Interpretive Opinion No. 71 / 25F

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. Llewellyn Johns
Attorney at Law
Gunheim, Yturbide, Rose,
Johns and Winther
1231 Market Street-Penthouse
San Francisco, CA 94103

Dear Mr. Johns:

The request for an interpretive opinion contained in your letter dated February 23, 1971 as supplemented by your letter dated February 23, 1971, has been considered by the Commissioner. Your letter raises the question whether contracts of the type described therein between ADCO, Inc., a Nevada corporation ("ADCO") , and merchandisers located in the State of California, are franchises within the definition of Section 31005 and subject to the provisions of the Franchise Investment Law.

You have represented that ADCO publishes and sells brochures and catalogues illustrating products of various manufacturers. These brochures and catalogues carry a distinctive name other them that of ADCO, which the merchandisers who purchase therm, may use in their respective businesses. The contract requires the merchandiser to keep a minimum fixed sum invested in the business, to notify ADCO of the number of brochures and catalogues required each year, and to pay ADCO the actual cost of printing the brochures and catalogues shipped to him plus 1-1/2 to 2% for the first $900,000 of sales and a decreasing percentage of additional sale each year.

The merchandiser purchases the illustrated products directly from the manufacturers with whom he makes his own account arrangements. His sales are not limited to products of manufacturers whose products are illustrated in the brochures, and catalogues.

Please understand that this interpretive opinion is not applicable to the contracts between ADCO and merchandisers heretofore concluded and presently in effect.. The principal purpose of interpretive opinions is to provide 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 such opinion. Where the contract or agreement in question already has been made effective, there can be no such reliance and, for that reason under these circumstances, an interpretive opinion cannot be issued. You have represented, however, that ADCO has negotiated individual contracts with merchandisers in various states, including the State of California from time to time over a period of approximately 20 years at an average rate of one every two years, and we thus understand you to represent that ADCO will negotiate additional contracts in the future. The opinion expressed below is applicable only to such additional contracts, and with respect to contracts heretofore entered into it does not have the effect specified in Section 31511, Corp Code.

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 trademark, service mark, tradename, logotype, advertisement, or other commercial symbol designating the franchisor or its affiliate; and the franchisee is required to pay a franchise fee.

You have represented that the brochures and catalogues printed and sold by ADCO bear a name other them that of ADCO, and we are not advised whether or not the name with which the merchandiser's business is thus associated, designates ADCO or an affiliate or an affiliate of ADCO, as required by Subdivision (b) of Section 31005, for the finding of a franchise. It is unnecessary, however; for us to resolve this factual question, because on the basis of your representations, and assuming no other facts to be in existence which would bear upon this point, it must be concluded that the contracts between ADCO and the merchandisers do not provide for a marketing plan or system prescribed in substantial part by ADCO, as required by Subdivision (a) of the Section, but leave the merchandisers almost entirely free to conduct the purchase and sales operations of their respective businesses as each one of them may desire. Therefore, in our opinion, on the basis of your representations, the contracts in question are not franchises within the definition of Section 31005.

Your letter of February 23, 1971 makes reference to Rule 011 of the Commissioner apparently in support of the contention that the contracts in question do not provide for the payment of a franchise fee, as required for the finding of a franchise in Subdivision (c) of section 31005. 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. Pursuant to Section 31011 (a), the purchase or agreement to purchase goods at a bona fide wholesale price is not considered the payment of a "franchise fee". 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. You have represented that the merchandisers are required to pay ADCO a percentage of their annual sales in addition to the actual cost of printing.

Without concurring in your contention that under these circumstances merchandisers are not paying ADCO a franchise fee within the meaning of Section 31011 and Rule 011, we deem it unnecessary to approach and resolve the factual and legal question whether such a fee is being paid by them, because based upon the representations contained in your letter and the assumption which has been noted we have already, for reasons stated above, reached the conclusion that the contracts between ADCO and the merchandisers are not franchises within the definition of Section 31005 and therefore are not subject to the provisions of the Franchise Investment Law.

Dated: San Francisco California
April 13, 1971

By order of
ANTHONY R. PIERNO
Commissioner of Corporations

_______________________
HANS A. MATTES
Assistant Commissioner
Office of Policy