Interpretive Opinion No. 71 / 7F

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. Richard C. Ackerman
Attorney at Law
Miller, Macdonald & Bush
Suite 700
2555 East Chapmen Avenue
Fullerton, CA 92631

Dear Mr. Ackerman:

The request for reconsideration of the opinion expressed in our letter dated February 5, 1971, in relation to the "Independent Distributors Agreements" of Transcon, Inc., of Anaheim, California ("Transcon"), contained in your letter dated February 22, 1971, has been considered by the Commissioner. In your recent letter you have presented additional factual information and again raised the question whether the aforementioned agreements are "franchises" within the definition of Section 31005 and subject to the provisions of the Franchise Investment Law. On the basis of the additional information thus submitted to us and on the assumption stated below, this question is answered in the negative.

You have represented in your letter dated January 12, 1971, that Transcon sells what it describes as an exotic line of costume rings under the trade style "Selections by Valarie". It sells these rings to retail distributors under an agreement entitled "Independent Distributor Agreement". Under this agreement, the distributor initially purchases a certain number of ring units not less than five, at prices varying from $194.50 to $139.50 per unit, depending upon the number of units purchased. The average purchase is 11 units. The payment for the initial units is described in the Agreement as the "Distributor's initial investment. The Agreement provides that this investment is to be rebated to the distributor by a 5% discount on subsequent purchases or rings.

The unit consists of sixty assorted rings and a display case. These cases are placed in various shops initially selected by Transcon. After they are so placed, they are serviced by the distributor. The distributor is obligated to maintain a reasonable inventory of the rings at all times, and to reorder at least once every 45 days from the date Transcon has secured the last initial retail location specified in the agreement. If an initial location is terminated, the distributor must secure a replacement. Transcon has exclusive right to the trade style, and in the event of termination of the agreement, the distributor must discontinue its use.

You have further represented that Transcon purchases the rings at various prices averaging $4.25 per dozen, and resells them, we assume on reorders, to the distributors at $9.96 per dozen less the aforementioned 5% discount, including shipping fees. The distributor retails the rings at $16.80 per dozen.

In your letter dated February 22, 1971, you have furnished information concerning the wholesale price of rings similar to those sold by Transcon. We understand you to represent that in the light of this information, the price charged by Transcon for the merchandise is its bona fide wholesale price.

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 a trade name or style, 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 310ll(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.

From the information contained in your letter dated January 12, 1971, as supplemented by your letter dated February 22, 1971, we understand. that the distributors will make no payments to Transcon, except for merchandise, and that the sale by Transcon to the distributors of such merchandise will be at its bona fide wholesale price.

On this assumption, we are of the opinion that the distributors are not required to pay a franchise fee within the meaning of Section 31011, and that therefore the agreements described by your 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 10, 1971

By order of ANTHONY R. PIERNO
Commissioner of Corporations

By __________________

HANS A. MATTES
Assistant Commissioner
Office of Policy