Interpretive Opinion No. 71 / 17F

State of California Department of Corporations

Anthony R. Pierno, Commissioner
In reply refer to: File No. _____

This interpretive opinion is issued by the Commissioner of Corporations pursuant to section 31510 of the franchise investment law. It is applicable only to the transaction identified in the request therefor, and may not be relied upon in connection with any other transaction.

Mr. J. J. Brandlin
Attorney at Law
411 West Fifth Street
Los Angeles, CA 90013

Dear Mr. Brandlin:

The request for an interpretive opinion contained in your letter dated March 1, 1971, has been considered by the Commissioner. Your letter raises the question whether the agreements between Trend O'Fashion, Inc., a California corporation ("Trend O'Fashion"), and its so-called concessionaires as described by you, are franchises within the meaning of Section 31005 and subject to the provisions of the Franchise Investment Law. It is our opinion that, based on the assumptions stated below, this question must be answered in the negative .

You have represented that Trend O'Fashion enters into an agreement with the concessionaire by Which it licenses him to operate a Trend O'Fashion retail store at a specified location, and authorizes him to use the name "Trend O'Fashion" in that operation. The term of the license is made concurrent with the lease of the store premises procured by Trend O'Fashion from the owner of the premises. Trend O'Fashion has the option to extend the license for the period of any lease extension or renewal or new lease of the store premises. The concessionaire may sell only merchandise consigned to it by Trend O'Fashion with labels and tags bearing the Trend O'Fashion trademark and/or trade name, and Trend O'Fashion determines the quality and quantity of merchandise consigned to the concessionaire.

When the products are sold, the concessionaire deposits the gross receipts in a bank to the account of Trend O'Fashion and receives, at intervals of not more than once a week, certain percentages thereof as specified in the Concession Agreement. Also, under the agreement, the concessionaire pays Trend O'Fashion - we understand by way of rental for the store - an amount exactly equal to the rent paid for the store by Trend O'Fashion as the primary lessee. The concessionaire collects and pays sales taxes, withholding taxes, utilities, and salaries. The agreement requires that the concessionaire purchase a "few supplies of little consequence'', and the store fixtures which he is asked to depreciate over the remaining term of the lease.

Section 31005 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 tradename, 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 sect:ion 31110 of the Law, any offer or sale of a franchise which would be subject to registration solely because the franchisee purchases or agrees to purchase goods at a price other than the bona fide wholesale price, if the total payment in excess of the bona fide wholesale price computed on an annual basis does not exceed $100.

You have represented that Trend O'Fashion charges no franchise fee, and you have referred to the provision of the Franchise Investment Law that the purchase or agreement to purchase goods at their bona fide wholesale price is not to be considered the payment of a franchise fee. For the purpose of this opinion, we therefore assume, and expressly predicate this opinion on this assumption, that the net price collected by Trend O'Fashion for the merchandise consigned to the concessionaire, after deducting the percentages specified in the Concession Agreement, does not exceed the bona fide wholesale price of the consigned goods, and moreover, that the price charged by Trend O'Fashion to the concessionaire for the store fixtures does not exceed the bona fide wholesale price of these articles.

Predicated on these assumptions, we are of the opinion that the agreements described by you, as reflected above, are not franchises within the definition of Section 31005, and consequently are not subject to the provisions of the Franchise Investment Law.

We have noted the argument made by you in the second paragraph of your letter that the Trend O'Fashion type of franchise arrangement is exempt under Section 31101 of the Franchise Investment's Law, for the reason that Trend O'Fashion has conducted business which is the subject of the franchise, continuously for not less than five years preceding the offer or sale, and the net audited worth of Trend O'Fashion is about $300,000. We call your attention to the requirement under Subdivision (a) of Section 31101 that, to be exempt from the provisions of Chapter 2 of Part 2 and especially from the registration requirement of Section 31110, of the Franchise Investment Law, a franchisor who has conducted business which is the subject of the franchise, continuously for not less than five years preceding the offer or sale, as provided in Subdivision (b) of Section 31101, must have a net worth on a consolidated basis according to its most recent audited financial statement of not less than $5,000,000

Therefore, if the factual assumptions made hereinabove are inappropriate, so that the licenses granted by Trend O'Fashion are to be regarded as franchises within the meaning of Section 31005 of the Law, the exemption of Section 31101 is not available for the offer and sale of these franchises by Trend O'Fashion.

Dated: San Francisco, California
March 18, 1971

By order of
ANTHONY R. PIERNO
Commissioner of Corporations

_______________________

HANS A. MATTES
Assistant Commissioner
Office of Policy