Interpretive Opinion No. 71 / 33F
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. Ralph E. Wiggen
Attorney at Law
Ziskind and Wiggen
Suite 515 Wilshire Square
3345 Wilshire Boulevard
Los Angeles, CA 90010
Dear Mr. Wiggen:
The request for an interpretive opinion contained in your letter dated March 10, 1971, as supplemented by your letter dated April 19, 1971, has been considered by the Commissioner. Your letter raises. the question whether the agreements between Architectural Partitions, a California corporation ("Architectural"), and various individuals, referred to therein as "franchisees" , 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 Architectural owns the inventor's rights in and to certain movable partition systems, consisting of metal studs and strips, for which an application for U.S. Letters Patent has been filed, and which are distributed under the name "KW-500", "KW 500", "500 Series Partition System", and "500 Series Movable Partition System". The wall structures are manufactured and distributed pursuant to a license agreement between Architectural and Kaiser Gypsum Company, a Washington corporation ("Kaiser" ), granting Kaiser the exclusive rights to manufacture and sell said wall systems and component parts. Kaiser agrees to pay Architectural certain flat rates per lineal foot for the wall system and component parts it sells. The agreement enclosed with your letter indicates-that Interior Construction Systems, Inc., a California corporation ( "ICS" ), also has an agreement with Architectural to make arrangements for the manufacture and distribution of other Kaiser and ICS components, and that ICS will sell said components to the individual. You have not furnished us with the details of the agreement between Architectural and ICS.
You have further represented that the individual agrees to use his best efforts to actively promote the sales and installation of the wall system; to purchase material for, and construct and maintain accessible and convenient to "key factor groups", a full office-size KW-500 System display area with ICS components for use in demonstrating KW-500 System construction details, appearance, ease of installation and movability; to purchase from Architectural two copies of the KW-500 Systems promotional file, one technicolor 1000 projector, and one portable product mock-up for use in sales calls, at a total -cost of $700; to establish and maintain up-to-date mailing and/or prospect lists; to make active use of other Kaiser or ICS sales tools and advertising materials; and at the individual's own expense and with both sales and construction personnel, to attend periodic KW-500. meetings which Kaiser and/or Architectural will hold.
You have further represented that Architectural recommends the. use of panels manufactured by Kaiser in the selection and installation of the KW-500 System. However, if the individual so desires, he may purchase panels from a source other than Kaiser if they meet specifications set forth in the agreement. Kaiser has agreed to sell gypsum boards with laminated hook strips and component parts, and ICS has agreed to sell its component parts to the individual. Although the agreement indicates that these sales will be made at the net distributor prices in effect at the time of acceptance of each of the individual orders, f.o.b. Plant of manufacture, you have represented that the franchise agreement provides "only-for the purchase of goods at the bona fide wholesale price" We assume this representation applies to the purchase of goods from Kaiser and ICS, and includes the purchase of the film, projector, and advertising material.
The agreement provides that the payment terms covering all sales and purchases will be "2% - 20th prox, net cash on or before the last day of the calendar month following the month of shipment." We understand this to mean that the individual may receive a 2% discount if he makes payment by the 20th day of the month in which purchases are shipped, and must make all payments on or before the last day of the calendar month following the shipment. The individual may, during the term of the agreement, use Kaiser's name and the phrase· "KW-500 Movable Partition Systems" or "ICS Components" in, or as part of, advertising and publicity material, provided written approval is obtained from. Architectural and Kaiser or ICS.
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.
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.
You have represented that all goods purchased by the individuals from Raiser and we have assumed that all goods purchased by them from ICS as well as the projector, film, and advertising material, are purchased at the bona fide wholesale price. Furthermore, you have represented that no other payments are required by the individuals.
Accordingly, it is our opinion that under the circumstances described in your letters and assumed by us as outlined above, the agreements between Architectural and the individuals are not "franchises" within the definition of Section 31005, and not subject to the provisions of the Franchise Investment Law.
Dated: San Francisco California
May 27, 1971
By order of
ANTHONY R. PIERNO
Commissioner of Corporations
JAMES L. KELLY
Chief Deputy Commissioner