Commissioner's Opinion No. 72 / 9F

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.

The request for an interpretive opinion contained in your letter dated January 27, 1972, as supplemented by your letter dated March 8, 1972, has been considered by Commissioners. Your letters raise the question whether the proposed agreements between X 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. On the assumption stated below, this question is answered in the negative. The question also raised in your letter whether these arrangements are "securities" within the meaning of Section 25019, and subject to the qualification requirements, of the Corporate Securities Law of 1968, is answered in a separate opinion issued under that Law contemporaneously herewith.

We understand you to represent that X, a recently formed corporation, will be selling food supplements and other household items to the distributors under a plan which gives volume discounts of up to 75% of the purchase price, according to a schedule to be adopted by X. Persons having a volume of less than $1,000 (during what period, is not clearly stated, although it may be 6 months) cannot purchase form X but only from a distributor. Initially X proposes to obtain 100 distributors who will have preference as to territories.

We further understand that each distributor will be required to deposit $80 with an escrow company, to be related X in return for delivery to distributor of $80 of X products, as selected by X, when X has obtained 100 distributors, or to be returned to the distributor in the event that X is unable to obtain 100 distributors.

A time limit (not specified in your letter) will be set for X to either deliver the goods or cause the deposits to be refunded.

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 grated 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 such payment for goods 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.

In the instant case it does not appear that distributors will engage in the business of selling X products under a marketing plan or system prescribed in substantial part by X. Such a marketing plan or system may be prescribed within the meaning of Section 31005, although it is not compulsory, but is informally suggested, recommended or otherwise originated by the franchisor.

Assuming that sales of distributors are not made pursuant to a marketing plan or system prescribed by X, the arrangements between X and the distributors are not "franchises" within the definition of Section 31005, and are not subject to the provisions of the Franchise Investment law.

Dated: San Francisco, California
March 29, 1972

By order of
Commissioner of Corporations

By __________________
Assistant Commissioner
Office of Policy