Interpretive Opinion No. 71 / 6F

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. Robert G. Leff
Attorney at Law
Lipsig, Rosenfield, Temkin & Leff
405 North Camden Drive
Beverly Hills, CA, 90210

Dear Mr. Leff:

The request for an interpretive opinion contained in your letter dated January 5, 1971, as supplemented by your letter dated January 15, 1971, and enclosures, has been considered by the Commissioner. Your letters raise the question whether the agreements between I & J Bagels, Inc., a California corporation ("I & J" ), and Irving Marks, its general manager, or other persons, as explained by you, are "franchises" within the definition of Section 31005 and subject to the provisions of the Franchise Investment Law. On the assumption stated below, this question is answered in the negative.

You have represented that I & J now operates two retail stores selling the products it manufactures. It is planning additional stores under two separate plans. Under the first plan, Mr. Marks proposes to operate the store under his own name or as a partnership with other I & J employees under a license from I & J. Under the second plan, Mr. Marks will enter into a partnership, in which he may be a general or a limited partner, with another person who will own one-third of the assets, while Mr. Marks and possibly other I & J employees will own the other two-thirds. The cost of the fixtures which, we understand, thus will be owned in the foregoing proportions, is represented to be $10,000. we assume, that all partners, including Mr. Marks, will contribute to the acquisition cost of the assets, including the fixtures, in the aforementioned proportion of their ownership of the assets.

You have represented that there will be no advertising or solicitation and no royalty payments, and that the licensees are obligated to purchase goods at "bona fide wholesale prices" from I & J, and if they do so shall have the right to use the I & J tradename. The agreements state that this tradename is owned by Mr. Marks who, under the second plan, will sublicense the partnership.

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 tradename, 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 3l011(a), and Rule 011 of the Commissioner exempts from the registration requirement 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.

You have represented that there will be no franchise fee and that the sale of goods by I & J to the franchisee will be at bona fide wholesale prices. On this assumption, we are of the opinion that the agreements described by you, as reflected above, are not franchises within the definition of Section 31005, and consequently are not subject to the provisions of the Franchise Investment Law.

Dated: San Francisco, California
March 3, 1971

By order of ANTHONY R. PIERNO
Commissioner of Corporations

By __________________

HANS A. MATTES
Assistant Commissioner
Office of Policy