Interpretive Opinion No. 71 / 62F
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.
Dr. M. DeBell
DeBell Associates Company
11911 Weddington Avenue
North Hollywood, CA
Dear Dr. DeBell:
The request for an interpretive opinion contained in your letter dated November 18, 1971, has been considered by the Commissioner. Your letter raises the question whether the arrangements between you, dba DeBell Associates Company ( "DeBell" ) and persons referred to hereinbelow as lessees are franchises within the definition of Section 31005 and subject to the provisions of the Franchise Investment Law.
You have represented that DeBell offers to existing auto service type businesses, a "package" consisting of a five-year lease of a pipe bending machine at a cost to lessees of $220 per month, with the first and last two months installments payable in advance; a starting inventory of mufflers, clamps and automobile tail pipes on consignment; opening advertisement in a local newspaper paid for by DeBell; a 6' x 6 1 sign; and the complete training of personnel on the premises.
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 lessees to offer, sell, or distribute the aforementioned products under a marketing plan or system prescribed in substantial part by DeBell. 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 these or similar means, a non-mandatory program may attain the force of a "prescribed" one (Dept. of Corp. , Rel. Ho. 3-F)
In this connection, you have represented, as above stated, that DeBell will pay for opening advertisements in local newspapers and provide the complete training of personnel on the premises of lessees. We are not in a position on the basis of this information to make a finding that, as a matter of fact, lessees will not sell the aforementioned products under a marketing plan or system prescribed in substantial part by DeBell. If, as a matter of fact, sales are not made pursuant to such a plan or system, the arrangements between DeBell and the lessees are not "franchises" within the definition of Section 31005, and are not subject to the provisions of the Franchise Investment Law.. Otherwise the arrangements, in our opinion, are "franchises" and subject to the provisions of the Law, because assuming that the lessees conduct their business under or in connection with DeBell's trade name or trademark, the arrangements for advertising and signs indicate that the lessees' auto service type business will be substantially associated with DeBell's commercial symbol.
We cannot concur in your opinion that no royalty or franchise fee is paid by the lessees. In our opinion the $220 monthly payment for the package, including lease of the pipe bending machine and various services in addition to consignment of the starting inventory, must be regarded as a "franchise fee" within the meaning of Section 31011 of the Law. That section defines "franchise fee" to include any fee that a franchisee is required to pay or agrees to pay for the right to enter into a business under a franchise agreement. The exceptional provision of Section 31011(a) that the purchase or agreement to purchase goods at a bona fide wholesale price is not to be considered as a franchise fee, is inapplicable to a payment which, as in your case, includes rental and compensation for services.
Dated: San Francisco, California
December 14, 1971
By order of
BRIAN R. VAN CAMP
Commissioner of Corporations
HANS A. MATTES
Office of Policy