Commissioner's Opinion No. 72 / 10F

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.

The request contained in your letter dated February 10, 1972, for further consideration of the views expressed by us in Interpretive Opinion No 71/57F, has had the attention on the Commissioner. Your letter advises us that Z, a California corporation (" "), has revised the proposed agreements with persons referred to therein and hereinbelow as "Distributors", and raises the question whether as so revised, those agreements are franchises within the definition of Section 31005 and subject to the provisions of the Franchise Investment Law. In Interpretive Opinion No. 71/57F, we answered this question in the affirmative with respect to the Distributors Agreement in the form submitted to as at that time.

You have now represented that by the revised agreement, the Distributor will be granted the right using Z trademark and trade name, to deliver and distribute Z products to specified accounts created by Z, and also to such additional accounts as he may create, in accordance with Z rules and specifications, and to collect for such products. The Distributors will purchase these products from a bottler who, we understand, processes them pursuant to agreements with Z. The Distributor will be given credit by the Bottler for his first load of products, including cases and bottles, on open account. When he picks up his second load, he must pay for his first load; he will at all times have an open account on one load.

The Distributor agrees to keep adequate records of all operations, to take orders and diligently serve his accounts, at his sole cost to maintain repair his trucks painted in the colors and with the designs specified by Z, to keep his person and employees, uniforms and equipment neat, trim, and clean when delivering and handling Z products, to purchase from sources approved by Z all of his equipment necessities and essentials for performing his delivering and handling services, to acquire specified liability and property damage insurance, and to comply with all Government laws pertaining to the deliver and handling of Z products.

The agreement states that it does not create an agency, employment, or partnership, and it also states that Z is responsible for all facets of sales and advertising.

Section 31110 of the Franchise Investment Law imposes a registration requirement on the offer or sale of any franchise in this state, unless an exemption is available. Rule 011 provides an exemption from this requirement but not from the other regulatory provisions of the Law for the offer or sale of a franchise if the provisions of the Law for the offer or sale of a franchise if the franchise fee on an annual basis does not exceed $100. 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. 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 31011(a).

In our opinion, the revised agreements, like those considered in Interpretive Opinion No. 71/57F, prescribe a detailed marketing plan or system connected with Z's trade name and trademark.

While the revised agreements eliminate the initial charge which the Distributor was required to pay Z under the form of agreement previously considered, and assuming that under the revised agreement such a charge will not be made by Z, the Distributor still will have to make a payment to the bottler for the Z products. Since this payment is made to an affiliate of Z, it constitutes a "franchise fee" as defined in Section 31011, unless it is excepted from the definition of "franchise fee" by Section 31011, par. 2(a). That Section provides that the purchase of goods at a bona fide wholesale price is not to be considered the payment of a franchise fee.

According to Section 31153, Z has the burden of proving that the price paid by the Distributor does not exceed the bona fide wholesale price of the products purchased from the bottler. If it fails to meet this burden, the payment to the bottler is a franchise fee, and in that case the agreement in our opinion is to be regarded as a franchise. Moreover in that case, if the excess over the bona fide wholesale price computed on an annual basis exceeds $100, the agreement is subject to the registration requirement of Section 31110; if it is less than that amount, the agreement need not be registered but is subject to all other regulatory provisions of the Franchise Investment Law.

If the price paid by the Distributor does not exceed the bona fide wholesale price of the Z products purchased from the bottler, the agreement is not a franchise within the definition of Section 31005 and is not subject to the provisions of the Franchise Investment Law.

Dated: San Francisco, California
April 4, 1972

By order of
BRIAN R. VAN CAMP
Commissioner of Corporations

By __________________
HANS A. MATTES
Assistant Commissioner
Office of Policy