Commissioner's Opinion No. 72 / 20F
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.
Mr. Joseph H. Tausch
Joseph H. Tausch and Associates
Suite A, 6152 Mission Gorge Road
San Diego, CA 92120
Dear Mr. Tausch:
The request for an interpretive opinion contained in your letter dated March 22, 1972, as supplemented by your letters dated April 13, 1972 and May 8, 1972, has been considered by the Commissioner. Your letters raise the question whether the associate distributorship agreement between Aristocrat Originals Tie Company, a Division of Joseph H. Tausch and Associates ("Aristocrat"), and persons referred to therein and hereinbelow as "Associate Distributors", are franchises within the definition of Section 31005 and subject to the provisions of the Franchise Investment Law. This question is answered in the affirmative.
You represent that Aristocrat is engaged in the distribution of Aristocrat Originals men's neckwear, which bear its registered trademark. Pursuant to the agreement, it will appoint an Associate Distributor to market its merchandise through independent retail outlets in a specified area. Aristocrat will secure a specific number of retail locations with each location secured by six dozen neckwear items, a display rack, top sign, window banner and signed location agreement form.
You further represent that a minimum investment of $1917.50 is required of each Associate Distributor for ten retail accounts. For the ten accounts the Associate Distributor must spend approximately five to ten hours per week delivering merchandise, collecting monies due from retailers, replenishing merchandise which has been sold and keeping displays neat and amply stocked. It is suggested that Associate Distributor advise Aristocrat monthly of his sales to each retailer in order for it to analyze the count and offer suggestions, if necessary, to increase sales. Moreover, Aristocrat agrees to supply Associate Distributor with guidance and assistance on additional sales and promotional programs as developed. In addition, Aristocrat will promptly forward to Associate Distributor all leads and inquiries pertaining to sale of its merchandise within his marketing area, and he will forward to Aristocrat any leads or inquiries outside his area.
Upon completion of Associate Distributor's minimum purchase requirement, Aristocrat will further assist him in his expansion of new accounts by consigning to him merchandise at wholesale prices and display racks equal to 20% of his gross purchases each month. This consignment privilege is available until Associate Distributor has completely filled his area with racks, on the condition that he maintains purchases from Aristocrat equal to an average of 20 items per location per month on the total locations he services. All merchandise must be paid for within 90 days. If Associate Distributor fails to promptly receive and pay for shipments, Aristocrat may, after giving 30-days written notice, terminate the agreement. If the agreement is terminated for the above reason or for any other breach thereof, Aristocrat, after proper notification, and opportunity to correct the breach, will retain all monies paid to it by Associate Distributor.
The term of the agreement is five years, but will be automatically renewed for an additional five-year period provided Associate Distributor notifies Aristocrat 90 days prior to its expiration date of his intent of renewal. Upon renewal, no initial purchase order is required.
We understand that an Associate Distributor may obtain the exclusive rights to a geographical area of 5,000 people or more for a minimum investment of $10,055. Prior management or business experience is not required since the Associate Distributor will receive complete training by Aristocrat's staff.
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 the 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, 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). 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 is required to pay, directly or indirectly, a franchise fee which, on an annual basis, does not exceed $100.
In our opinion, the agreement between Aristocrat and Associate Distributors contains all of the essential elements of a "franchise". The agreement grants Associate Distributors the right to engage in the business of offering, selling and distributing Aristocrat's merchandise under a marketing plan or system prescribed in substantial part by Aristocrat. In reaching this conclusion, we have taken into consideration the aforementioned requirements regarding the manner in which Associate Distributors agree to service retail locations and the requirement that they forward to Aristocrat any leads or inquiries outside their marketing areas. Moreover, we have noted 'that Aristocrat suggests that Associate Distributors advise Aristocrat monthly and that it will supply an Associate Distributor, who does not have an exclusive territory, guidance and assistance on additional sales and promotional programs as they are developed. Further, if the Associate Distributor has an exclusive territory, he receives complete training by Aristocrat's staff. With regard to these latter provisions, the Commissioner has stated in his Release No. 3-F that a marketing plan or system may be "prescribed", although there are no obligations on the part of the franchisee to observe it, where a specific sales program is outlined, suggested, recommended, or otherwise originated by the franchisor. 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 business establishments created by the franchisor for all of which he ostensibly assumes responsibility by causing them to be operated with the appearance of some centralized management as regards the quality and price of goods sold, services rendered, and other material incidents of the operation.
As regards the question whether Associate Distributors are required to pay a "franchise fee"; we have noted the statement in your advertisement literature that "there are no franchise or royalty fees". As indicated above, an Associate Distributor must purchase a minimum of ten retail accounts for $1917.50, and an Associate Distributor who wishes to have an exclusive area must make a minimum investment of $10,055. Nothing contained in or with your letters, however, indicates that these payments are for the purchase of goods at a bona fide wholesale price. Neither can a determination be made that the amount paid does not exceed the sum of $100 under Rule 011. Moreover, as reflected above, Aristocrat retains all monies paid by the Associate Distributors when the agreement is terminated. Section 31152 of the Law provides that the burden of proof for an exemption or exception. from a definition or a requirement is upon the persons claiming it. Therefore, Aristocrat bears the burden of establishing as a matter of fact that the prices it charges for its merchandise does not exceed the bona fide wholesale price. We are unable to make such a determination because this is a question of fact concerning which the issuance of an interpretive opinion, limited as it must be to the consideration of legal questions, would not be appropriate.
Accordingly, since Aristocrat has not met this burden of proof, it is our opinion that, under the circumstances described by you as outlined above, the agreement between Aristocrat and Associate Distributors constitutes "franchises" and are subject to the provisions 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 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
June 7, 1972
By order of
BRIAN R. VAN CAMP
Commissioner of Corporations
HANS A. MATTES
Office of Policy