Interpretive Opinion No. 71 / 36F

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. David A. Riegels
Attorney at Law
Diepenbrock, Wulff, Plant
& Hannegan
455 Capitol Mall
Sacramento, CA 95814

Dear Mr. Riegels:

The request for an interpretive opinion contained in your letter dated April 26, 1971, as supplemented by your letter dated May 21, 1971, has been considered by the Commissioner. Your letter raises the question whether the agreements between Mary Carter Industries, Inc., a Delaware corporation ( "Mary Carter" ), and persons referred to by you and hereinbelow as distributors, commission agents, and dealers, are "franchises" within the definition of Section 31005, and subject to the provisions of the Franchise Investment Law.

You have represented that Mary Carter manufactures a complete line of paints, marketed under its own label through a system of distributors, commission agents, and dealers. Distributors and commission agents must operate at least one retail store of their own. Each is given a specific geographic area of responsibility. You have stated that they use the trade name "Mary Carter Paints" to identify at least a part of their business, presumably the part in which paint is sold. Each distributor and commission agent enters into sales agreements with retailers within their areas to whom they assign a specific sub-area. These retailers do business as "Mary Carter Paint Stores". There are also such stores dealing directly with Mary Carter and not through distributors or commission agent.

You have further represented that distributors maintain a central warehouse for stocking supplies of paint which, on request by one of their retailers, they deliver in their own vehicles. Commission agents maintain no warehouse facilities, but forward all orders to Mary Carter which in turn, supplies the materials directly to the retailers.

All sales by Mary Carter to distributors, commission agents, and dealers are made at the same wholesale price, represented to be the bona fide wholesale price. However, distributors and commission agents are given a monthly rebate on paint sold. The distributors rebate amounts to 15%, and the commission agents' rebate ranges from 4% to 9%. If a distributor's purchase exceeds his quotas set forth in the agreement, he may receive an additional rebate. Commission agents may also receive higher rebates based upon the aggregate annual purchases after they are actively operating three retailer accounts. The agreement represents that these rebates are not available on purchases of certain "non-rebateable items", including fixtures, promotional items, and certain drop ship goods. We understand, and predicate this opinion upon the assumption, that no other fee or charge is paid by distributors, commission agents or dealers for the right to sell Mary Carter products

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 requirements 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.

Under the circumstances represented by you, as reflected above, it appears that the effective price paid for Mary Carter products by distributors, commission agents, and dealers (the latter being understood by us to be identical with the persons also referred to in your letter as "retailers"), varies as a result of the rebating procedure described by you and outlined above. As a result of this procedure, dealers generally will pay a somewhat higher price than distributors and commission agents, and commission agents will pay a higher price than distributors. The variance between the price paid by distributors and commission agents is explained by you on the ground that distributors provide additional services as outlined, which are not provided by commission agents, and therefore must be provided by Mary Carter. The variance between the effective price paid by distributors and commission agents on the one hand, and dealers on the other, is not explained by you, but we assume that this variance may relate to the volume and method of distribution of the merchandise, and the services required on the part of the dealers in connection therewith.

The question thus presented for our consideration is whether the variance in the price paid by distributors, commission agents, and dealers, as a matter of law obviates a finding that as a matter of fact all of these prices constitute a bona fide wholesale price for Mary Carter products within the meaning of Section 31011. In our opinion, this question must be answered in the negative. We understand the term "wholesale price" in the Section to denote a price paid for goods sold in quantity to a person engaged in their redistribution. In a layered system of distribution the price paid by a person engaged in distribution of the goods on one level, may be a bona fide wholesale price though it is at variance from the bona fide wholesale price paid for the same goods by a distributor on another level.

Even though in accordance with the foregoing, the variance in the prices paid by distributors, commission agents, and dealers, in our opinion, does not as a matter of law obviate the possibility that all of these prices as a matter of fact are bona fide wholesale prices, we make no finding that they are in fact bona fide wholesale prices. The questions "which may be resolved by an interpretive opinion pursuant to Sections 31510 and 31511, Corp. Code, are legal questions relating to the interpretation of the Franchise Investment Law, and do not include factual issues, such as the question whether the several prices paid by distributors, commission agents, and dealers for Mary Carter products are bona fide wholesale prices.

The opinion which we express, therefore, is that the agreements between Mary Carter and its distributors, commission agents, and dealers are not "franchises" within the definition of Section 31005, and are not subject to the provisions of the Franchise Investment Law, if the price which each of said class of persons pays for Mary carter products, does not exceed the bona fide wholesale price of these goods applicable on the particular level of distribution, and subject to the tolerance allowed by Rule 011.

Dated: San Francisco California
June 21, 1971

By order of
Commissioner of Corporations

Assistant Commissioner
Office of Policy