Interpretive Opinion No. 71 / 21F

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. James E. Schneider
Attorney at Law
Singer & Oberg
2437 Second Avenue
San Diego, CA 92101

Dear Mr. Schneider:

The request for an interpretive opinion, contained in your letter dated February 23, 1971, supplemented by your letter dated March 10, 1971 , has been considered by the Commissioner. In these letters you have raised the question whether, under t:he circumstances described by you, the licenses granted by Roffler Industries, Inc., ( "Roffler"), through Roffler of Southern California and Roffler of California (each of which is referred to below as "Dealer"), to barbers known as Roffler Stylists ( "Stylists" ), are to be regarded as franchises within the definition of Section 31005, and subject, to the registration requirement of Section 31110 and other provisions of the Franchise Investment Law, and whether Dealer is to be regarded as a subfranchisor within the definition of Section 31009 of that Law.

You have represented that Roffler is a national company which manufactures and distributes men's hair styling products under several trade names, including "Roffler". The Stylists are procured by Dealer and licensed to use and sell Roffler products under the Roffler trade name. The Stylists pay a setup fee of approximately $425. You have represented that $200 of this amount is attributable to the purchase price of products and tools furnished to the Stylist.

Under its agreement with Roffler, Dealer is obligated to pay $50 to Roffler for each Stylist procured by it, and in addition to perform certain promotional and other acts and services in furtherance of the Roffler enterprise, including minimum purchase of Roffler tools and products, training of Stylists, and demonstration of the Roffler method and tools. The agreement gives Dealer an exclusive marketing area and credit of a 40% markup, more or less, for all Baffler products sold to Stylists in that area. Dealer also is sole agent for other products manufactured or distributed by Roffler not bearing the Roffler trade name. These products can be sold to persons other than Stylists, likewise at a 40% mark-up to Dealer. Stylists generally take a l00% mark up on the price they pay.

Section 31005 defines "franchise" to include an agreement, either oral or written, between them 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, and the franchisee is required to pay a franchise fee.

The licenses granted to Stylists meet all of the requirements of this definition, and therefore in our opinion are franchises within the meaning of Section 31005. The offer or sale of these franchises by Roffler in California, therefore, is subject to the registration requirement of Section 31110 and other provisions of the Franchise Investment Law.

Section 31009 defines "subfranchisor" as a person to whom an area franchise is granted. "Area franchise" as defined in Section 31008 to mean any 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 such right, to sell or negotiate the sale of franchises in the name or on behalf of the franchisor. Subfranchisors are responsible for compliance with the registration requirement of section. 31110.

In our opinion, Dealer is employed by Roffler to effect or attempt to effect sales of the Roffler franchises within its assigned area. It is not a subfranchisor, because as we see it, Dealer gives no consideration to Roffler for the right to effect such sales. The undertaking of Dealer to perform the promotional acts and services described above and to remit to Roffler $50 for each Stylist procured, cannot be said to be consideration given by Dealer for the right to sell or negotiate the sale of Roffler franchises to Stylists. It is true that Dealer retains the larger portion of the setup fee paid by the Stylists, and this is a franchise fee as between Roffler and the stylists; as between Roffler and Dealer, the portion of the fee retained by Dealer, is in the nature of a commission stipulated between Roffler and Dealer as being payable to Dealer for selling the franchises on behalf of Roffler

In our opinion, therefore, Dealer is not a subfranchisor within the meaning of Section 31009, and is not responsible under Section 31110, for the registration of the franchises sold by Roffler in California.

However, pursuant to Section 31210, if Dealer is not licensed by the California Department of Real Estate as a real estate broker or real estate salesman, or by the Commissioner of Corporations as a broker-dealer or agent, it is unlawful for Dealer to effect or attempt to effect the sale of these franchises in California (except in transactions exempted under Chapter 1 of Part 2 of the Law), unless Dealer is identified in an application or amended application filed by Roffler for registration of the franchises.

Dated: San Francisco California
March 26, 1971

By order of
Commissioner of Corporations

Assistant Commissioner
Office of Policy