Interpretive Opinion No. 71 / 8F

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. W. J. Carey, General Manager
Rainey Industries, Incorporated
Box 801
Soquel, CA 95073

Dear Mr. Carey:

Your letter dated February 8, 1971, addressed to the Secretary of State, has been forwarded to the Department of Corporations for consideration. Your letter raises the question whether the so-called "free franchise contracts" of Rainey Industries, Incorporated ("Rainey"), under the circumstances described by you, constitute "franchises" within the meaning of Section 31005 of the Franchise Investment Law. In our opinion, on the assumption stated below, this question must be answered in the negative.

You have represented that Rainey intends to use direct mail to obtain parties interested in business opportunities, and to sell to these parties as an initial product, Ack-Rainey Kote, a building maintenance material. Then Rainey will make an offer to these parties of what it calls a "free franchise contract" if they make a minimum purchase at a stipulated wholesale price. The contract is non-cancellable. The holder of the contract becomes a distributor and applicator of Ack-Rainey Kote within the franchised territory and is guaranteed an override commission on shipments of the product into the territory if sold through direct mail or other persons. He also will receive an instruction manual covering solicitation of business and application of the product. Rainey will carry on direct mail solicitation. Additional products of Rainey will be offered to contract holders as researched, developed, and determined to be ready for marketing.

A "franchise" which is subject to the registration, disclosure, and other regulatory requirements of the Franchise Investment Law, is defined in Section 31005 of the Law, to mean a contract or agreement, either expressed or implied, whether 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, where the operation of the franchisee's business pursuant to such plan or system is substantially associated with the franchisor 's trademark, service mark, trade name, logotype, advertising or other commercial symbol designating the franchisor or its affiliate, and the franchisee is required to pay, directly or indirectly, a franchise fee.

Section 31011 of the Law provides that "franchise fee" means any fee or charge that the 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 such goods or services. It is further provided that the purchase or agreement to purchase goods at a bona fide wholesale price shall. not be considered the payment of a "franchise fee" , 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.

We understand you to represent that there will be no payment to Rainey by contract holders except for merchandise, and that the price charged for such merchandise will be a stipulated wholesale price. Assuming that this price is the bona fide wholesale price of the merchandise, we are of the opinion that the contracts 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 10, 1971

By order of ANTHONY R. PIERNO
Commissioner of Corporations

By __________________

HANS A. MATTES
Assistant Commissioner
Office of Policy