Commissioner's Opinion No. 72 / 2F

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.

Mr. Jefferson Frazier
Attorney at Law
O'Brien, Stout, Bunim, Fraizer & Hallisey
One California Street
San Francisco, CA 94111

Dear Mr. Frazier:

The request for an interpretive opinion contained in your letter dated December 10, 1971, has been considered by the Commissioner. Your letter raises the question whether the arrangements between R.E.I.. Industries ("R.E.I.") and persons referred to by you and hereinbelow as "regional managers", "general distributors" and "dealers" , are franchises within the meaning of Section 31005. and/or area franchises within the meaning of Section 31008, and subject to the provisions of the Franchise Investment Law.

According to your representations, as we understand them, R.E.I. sells paser magnum device through a sales organization, consisting of dealers, general distributors, and regional managers, all appointed by it, and none of whom are required to pay for their own training or schooling or to purchase an inventory of devices or other articles.

The dealers may be garage owners, service stations, parts houses, or other retailers. They purchase the devices from R.E.I. at quantity discount cash prices varying from $13.50 to $16 per unit. You have stated in your letter that dealers are free to determine the manner of resale and the retail prices charged by them.

Dealers will be procured by and will receive sales and technical assistance from the general distributors. General distributors may but need not purchase at a price under $100 a sales demonstration kit, including 3 units and sales literature. General distributors will be paid, we presume, by R.E. I. commissions ranging from $2 to $4 per unit purchased by dealers from R.E.I.

Regional managers within a specific area of responsibility establish and maintain a group of general distributors to whom they provide no cost training and sales assistance. They are responsible for sales within their area and bear the cost of the training and supervision of general distributors and dealers, including the cost of keeping an office and renting a room for sales meetings. If the regional manager is not proficient in automotive technology, he is required at his expense to employ a technical adviser. Regional managers will be paid, we presume by R.E.I., $2 per unit purchased at wholesale in their area.

We understand that R.E.I. has already entered into some arrangements with regional managers, general distributors and dealers in. California. Please understand that as regards these arrangements, this letter is not and does not have the legally binding effect of an interpretive opinion, since such opinions pursuant to Sections 31510 and 31511 of the Franchise Investment Law are issued for the principal purpose of providing a means by which members of the public can protect themselves against liability for acts done or omitted in good faith in reliance upon an administrative determination and, of course, such reliance is not possible when the transaction in question has already taken place. (See Dept. of Corp. Rel. No. 2-F.)

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 payment for goods or 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) 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 the registration requirement solely because of the purchase or agreement 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.

In determining whether the business of offering, selling, or distributing goods is conducted "Under a marketing plan or system prescribed in substantial part by a franchisor" , as provided in Section 31005, the Commissioner has taken the position set forth in his Release No. 3-F, that even though there may be no obligation on the part of franchisees to observe specific directions given by the franchisor with respect to the manner of conducting sales or with respect to sales prices, a nonmandatory sales program suggested recommended or by training courses, seminars or otherwise originated and communicated by the franchisor, may obtain the force of a "prescribed one".

In the instant case, we have noted your statement that dealers are free to determine the manner of resale and the retail prices charged by them, but we understand that at the same time these dealers will receive sales and technical assistance from the general distributors who, in turn, will receive training and sales assistance from the regional managers. 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 and uniform standards as regards the quality and price of the goods sold, services rendered, and other material incidents of the operation. The marketing plan or system originated by the franchisor, is one of the important means by which the appearance of centralized management and uniform standards is achieved. If the arrangements for sales and technical assistance and training made in the instant case, have this effect, the R.E.I. program, though not mandatory in the strict sense of the word, in our opinion, is a "prescribed marketing plan or system" within the meaning of Section 31005.

As regards the question whether the dealers are required to pay a franchise fee, we understand you to represent that they make no payment to R.E.I. or to other persons for the right to engage in the sale of the devices supplied by R.E.I., other than on account of the purchase prices which they pay for these devices . We make no finding as to whether these prices do or do not exceed the bona fide wholesale price of the devices sold by R.E.I. to the dealers, because this is a question of fact concerning which issuance of an interpretive opinion, limited as it must be to the consideration of legal questions, would not be appropriate. Section 31153 of the Law provides that the burden of proof for an exemption or exception from a definition or requirement is upon the person claiming it. Therefore, R.E.I. bears the burden of establishing as a matter of fact that the prices which it charges for the devices, do not exceed their bona fide wholesale price.

Inasmuch as it appears that the business of the dealers is substantially associated with R.E.I.'s trade name, trademark or other commercial symbol, we are of the opinion that the arrangements between R.E. I. and the dealers constitute "franchises" within the meaning of Section 31005 and are subject to the provisions of the Franchise Investment Law, if and only if a marketing plan or system for the dealers' business is "prescribed" by R.E.I. in the sense in which we have hereinabove interpreted this term, and if the prices charged by R..E. I. for the devices, exceed their bona fide wholesale price.

If upon factual findings thus required the conclusion is reached that R.E.I.'s arrangements with the dealers are franchises within the meaning of Section 31005, we are furthermore of the opinion that its arrangements with the general distributors and regional managers are subject to the provisions of the Franchise Investment Law as "area franchises" within the meaning of Section 31008, and the general distributors and regional managers are "subfranchisors" within the meaning of Section 31009 of the Law Section 31008 defines "area franchise" as an agreement between a franchisor and a subfranchisor whereby the sub franchisor is granted the right, for a consideration given in whole or in part for such right, to sell or negotiate the sale of franchises in the name or on behalf of the franchisor. According to Section 31009, a subfranchisor is a person to whom an area franchise is granted.

We understand that R.E.I. grants to the general distributors the right to procure dealers and to the regional managers the right to procure general distributors. For their efforts the general distributors and regional managers receive commissions and other allowances, as above set forth. In our opinion, if in accordance with the foregoing, the arrangements which R. E. I. makes with the dealers, are franchises within the meaning of the Law, then its arrangements with the general distributors and regional managers are area franchises, because by them, it grants to the general distributors and the regional managers the right through the dealers to sell such franchises in its name and on its behalf, and this right is granted to the general distributors and the regional managers "for a consideration".

In this connection, it is unnecessary for us to determine whether the aforementioned exemption granted in Rule 011 is available as regards general distributors with respect to the price paid by them for the demonstration kit purchased from R.E.I., because even if this question is answered in the affirmative, nevertheless the expenditure required of general distributors on account of sales and technical assistance to dealers, and of regional managers on account of training and supervision to dealers and general distributors, in our opinion, constitutes "consideration" given for the account and benefit of R.E.I. within the definition of "area franchise'' in Section 31008.

According to Section 31010, the term "franchise" where used in the Law, unless specifically stated otherwise, includes "area franchise''. Therefore, in our opinion, if the arrangements between R. E. I. and the dealers are "franchises", as above stated, the registration requirement and other provisions of the Franchise Investment Law of Section 31110 are also applicable to the arrangements between R. E. I. and the general distributors and regional managers.

Dated: San Francisco, California
February 16, 1972

By order of
BRIAN R. VAN CAMP
Commissioner of Corporations

By __________________
HANS A. MATTES
Assistant Commissioner
Office of Policy