Commissioner's Opinion No. 72 / 32F

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. Richard C. Ackerman
Attorney at Law
Suite 700
2555 East Chapman Avennue
Fullerton, CA 92631

Dear Mr. Ackerman:

The request for an interpretive opinion contained in your letter dated August 7, 1972, has been considered by the Commissioner. Your letter raises the question whether, under the circumstances described by you, the agreements between SMB Company, a sole proprietorship ("SBM" ), and persons referred therein and hereinbelow as "distributors", are franchises within the definition of Section 31005 and subject to the provisions of the Franchise Investment Law.

You have represented that SBM is engaged in merchandising and distributing the "Scripto Butane Match" which it purchases wholesale from Scripto Inc. ("Scripto") and sells at a net profit of 5% to distributors designated in and pursuant to the aforementioned agreement. The distributors sell the matches to the public within a specified territory.

The agreement provides that SBM will furnish to the distributor the initial retail outlets for displaying the merchandise on racks or stands on a consignment basis, with new locations, as needed, to be secured by the distributor. The distributor agrees to keep his displays properly serviced and well-stocked at all times.

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 franchisors 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), 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 is required to pay, directly or indirectly, a franchise fee which, on an annual basis, does not exceed $100.

You have not informed us in detail with respect to the instructions, suggestions, or recommendations extended by SBM to the distributors concerning the operation of their business and especially the manner in which sales are to be effected, except that you have stated that display racks or stands will be furnished to them. They are committed to keep displays properly serviced and well-stocked. Lacking specific and complete information on this point, we cannot answer the question whether the franchisees' business will be operated pursuant to a marketing plan or system prescribed in substantial part by SBM.

We point out however that a marketing plan or system within the meaning of Section 31005 may be "prescribed" within the meaning of that Section, although there is no obligation on the part of the franchisee to observe it, where a specific sales program is outlined, suggested, recommended, or otherwise originated by the franchisor. Thus a sales program may be "prescribed" by the franchisor where he supplies kits or detailed instructions for presentation of the product, especially where such action on his part is supported by elaborate training material, courses, or seminars. By these or similar means, a non-mandatory program may attain the force of a "prescribed" one (Dept. of Corps., Release No. 3-F).

If, as a matter of fact, there is no such marketing plan or system for the sales by the distributors, the agreements between SBM and the distributors are not "franchises" within the meaning of Section 31005, and are not subject to the provisions of the Franchise Investment Law. Otherwise since the sales are substantially associated with SBM's trademark "Scripto Butane Match" , the arrangements, in our opinion, are "franchises" and subject to the provisions of the Law, because we do not concur in your opinion that the distributors are not required to pay a "franchise fee" or that the franchises are exempt from the registration requirement of Section 31110 by virtue of Rule 011.

In this connection, you have represented that a distributorship is sold by SBM to a distributor at a price of $2,500 or multiples thereof. Included in this price are "locating expenses", "sales commissions", and the "G & A expense (including salary}", totaling $1,250. These charges do not appear to be payment for "goods" , and therefore the exception provided by Section 31011(a) is unavailable (see Dept. of Corps., Release No. 3-F, pp. 8-9). Moreover, since the charges are in excess of $100 on an annual basis, Rule 011 is not applicable.

Dated: San Francisco, California
September 27, 1972

By order of
Commissioner of Corporations

By __________________
Assistant Commissioner
Office of Policy