Interpretive Opinion No. 71 / 61F

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. Bruce M. Phillips
Attorney at Law
Cahill, Hanson, Chard & Phillips
3443 North Central Avennue
Pheonix, AZ 85012

Dear Mr. Phillips:

The request for an interpretive opinion contained in your letter dated October 28, 1971, has been considered by the Commissioner. Your letter raises the question whether the "Lease and Royalty Agreements" between Resler, Inc., an Arizona corporation ("Resler"), and persons referred to therein and hereinbelow as "licensees" are franchises within the definition of Section 31005 and subject to the provisions of the California Franchise Investment Law..

You have represented that, pursuant to the agreement, Resler grants to the licensee the exclusive and non-transferable right to manufacture the "Resler Fence Block" , within a specified geographical area, and to sell the same within or outside that area. The licensee is also granted the right to use the trademark "Resler Fence Block".

The Resler Fence Block is produced by means of a patented process and design, and is used in fence construction. The licensee agrees to pay Resler $12,000 for the right to use the Resler Fence Block processes in the manufacture and sale of this product, and moreover for Resler's agreement to provide training in the operation of the block producing equipment, to conduct marketing research, and to furnish the licensee from time to time with certain price lists and manufacturing supplies. In addition, the licensee is required to pay Resler monthly an amount equal to 1¢ per each half block and 2¢ per each regular block sold.

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.

You have not informed us of any express agreement requiring licensees to offer, sell, or distribute the Resler Pence Block under a marketing plan or system prescribed in substantial part by Resler. Such a marketing plan or system may be "prescribed" within the meaning of Section 31005, although there is no obligation on the part of the franchisee to observe it, where a specific sales program is outlined, suggested, recommended, or otherwise originated by the franchisor. Thus, a sales program may be "prescribed" by the franchisor where he supplies kits or detailed instructions for presentation of the product, especially where such program is supported by elaborate training material, courses, or seminars. By such means, a non-mandatory program may attain the force of a "prescribed" one {Dept. of Corp. , Rel. No. 3-F) .

In this connection, it appears, as above stated, that Resler will conduct marketing research for the benefit of the licensees, and will provide them with promotional aids, such as manuals to be distributed to prospective customers interested in purchasing Resler Fence Blocks. Nation-wide advertising will be done through Resler, with options for local introductory advertising in the licensee's territory. Resler agrees to provide initial training in the manufacturing process and to provide trained personnel to assist licensees in maintaining the high standard and quality of the product and whenever difficulties arise subsequent to the manufacture of the first Resler Fence Block. The licensee is required to make available to Resler all original books and records necessary to ascertain "gross sales" of the Resler Fence Block and to provide a year-end certified audit of sales. Licensees agree to use reasonable efforts to maintain competitive pricing of the Resler Fence Block, compared to other fence building materials.

We are not in a position on the basis of the information furnished us, as outlined above, to make a finding that, as a matter of fact, the licensees will not sell the Resler Fence Block under a marketing plan, or system prescribed in substantial part by Resler. If, as a matter of fact, sales are not made pursuant to such a plan or system, the agreements between Resler and the licensees are not "franchises" within the definition of Section 31005, and are not subject t:o 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 payment of $12,000 as well; as the royal ties, referred to above, must be regarded as "franchise fees" within the meaning of Section 31011 of the Law. That Section 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.

We cannot concur in your opinion that the agreements in question are exempted from the provisions of the California Franchise Investment Law on the ground that they are conducted with only a select group of manufacturers and not with the general public, inasmuch as our Law does not contain a private or limited offering exemption.

Your letter also requests documents required for a foreign corporation to qualify for business in California. For this information, we suggest that you contact the Office of the Secretary of Stater 111 Capitol Mall, Room 324, Sacramento CA 95814.

Dated: San Francisco, California
December 14, 1971

By order of
Commissioner of Corporations

By __________________

Assistant Commissioner
Office of Policy