Commissioner's Opinion No. 72 / 39F

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. Gerald V. Niesar
Attorney at Law
Morrison, Foerster, Holloway
Clinton & Clark
Crocker Plaza
One Post Street
San Francisco, CA 94104

Dear Mr. Niesar:

The request for an interpretive opinion contained in your letter dated September 11, 1972, has beep considered by the Commissioner in your letter, you have raised the question whether the arrangements described therein, between Armstrong Cork Company ("Armstrong") and its dealers, are exempt by virtue of Section 31101, from the registration requirement of Section 31110 of the Franchise Investment Law. Based upon the assumptions stated below, this question is answered in the affirmative.

You have represented that Armstrong has marketed hard-surface floor coverings throughout the United States using a variety of advertising and promotional programs since the late 1800's. In 1965, Armstrong started offering to its dealers a program of in-store merchandising displays and point of sale materials under the designation of "Armstrong Floor Fashion Center" ("Center"). Center is a registered trademark of Armstrong. In 1968, this concept was broadened to include an ongoing package of merchandising aids, displays, indoor and outdoor signs, yellow page listings, and introductory advertising under the Center designation.

You have represented that this package has been made available to all Armstrong dealers for $1,250 to defer the cost of initial benefits and $250 per year for additional benefits to build up the initial merchandising package so as to insure a long-term ongoing program. In addition, the dealer is subject to various requirements regarding floor space free of competing displays; interior, and exterior appearance of his store; quality of customer services, including installation by trained installers, consumer credit and passing on the Armstrong warranty in addition to the dealer's own installation and warranties and utilization of the Armstrong coop advertising program.

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 arrangements between Armstrong and its dealers regarding the Center program constitute "franchises" within the definition of Section .31005 of the Law, since they contain all of the essential elements of a "franchise" , as stated above. They are therefore subject to the registration requirement of Section 31110, unless an exemption is available.

Section 31101 of the Law provides that there shall be exempted from the disclosure requirements of Chapter 2 of Part 2 of the Law, and especially from the registration requirement of Section 31110, the offer and sale of a franchise if the standard as to financial condition set forth in Subdivision (a) and the standard as to scope of operations set forth in Subdivision (b) of Section 31101 are met, and provided further that the franchisor complies with the disclosure requirements specified in Subdivision (c) of the Section.

The standard as to financial condition set forth in Subdivision (a) is satisfied if the franchisor has a net worth on a consolidated basis, according to its most recent audited financial statement, of not less than $5,000,000. In this connection, you have represented that Armstrong's consolidated net worth is in excess of $500,000,000. We, therefore, expect, and for the purpose of this opinion assume, that it will be able to meet the required standard as to financial condition.

One alternative provided in Subdivision (b) for satisfying the standard as to scope of operations, is for the franchisor to have conducted business, which is the subject of the franchise, continuously for not less than five years preceding the proposed offer or sale of franchises. In this connection, we understand you to represent that Armstrong has engaged in the business of marketing hard-surface floor coverings under the trademarked Center designation since 1965, i.e. in excess of five years. It therefore appears that it meets the standard as to scope of operations set forth in Subdivision (b), and it is unnecessary to determine whether it also complies with the other alternative provided in Subdivision (b) for meeting that standard by having had at least 25 franchisees conducting business during the five year period preceding the offer or sale of franchises.

Inasmuch as on the assumption stated above, Armstrong meets the standards set forth in Subdivisions (a) and (b) of Section 31101, and if, as represented by you, it will comply with the disclosure requirements specified in Subdivision (c) of the Section, it is our opinion that the arrangements in question are exempt from the registration requirement of Section 31110 of the Franchise Investment Law by virtue of Section 31101 of the Law.

Dated: San Francisco, California
November 1, 1972

By order of
BRIAN R. VAN CAMP
Commissioner of Corporations

By __________________
HANS A. MATTES
Assistant Commissioner
Office of Policy