Interpretive Opinion No. 71 / 28F

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. Vincent A. Narcisi
Attorney at Law
Gibson, Dunn & Crutcher
634 South Spring Street
Los Angeles, CA 90014

Dear Mr. Narcisi:

The request for an interpretive opinion, contained in your letter dated April 7, 1971, has been considered by the Commissioner. Your letter raises the question whether the Direct Dealer Agreements between Mazda Motors of America, Inc. , a California corporation ("Mazda"), and the persons referred to therein as Direct Dealers ( "Dealers" ), under the circumstances described in your letter and the form of agreements submitted to us, are franchises within the definition of that term in Section 31005, and are subject to the provisions of the Franchise Investment Law.

You have represented that Mazda is a wholly owned subsidiary of Toyo Kogyo Co., Ltd., a Japanese corporation ( "Toyo" ). Toyo manufactures the "Mazda" automobile as well as numerous other products. Recently, it has begun importing Mazda automobiles into the United States through several United States subsidiaries. Mazda is in the process of creating a distribution network for these automobiles in several Southwestern states, including California, and contemplates the appointment of several dealers in California.

By agreement in question, the Dealer is granted the right to purchase Mazda automobiles at wholesale prices for resale and to use the Mazda trademarks. He agrees at his own expense to construct facilities suitable for the sale and servicing of these automobiles and to meet certain other requirements concerning invested capital, use of a uniform accounting system, and standards of dealership operation, and generally, to market and service Mazda automobiles in accordance with the plan prescribed by Mazda.

You have stated that no amount is payable by the Dealer to Mazda for the right to become a Mazda dealer, and moreover, that the initial inventory of automobile parts in the amount of $15,000, and special tools for the servicing of Mazda vehicles in the amount of $1,000, will be sold to the dealer at bona fide whole sale prices applicable to these items.

You have represented, moreoever, that Mazda will sell to the Dealer at a price of approximately $300, certain collateral materials, including such items as showroom brochures illustrating Mazda vehicles, sales materials, and window posters and, moreover, that the Dealer will agree to pay Mazda $30, per car purchased, for use together with a contribution of an equal sum by Mazda, as an advertising fund to be administered by a dealer association, which you have stated, is to be controlled by the Dealers and is to be independent of Mazda.

In addition, a Dealer will purchase or agree to purchase from independent third parties at prices of $6,000 and $200, respectively, represented to be bona fide wholesale prices, a uniform sign for use on the dealership premises, and accounting books and forms for use in dealership operations.

Section 31005 of the Franchise Investment Law defines "franchise" to mean a contract or agreement, either expressed or implied whether 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, tradename, or other commercial symbol designating the franchisor or its affiliate, and the franchisee is required to pay, directly or indirectly, a franchise fee. In our opinion, the agreements between Mazda and the Dealers, described by you as reflected above, are not franchises within this definition.

According to Section 31011, "franchise fee" includes any fee or charge that a franchisee 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 payment for goods or services. The purchase or agreement to purchase goods at a bona fide wholesale price, according to Subdivision (a) of the Section, is not considered a franchise fee, and Rule 011 exempts from the registration requirement of Section 31110, the offer or sale of a franchise which would be subject to registration solely because of the purchase or agreement to purchase goods at a price other than the bona fide wholesale price, if the total payment which is in excess of the bona fide wholesale price, computed on an annual basis, does not exceed the sum of $100.

Based upon your representations, we assume that the $15,000 paid by Dealers for the initial inventory of automobiles and the $1,000 paid by them for the special tools used in servicing Mazda vehicles, constitute the bona fide wholesale price, respectively, of these articles and therefore do not constitute a franchise fee. Under . the circumstances you have related, we do not conclude that the payment of the $300 for advertising brochures, which are only purchased through Mazda at its cost, is an indirect payment of a franchise fee, nor do we conclude that the handling of a payment of $30, per car, for advertising, which is not retained by Mazda, is an indirect payment of a franchise fee.

For the foregoing reasons, under the circumstances described by you and reflected above the Direct Dealer Agreements between Mazda and the Dealers, in our. opinion, are not franchises within the definition, and are not subject to the provisions of, the Franchise Investment Law.

Dated: San Francisco California
May 19, 1971

By order of
Commissioner of Corporations

Assistant Commissioner
Office of Policy