Interpretive Opinion No. 71 / 49F
State of California Department of Corporations
Brian R. Van Camp, 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. Warlick Thomas
Attorney at Law
Sanders, Scott, Saunders,
Brian & Finney
7th Floor Amarillo Building
Amarillo, TX 79101
Dear Mr. Thomas:
The request for an interpretive opinion contained in your letter dated July 27, 1971, has been considered by the Commissioner. Your letter raises the question whether the agreements described therein between Goals Unlimited, Inc., a Texas corporation sometimes dba Goals, Inc. ("Goals"), and persons referred to by you and hereinbelow as "distributors", are franchises within the definition of Section 31005 and subject to the provisions of the Franchise Investment Law.
You have represented that Goals is in the business of producing and marketing personal development programs for individuals and groups. These programs are marketed under the names or titles of "Success for You", "Adventures in Success", and "Secrets". Goals owns the copyright to "Success for You" and "Adventures in Success", and the marketing rights to "Secrets". The copyright to "Secrets" is owed by Children's Success Goals, Inc., a corporation 51% of whose capital stock is owned by Goals. At the present time, Goals has 48 distributorships operating throughout the United States, including two in California.
The distributorships which Goals proposes to offer in California, will authorize the distributors to sell one or several of the aforementioned Goals programs. We understand you to represent that a distributor will make no payments to Goals except on account of the purchase price of the programs and sales materials which Goals will furnish him, and that the purchase price will be the same at the time of the establishment of the distributorship and on reorders, unless Goals in the meantime has changed what you describe as the established wholesale price of the merchandise. A distributor who markets all Goals programs, pays $3,612 for a number of these programs and a supply of kits and brochures purchase of a larger package for $9,271.50 gives the distributor a 10% discount. A distributor marketing only the Secrets programs, pays $3,364 for the programs, kits and brochures.
You have further represented that distributors are not assigned an exclusive sales area and are not restricted to marketing only Goals programs, but may sell any other merchandise, including personal development programs in competition with Goals. Goals offers no financing arrangements for the payment of the purchase price of its programs. The agreement provides that Goals is not concerned with the means by which sales are made, the manner in which the business of the distributor is conducted, or similar matters, but that it is concerned only with the results experienced by the distributor.
You have also represented that the distributor may but is not required at his own expense to attend a training seminar usually conducted by Goals in Dallas, Texas, and he will not. be obligated to recruit additional distributors, and no commission will be paid him for recruiting.
Section 31005 of the Franchise Investment Law defines "franchises" to mean an 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 parts by a franchisor, the operation of the franchisee 's business pursuant to such plan or system is substantially associated with the franchisor's trade name, trademark, advertising or other commercial symbol, and the franchisee is required to pay a franchise fee.
You have not informed us of any expressed agreement or of any practice expressly imposed which might have the effect of distributors offering the Goals programs under a marketing plan or system prescribed in substantial part by Goals. Such marketing plan or system suggested, recommended, or otherwise originated by Goals, might attain the force of a "prescribed" plan or system within the meaning of Section 31005, even if it was noncompulsory, if, as a matter of fact, it were to be substantially adhered to by the distributors. Therefore, the aforementioned provision of the agreement that Goals is not concerned with the means by which sales are made, or the manner in which the business of the distributor is conducted, does not preclude the possibility that the distributor's business is in fact, operated pursuant to a marketing plan or system prescribed. in substantial part by Goals, and we are not in a position on the basis of the information furnished us, to make a finding that, as a matter of fact, distributors will not sell the programs under a marketing plan or system prescribed in substantial part by Goals.
If as a matter of fact sales are not made pursuant to such a plan or system, the agreements between Goals and the distributor are not "franchises" within the definition of Section 31005, and are not subject to the provisions of the Franchise Investment Law. Otherwise the agreements, in our opinion, are "franchises" and subject to the provisions of the Law, because the payments required to be made by distributors in the amounts of $3,612, $9,271.50 or $3,364, respectively as above stated, must be regarded as "franchise fees" within the meaning of Section 31011 of the Law which defines "franchise fee", to include 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.
In our opinion, the provision of section 31011(a) that the purchase or agreement to purchase goods at a bona fide wholesale price is not to be considered the payment of a franchise fee, is. inapplicable to the charges made by Goals in the aforementioned substantial amounts for the programs, kits and brochures, on the initial purchase of which depends the distributor's right to engage in the business of offering, selling and distributing the programs.
The exception in Section 31011 (a) from the definition of "franchise fee", for goods sold at a bona fide wholesale price, is based. on the rationale that no substantial prejudice will come to a person buying a business and paying only the bona fide wholesale price for merchandise which he proposes to sell and equipment which he will use in that business. The word "goods" used in the exceptional provision therefore must be given a meaning commensurate with this rationale. "Goods" so understood does not include an idea or program, whether or not it is offered, or distributed by word of mouth through instruct:ions or lectures, or in the form of written or printed material, or by a combination of both. Rather the communication of such an idea or program is in the nature of a service, to which the provision of Section 31011(a) is not applicable.
Dated: San Francisco California
September 8, 1971
By order of
BRIAN R. VAN CAMP
Commissioner of Corporations
HANS A. MATTES
Office of Policy