Commissioner's Opinion No. 72 / 40F

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
Miller, Macdonald & Bush
Suite 700
2555 East Chapman Avenue
Fullerton, CA 92631

Dear Mr. Ackerman:

The request for a further interpretive opinion contained in your letter dated October 11, 1972, has been considered by the Commissioner. Your letter renews the question heretofore considered in Comm. Op. No. 72/32F whether, under the circumstances described in your letter dated August 7, 1972, as supplemented and modified by your letter dated October 11, 1972, the agreements between SBM Company, a sole proprietorship ( "SBM"), and persons referred to therein and hereinbelow as "distributors", are "franchises" within the definition of Section 31005 and subject to the provisions of the Franchise investment Law.

In Comm. Op. No. 72/32F, we pointed out that the definition of "franchises" in Section 31005 of the Franchise Investment Law, among the essential elements of the franchise concept, specifies a marketing plan or system prescribed in substantial part by the franchisor and this payment of a franchise fee to the franchisee by the franchisor. Your letter of October 11, 1972, contends that neither of these two elements is present in the agreements between SBM and the distributors.

As regards the question whether SBM prescribes a marketing plan or system, you have represented that three major distribution methods are described by SBM to the distributor. Aside from acting as jobber or consignor of the "Scripto Butane Match" for the distribution o£ which SBM holds an exclusive license from Scripto Ink, the use of racks is described by SBM to the distributor as an available selling method since the match is considered an impulse item. Racks, therefore, are sold by SBM to the distributor, together with the match units.

You have represented that the distributor is not required to follow any of the distribution methods described to him by SBM and that SBM is not engaging in any practice designed to maintain an appearance of centralized management regarding the sale of the matches. As was pointed out in Comm. Op. No. 72/32F, a marketing plan or system may be "prescribed" within the meaning of section 31005 of the Law, although there is no obligation on the part of the franchisee to observe it, where the franchisor outlines, suggests, recommends, or otherwise originates a specific sales program; and this is especially significant where he provides the franchisee with sales aids, such as the racks, or with services, such as those of the locators, to assist him in the distribution of the products.

However, we are impressed by your representation that the distributors ·in the instant case are not required to use the racks selling method and that they are free to operate without the employment of the locators. Assuming that the primary burden of obtaining retail outlets is placed on the distributors, and further assuming that no specific marketing plan is prescribed or otherwise originated by SBM, it is the Commissioner's opinion that the agreements between SBM and the distributors are not "franchises" within the definition of section 31005 and are not subject to the provisions of the Franchise Investment Law.

If contrary to the foregoing assumptions, a marketing plan or system is prescribed by SBM, it is the Commissioner's opinion that the agreements in question are "franchises" and subject to the provisions of the Franchise Investment Law, because contrary to your conclusion it is the Commissioner's opinion that the distributors are required to pay a "franchise fee" within the meaning of Section 31011.

As regards this point, our previous opinion proceeded upon the representation contained in your letter dated August 7, 1972, that distributorships would be sold by SBM to distributors at a price of $2,500 or multiples thereof, including $1,250 on account of "locating expenses'', "sales commissions" , and "Q & A expense (including salary)". Your letter dated October 11, 1972, amends this factual representation and asks us to assume that the "practical minimum purchase price" of a distributorship is $500, including "locating expense" of $75, "sales commissions" of $75, "advertising for distributors" of $50, "overhead" of $60, and "profit" of $27.05.

These itemized charges totaling $287.05, other than charges for matches, refills, and display racks, are not payment for "goods" and constitute a franchise fee. It is therefore unnecessary to consider whether the charges for matches, refills, and display racks are excepted from that concept by virtue of the provision relating to "goods" in Paragraph 2(a) of Section 31011.

Dated: San Francisco, California
November 6, 1972

By order of
BRIAN R. VAN CAMP
Commissioner of Corporations

By __________________
HANS A. MATTES
Assistant Commissioner
Office of Policy