Interpretive Opinion No. 71 / 2F

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. Robert C. Keck
Attorney at Law
Price, Cushman, Keck & Mahin
134 South La Salle Street
Chicago, IL 60603

Dear Mr. Keck:

The request for an interpretive opinion under the Franchise Investment Law contained in your letter dated January 5, 1971, has been considered by the Commissioner. In your letter you have raised the question whether the agreements entitled Dealer Franchise Agreements ("Agreements" ) between Schwinn Bicycle Company of Chicago, Illinois ("Schwinn") and the persons therein referred to as authorized dealers for Schwinn Products ( "Dealers"), under the circumstances described by you, constitute franchises within the meaning of Section 31005 of the California Franchise Investment Law. In our opinion, on the assumptions stated below, this question must be answered in the negative.

You have represented that Schwinn is engaged in producing and selling a line of high quality bicycles and major parts thereof, that. it is family-owned, operates a business founded in the 1890's, and that in the 1930's it assumed industry leadership followed by national trade advertising, development of the Schwinn seal of quality and lifetime guarantee, and adoption of the Schwinn name to designate all Schwinn products, and of the Schwinn Plan method of selling ( "Plan" ).

Under this Plan, as it is in effect in California, approximately 285 Dealers purchase Schwinn bicycles in this state, either direct from Schwinn or at somewhat higher prices from socalled agents designated by Schwinn, maintaining warehouses in California.

The Dealers operate under their own trade names. While Schwinn products may be their principal line, they frequently also sell other articles. By the Agreement, they are committed to maintain satisfactory annual sales of Schwinn bicycles estimated therein at a set number, and to display, advertise, and service the Schwinn line. Schwinn, on its part in the Agreement, promises to offer the Dealer a market with an established potential, to limit the number of Dealers, to provide vigorous, sustained advertising support, to make advertising display and promotional material available to the Dealer at low cost, and to offer the Schwinn guarantee on all Schwinn products. We understand and predicate our opinion on the understanding that no payment is made to Schwinn by Dealers under the Agreements, other than payment of the purchase price of Schwinn bicycles and other Schwinn products purchased by the Dealers.

Section 31011 of the Franchise Investment Law provides that "franchise fee" means any fee or charge that. the 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 such goods or services. It further provides that the purchase or agreement to purchase goods at a bona fide wholesale price shall not be considered the payment of a franchise fee.

Under this provision, payment for goods or services is a franchise fee only if it is required to be made by the franchisee "for the right to enter into a business" under a franchise agreement. The quoted words having been used in the statute, must be presumed to be significant, They distinguish a payment for goods or services which is made, wholly or in part at least, "for the right to enter into a business", from a payment for goods or services which is made not at all for that right, but entirely for the goods or services.

You have provided no information which would enable us to determine whether the purchase price for Schwinn bicycles and other Schwinn products charged by Schwinn to the Dealers, exceeds the bona fide wholesale price for nontrademarked articles of equal quality. Assuming that it does, and assuming, moreover, that at the time when Schwinn enters into Agreements with the Dealers, the Schwinn bicycles and other Schwinn products purchased by the Dealers command their premium price in the market place by virtue of the Schwinn trademark, it is our opinion that the Dealers' payment and agreement to pay such premium price is made by them for the goods, and is not made for the right to enter into a business.

However any excess amount which the Dealers might be required to pay or agree to pay for bicycles or other products above the wholesale price of nontrademarked goods of equal quality and not supported by market recognition at the time of the transaction of premium value due to the Schwinn trademark, would not be part of the then bona fide wholesale price of the goods, and consequently would constitute a franchise fee within the meaning of Section 25011 (subject of course, to the exemption allowed in Rule 310.011).

In view of the foregoing conclusions, we find it unnecessary to consider, and we express no opinion concerning, the argument also presented by you to the effect that the "Schwinn Plan'' method of selling is not a marketing plan or system prescribed in substantial part by Schwinn, as provided in Subdivision (a) of Section 31005 of:the Law.

Dated: San Francisco, California
February 17, 1971

By order of
ANTHONY R. PIERNO
Commissioner of Corporations

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HANS A. MATTES
Assistant Commissioner
Office of Policy