Interpretive Opinion No. 71 / 22F

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. Merrill E. Steinberg
Attorney at Law
Cerf, Robinson & Leland
220 Montgomery Street
San Francisco, CA 94104

Dear Mr. Steinberg:

The request for an interpretive opinion contained in your letter dated February 18, 1971, as supplemented by your letter dated March 9, 1971, has been considered by the Commissioner. Your letters raise the question whether the agreements described by you between Redi-Brew Corporation ( "Redi-Brew" ) and its dealers are franchises within the definition of Section 31005 and subject to provisions of the Franchise Investment Law.

You have represented that Redi-Brew manufactures and sells prepackaged beverages and beverage dispensers. Sales are made through dealers in California and other states who sign a dealership agreement, order a minimum amount of not less than $2,500 worth of products and equipment, and make a deposit usually in the amount of the initial order, although it can be less but never more. The dealer sells the beverages through dispensers placed in offices or stores within the area specified in the agreement. After the initial order he is not required to but may purchase merchandise from Redi-Brew and may procure it from other sources. However, if his reorders are unsatisfactory, Redi-Brew attempts to sell another dealership in the same area.

Redi-Brew owns the trademark and name Redi-Brew but discourages the dealers from operating under, or using, the name "Redi-Brew" and does not permit such use except with Redi-Brew's written consent. However, the equipment has a "Redi-Brew" decal and, the dealer is encouraged to represent himself as a Redi-Brew dealer. You have further represented that dealers are not required to pay a franchise fee that goods are purchased by the dealers at their bona fide wholesale price and that though initial purchases are at the same price as reorders, Redi-Brew's operating profit is derived from reorders only.

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 trademark or trade name, 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 Section 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.

On the assumption that as represented by you, dealers will not be required to pay a franchise fee, and the sale of goods, including equipment, to them by Redi-Brew will be at bona fide wholesale prices, 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.

Dated: San Francisco California
March 29, 1971

By order of
Commissioner of Corporations

Assistant Commissioner
Office of Policy