Interpretive Opinion No. 71 / 32F
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. Martin E. Iorns
Post Office Box 661
West Sacramento, CA 95691
Dear Mr. Iorns:
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 agreements between you, d.b.a. Fibersteel Company ( "Fibersteel"), and persons referred to therein and hereinbelow as "Users", are franchises within the definition of Section 31005, and subject to the provisions of the Franchise Investment Law. This question is answered in the negative.
You have represented that Fibersteel, by the agreement in question, grants Users the exclusive right to use its developments to produce all designs and products registered by Users with Fibersteel within a specified territory. Each registration for a design or product must be accompanied by a production schedule and a financial statement showing that Users will be able to finance the production immediately upon receipt of a form order therefor. Users agree to pay Fibersteel a royalty of a percentage of the net selling price they receive from the sale of products built by the aforementioned developments or by the use of apparatus which Fibersteel discloses to Users and which appeared to be trade secrets. After the first year of the agreement, Users agree to pay Fibersteel $100 per month, as a minimum royalty which will be deductible from the earned royalty.
You have further represented that Users agree to keep at or accessible to their official mailing address, accurate and complete books and records showing in detail the number of products made by the use of Fibersteel developments, together with the names of customers, purchase dates and trade discounts which will be open to the inspection of Fibersteel or its duly authorized agent at all reasonable times. Users will render quarterly certified statements reflecting the types and numbers of products sold, use diligence and their best efforts in promoting the sale of devices made by the use of Fibersteel developments, and maintain a high standard of quality and safety. Moreover, Users agree to place on all products manufactured and sold, pursuant to the agreements, appropriate statutory patents and trademarks designations, together with such other territory or code indicia upon the request of Fibersteel However, Users may market products under other labels.
Fibersteel agrees to provide a fully qualified consultant to Users providing users pay $50 per day travel expenses and reasonable per diem expenses. Any improvements substitutions and modifications of the developments made or acquired by the Users shall be disclosed to Fibersteel.
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 trade name, and the franchisee is required to pay a franchise fee.
In our opinion, the provisions of the agreements between Fibersteel and Users prescribing the bookkeeping procedures, the use of diligence by Users in promoting sales of products made by the use of Fibersteel developments, and the placing of appropriate statutory patents and trademarks, constitute methods by which Fibersteel insures that its developments are properly used and that it receives the royalties to which it is entitled, but do not constitute a marketing plan or system prescribed in substantial part by the franchisor.
Accordingly, it is our opinion that the agreements between Fibersteel and Users, as outlined above, are not "franchises" within the definition of Section 31005, and not subject to the provisions of the Franchise Investment Law.
As regards the inclusion of a requirement of a lump sum initial payment of approximately $10,000, it is our opinion that, since the agreements do not include a marketing plan or system prescribed in substantial part by Fibersteel, the inclusion of payment charged for the laying out of the production facility and designing of production molds does not affect the opinion.
Dated: San Francisco California
July 12, 1971
By order of
ANTHONY R. PIERNO
Commissioner of Corporations
HANS A. MATTES
Office of Policy