Commissioner's Opinion No. 72 / 11F

State of California Department of Corporations

Brian R. Van Camp, Commissioner
In reply refer to: File No. _____

This letter is not an Interpretive Opinion for the reasons stated below.

Dr. David I. Freed
Attorney at Law
Fouke, Wersch & Hayes
One Eleven Sutter Street
Suite 2240
San Francisco, CA 94104

Dear Mr. Freed:

The request for an interpretive opinion contained in your letter dated January 12, l972, as supplemented by your letter dated February 8, 1972, has been considered by the Commissioner. Your letter raises the question whether the agreements described therein between Automotive Engineering Company of Oakland, a California corporation ("Automotive" ) and persons referred to therein and hereinbelow as "authorized dealers" or "dealers" are franchises within the definition of Section 31005, and subject to the provisions, including the registration requirement of Section 31110, of the Franchise Investment Law. This question is answered in the affirmative.

It appears that Automotive in two retail locations and through "authorized dealers" is engaged in the business of rebuilding automotive engines and transmissions for distribution and sale in the northern California area under the trade name "Automotive Engineering". Dealers are furnished signs and receive the benefit of advertising and other promotional materials for a monthly fee of approximately $300. They also promise to purchase from Automotive exclusively their requirements of rebuilt engines and transmissions, and moreover to maintain the sign in good condition and repair, to carry sufficient insurance covering liability for any damages to property or persons caused thereby, not to infringe upon or harm the trade name "Automotive Engineering", and not to use the words "Automotive Engineering" in their firm name without prior approval by Automotive. Automotive makes no warranties or guarantees to dealers or the dealers' customers with respect to Automotive products other than the guarantees contained in its "Automotive Engineering Power-Pak Exchange Engine Price List" , and dealers are prohibited from making other warranties or guarantees to their customers with respect to the installation of Automotive products. Dealers may initiate local advertising and promotional activities utilizing the trade name "Automotive engineering", subject to prior written approval by Automotive. Automotive has the right:, at reasonable times, to inspect the manner and method of dealers' operations.

The aforementioned Price List, in addition to the guarantees, sets forth wholesale and retail prices of Automotive products. You have advised that it is hoped that dealers will resell Automotive products at list prices, but that no concerted effort is made to enforce this policy.

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.

In our opinion, the agreements between Automotive and the dealers contain all the essential element:s of a "franchise" as defined in Section 31005. Especially, they provide for the grant to the dealer of the right to engage in the business of distributing Automotive products under a marketing plan prescribed in substantial part by Automotive, and the operation of the dealer's business, pursuant to said plan or system, is substantially associated with the trade name "Automotive Engineering". In making the determination whether there is a prescribed marketing plan or system, it is necessary to keep in mind the objective of the Law to deal with a multiplicity of outlets all of which ostensibly are controlled by the franchisor, though operated by several franchisees. In the instant case, the appearance of centralized management is achieved by detailed directions in the agreements and the Price List, as to how the franchisees are to conduct their business (see Dept. of Corps. Rel. No. 3-F).

We are also satisfied that the agreements require the dealers to make payment of a "franchise fee". That term according to Section 31011 includes any fee or charge which a franchisee is required to pay or agrees to pay for the right to enter into a business under a franchise agreement. The monthly fee of approximately $300 which the dealer is required to pay, in our opinion, constitutes a "franchise fee". It is therefore unnecessary for us to comment on the position, which we understand you have taken in your letter dated January 27, 1972, that Automotive products are sold to dealers at the bona fide wholesale price and that payments made by dealers for Automotive products therefore are not within the definition of "franchise fee" in accordance with the provision of Section 31011(a) which excludes from that definition the purchase or agreement to purchase goods at their bona fide wholesale price.

In conclusion it is our opinion that the agreements between automotive and the dealers, under the circumstances described by you as outlined above, are "franchises" within the definition of Section 31005 and are subject to the provisions, including the registration requirement of Section 31110, of the Franchise Investment Law.

Inasmuch as interpretive opinions are issued for the principal purpose of providing a procedure by which members of the public can protect themselves against liability for acts done or omitted in good faith in reliance upon the administrative determination under the Franchise Investment Law made in the opinion, and since there can be no such reliance where the Commissioner asserts jurisdiction with respect to a particular situation or determines that a legal requirement is applicable, advice to that effect, as contained in this letter, does not constitute an interpretive opinion.

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