners and Purchasers are “franchises” within the definition of Section 31005 and subject to the provisions of the Franchise Investment Law.

Your letter does not request our opinion, nor do we express any opinion with regard to questions arising under the Corporate Securities Law of1968.

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
February 27, 1975

By order of 
Commissioner of Corporations

By __________________ 
Assistant Commissioner
Office of Policy

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