Interpretive Opinion No. 71 / 57F
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. John L. Ckola, President
11750 Sorrento Valley Road
San Diego, CA 92121
Dear Mr. Carson:
The request for an interpretive opinion contained in your letter dated November 5, 1971, has been considered by the Commissioner. Your letter raises the question whether either or both of the agreements between KLIM Corporation, a California corporation ( "KLIM" ), and persons referred to therein as "Bottlers" and "Distributors" , respectively, are franchises within the definition of Section 31005 and subject to the provisions of the Franchise Investment Law, This question is answered negatively as regards the agreements with Bottlers and affirmatively as regards the agreements with Distributors.
You have represented that KLIM offers a complete marketing and distribution program for "Pop Bottle Milk." It proposes to enter into agreements with Bottlers granting them the right to process KLIM products to KLIM and Government specifications, using KLIM's trade names, tradernarks, and bottles for sale to KLIM exclusively in the several territories specified in the agreements. KLIM agrees daily to purchase Bottler's products in quantities and at pick-up times as per KLIM' s notification to the Bottler two days in advance. The purchase price payable by KLIM appears to be fixed in a part of the agreement not submitted to us.
Bottler is required upon execution of the agreement, to pay to KLIM a fee covering engineering supervision cost pursuant to construction and installation of facilities. Bottler agrees not to bottle any other products without written consent of KLIM.
Section 31005 of the Franchise Investment Law 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 or trademark, and the franchisee is required to pay a franchise fee.
In this connection, you have represented that at no time will the Bottler sell, service or distribute KLIM products, and, as above stated, you also have represented that the Bottler will sell these products to KLIM, and he will make delivery from his dock to Distributors procured by KLIM. You argue and we concur in the conclusion that under these circumstances, the Bottler is not granted the right to engage in the business of "offering, selling or distributing goods or services" within the meaning of Section 31005 of the Law, but is employed by KLIM as a processor for its products. Only the form of the relationship and especially the computation of the compensation for the Bottler's services suggests a sale. The substance of the agreement is one for the Bottler's services. Looking through form to substance, as we believe we must, it is our opinion that, under the circumstances described by you, as outlined above, the agreements between KLIM and the Bottler's are not "franchises'' within the definition of Section 31005, and are riot subject to the provisions of the Franchise Investment Law.
As regards the agreements between KLIM and Distributors, the Distributor, for an amount specified therein, is granted the right to deliver and distribute KLIM products from a specified Bottler to specific accounts created by KLIM, and also to such additional accounts as he may create in accordance with KLIM of rules and specifications, to collect for such products, and to use KLIM trademark and trade names. The Distributor agrees to take orders and diligently serve his accounts, and at his sole cost, to maintain and repair his truck or trucks painted in the colors and with the designs specified by KLIM, to keep his person and employees, uniforms and equipment neat, trim, and clean when delivering and handling KLIM products, to purchase from sources approved by KLIM all of his equipments, necessities and essentials for performing his delivering and handling services, to acquire the liability and property damage insurance specified in the agreement, and to comply with all Government laws pertaining to the delivery and handling of KLIM products.
The agreement states that it does not create an agency and that the Distributor is an independent business man, although it also states that KLIM is responsible for all facets of sales and distribution and that personnel will be retained in the Distributor's territory to implement the program.
In our opinion, the agreements between KLIM and the Distributors contain all of the essential elements of a franchise n as defined in Section 31005 of the Law. They prescribe a detailed marketing plan or system connected with KLIM's trade name and trademark, and they also provide for payment of a "franchise fee" defined in Section 31011 to include any fee or charge which a franchisee is required to pay for the right to enter into a business under a franchise agreement. We are of the opinion that the agreements in substantial part prescribe a marketing plan or system for the conduct of the Distributor's business. In making this determination, We have in mind the objective of the Law to deal With a multiplicity of business establishments created by the franchisor for all of which he assumes responsibility by causing them to be operated with the appearance of centralized management and uniform standards.
Accordingly, it is our opinion that, under the circumstances described by yon, as outlined above, the agreements between KLIM and the Distributors, are "franchises" within the meaning of Section 31005, and are subject to the provisions of the Franchise Investment Law.
Dated: San Francisco, California
November 23, 1971
By order of
BRIAN R. VAN CAMP
Commissioner of Corporations
HANS A. MATTES
Office of Policy