Business Law

Opinion No. 92 / 2F

State of California Department of Corporations

Thomas S. Sayles, Commissioner 
In reply refer to: File No. _____

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

William A. Darrin, Jr.
Attorney
We Care Hair Development, Inc.
325 Bic Drive
Milford, CT 06460-9810

Dear Mr. Darrin:

The request for an interpretive opinion, contained in your letter dated August 14, 1992, together with the attached materials, has been considered by the Commissioner. Your letter raises the question of whether a Development Agent Agreement of We Care Hair Development, Inc. (“We Care Hair”) is a subfranchise for purposes of Corporations Code Section 31008.5 of the Franchise Investment Law (“Law”). We conclude that the Development Agent Agreement constitutes a subfranchise for the reasons set forth below.

You represent that the franchisor, We Care Hair, engages in the sale of hair salon franchises throughout the United states. Based on your correspondence, We Care Hair proposes to enter into Development Agent Agreements and typically will offer these agreements to existing franchisees. As independent contractors of We Care Hair, development agents will sell franchises within particular geographic areas and follow up with franchisee oversight responsibilities. The development agent’s responsibilities under the proposed agreement include, but are not limited to, advertising for prospective franchisees, providing franchise information to prospective franchisees, providing site selection advice, providing lease negotiation advice, providing construction advice, assisting with hair salon openings, inspecting hair salons, and providing business advice to franchisees. Development agents have access to a We Care Hair representative for consultation, at no charge, regarding the sale of franchises and the operation of hair salons.

Under the Development Agent Agreement, the development agent must meet or exceed two criteria throughout the term of the agreement. First, the average weekly gross sales for the hair salons in the territory must be $4,000, as specified. Second, one hair salon must be operating for every 30,000 residents in the territory according to a specified development schedule. In return, We Care Hair agrees to pay the development agent 50% of all income from initial franchise fees, with 25% paid upon the development agent’s sale of the franchise and the remaining 25% paid upon the opening of the hair salon. Additionally, We Care Hair agrees to pay a percentage of each hair salon’s royalties and fees, as specified, to reimburse the development agent for services rendered to each salon.

Finally, the agreement in question requires the development agent to incur certain costs for implementing and upholding the prov1s1ons of the we care Hair franchise system within. its territory including, but not limited to, expenses associated with developing prospective franchisees into operating hair salons, providing advice and training to franchisees and their employees, and enforcing the franchise agreement of each hair salon. We Care Hair agrees to supply development agents with brochures, disclosure documents and related materials at a mutually agreeable price, while development agents agree to reimburse We care Hair for its costs plus 25% for providing any services to franchisees in the designated territory.

Given those facts, the sole question raised by your correspondence is whether the Development Agent Agreement is a “subfranchise” within the meaning of Section 31008.5 of the Law. Section 31008.5 defines a subfranchise as:

[A] ny contract or agreement between a franchisor and a subfranchisor whereby the subfranchisor is granted the right, for consideration given in whole or in part for that right, to sell or negotiate the sale of franchises in the name or on behalf of the franchisor. A contract or agreement which is a franchise does not become a subfranchise merely because under its terms a person is granted the right to receive compensation for referrals to a franchisor or subfranchisor or to receive compensation for acting as a sales representative on their behalf.

Applying the facts to the instant case, We care Hair proposes to enter into a Development Agent Agreement. Among other things, the agreement requires development agents to develop and service hair salons within a particular geographic area. Under the agreement, a development agent must advertise for prospective franchisees and provide those prospects with information regarding the We Care Hair franchise. Development agents receive necessary consultation and sales materials from the franchisor, to assist development agents with the sale of franchises. In return, development agents are entitled to 25% of the income from initial franchise fees upon the development agent’s sale of a franchise. In essence, a review of the Development Agent Agreement indicates that We Care Hair grants the right to sell or negotiate the sale of franchises in the name or on behalf of the franchisor.

Not only must a right be granted to sell or negotiate the sale of franchises, but consideration must be given in whole or in part for that right under Section 31008.5. It is noteworthy that the statutory reference to “consideration” was retained when the definition of subfranchise in Section 31008.5 was amended in 1988 to incorporate the definition of area franchise. See Chapter 562, Statutes of 1988. The definition of subfranchise does not establish a limitation on the consideration by requiring the payment of a fee, as does the definition of franchise in Section 31005 of the Law. Indeed, the commissioner has construed the term consideration to mean a payment or other legal consideration. See Comm. Op. No. 71/12F. Accordingly, an expenditure required on account of sales and technical assistance, or training and supervision, constitutes “consideration” for purposes of the statutory definition. For example, see Comm. Op. No. 72/2F. In the instant case, development agents are responsible for various expenditures associated with selling franchises, training and advising franchisees, and upholding the franchise system within a particular location. As a result, development agents are providing consideration in whole or in part for the right to sell or negotiate the sale of franchises. For these reasons, we conclude that the Development Agent Agreement proposed by We Care Hair, Inc. is a subfranchise for purposes of Section 31008.5 of the Law.

As a final note, the request for an opinion cites to Comm. Op. 71/21F. There, the Commissioner concluded that a person was not a subfranchisor under certain, specific circumstances. In that opinion, a franchisor employed a person as a representative to effect the sale of franchises within an assigned area and provided that person with a commission for selling the franchises on the franchisor’s behalf. The commission was incorporated into the franchise fee paid by the franchisee to the franchisor. That opinion is distinguishable from the instant case. Here, the development agent receives a percentage of franchise fees and royalties, both based on the ability of the development agent to sell, open, and oversee hair salons within a geographic area. In addition, the development agent is required to meet a development schedule measured by gross sales and salon operating requirements; a performance schedule absent under the arrangement discussed under Comm. Op. 71/21F. To the extent that the opinion expressed in Comm. Op. 71/21F recognizes royalty payments or performance goals as part of a commission paid to a representative for the offer and sale of franchises on behalf of a franchisor, it is overruled by the opinion we issue in this matter, today.

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: September 30, 1992
Sacramento, California

By order of 
THOMAS S. SAYLES
Commissioner of Corporations

By __________________ 
WILLIAM KENEFICK
Assistant Commissioner
Office of Policy
(916)322-3553

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