1973 Franchise Opinions
The Business Law Section is compiling the complete Interpretive Opinions concerning franchise issues from the State of California Department of Corporations.
Here is the archive for 1973. The archive for this year is complete.
- Opinion No. 73 / 1LF - May 30, 1973
Summary: Company that printed trading stamps and did not redeem stamps or mark stamps was not a trading stamp company.
Key Words: B&P 17754, 17752, 17754
- Opinion No. 73 / 2F - January 24, 1973
Summary: Inventor who charged a fee to manufacturer for the right to produce and sell a patented and trademarked device was not a franchisor when manufacturer is free to sell the device according to its own plan - i.e., the inventor does not prescribe a marketing plan or system. Commissioner determined that a narrowly tailored system designed to protect the patent rights of the inventor was not a marketing plan under these facts.
Key Words: 31005, marketing plan or system, franchise fee, license agreement, patent, intellectual property
- Opinion No. 73 / 3F - January 24, 1973
Summary: Commissioner cannot conclude based on the facts presented whether or not the manufacturer's assistance and system provided to its dealer constituted a marketing play or system necessary for a franchise relationship to exist.
Key Words: 31005, 31510, 31011, 31110, franchise fee, marketing plan, system, assistance
- Opinion No. 73 / 4F - March 8, 1973
Summary: Limited partnership agreements were not franchises because the limited partners were not permitted to take part in the conduct or control of the partnership business and had no right or authority to act for or bind the partnership - i.e., they were not granted the right to engage in the business of offering, selling, or distributing goods or services.
Key Words: limited partnership agreements, limited partners, 31005, 25019, securities, franchise fee, authority, rights, control
- Opinion No. 73 / 5F - February 2, 1973
Summary: Commissioner re-visited earlier opinion 72/6F, and reaffirmed its decision which found that manufacturer's proposed business was still considered a franchise because facts indicated that manufacturer prescribed a marketing plan by way of establishing a multiplicity of golf courses, all to be operated with the appearance of centralized management and uniform standards.
Key Words: 31005, marketing plan, training, promotional activities, trade name, uniform standards, centralized management, 72/26F, golf
- Opinion No. 73 / 6F - Undated
Summary: Commissioner considered whether the bona fide wholesale exemption to the definition of a franchise fee applied in a situation in which distributor required that specified amounts of products be purchased within a specified period. Commissioner determined that the bona fide wholesale exception was not available if the amount required to be purchased exceeded the quantity which a reasonable businessman normally would purchase either for starting inventory or to maintain a going inventory.
Key Words: Distributor, 31005, franchise fee, marketing plan or system, 31011, Rule 011, bona fide wholesale price, excessive purchase, area franchise, 31008, 31010
- Opinion No. 73 / 7F - February 2, 1973
Summary: Commissioner opined that whether what is paid for product is paid at a bona fide wholesale price is not based on putative franchisor's cost but on the bona fide wholesale price of its products sold to the putative franchisees compared to other items in the field.
Key Words: 31005, 31008, distributor, consultant, training, 31011, Rule 011, 31110, bona fide wholesale price, comparable products, cost
- Opinion No. 73 / 8F - February 2, 1973
Summary: Commissioner refused to consider request for interpretive opinion from putative franchisee because the right to such opinions are limited to putative franchisors
Key Words: 31006, 31110, 31511, 31007, 31005, 31510, putative, opinion, request, commissioner
- Opinion No. 73 / 9F - March 8, 1973
Summary: Commissioner determined that agreement by manufacturer to pantyhose products to its distributors was not a franchise because the products were sold at bona fide wholesale prices.
Key Words: 31005, 31110, Rule 011, exemption, 31011, 31153, bona fide wholesale price, distributor
- Opinion No. 73 / 10F - March 12, 1973
Summary: Distributor relationship is not franchise as distributors were only provided with display materials highlighting the product, and did not have to report to manufacturer for distributor's time, manner of selling, or income from sales - thus, no prescribed marketing plan or system was present.
Key Words: 31005, 31110, distributor, 31011, Rule 011, bona fide wholesale price, 31110, marketing plan or system, franchise fee
- Opinion No. 73 / 11F - March 20, 1973
Summary: No facts were brought to Commissioner's attention that suggested a marketing plan or system was imposed by manufacturer when the putative franchisee was free to sell the products and enter into any economic arrangement with the retailers that it chose.
Key Words: 31005, marketing plan or system, distributor, wholesaler
- Opinion No. 73 / 12F - March 20, 1973
Summary: Any person selling franchises must register in California, notwithstanding a prior personal relationship between the franchisor and proposed franchisee or a limited number of franchises to which a franchisor will be offering franchises.
Key Words: 31005, 31110, registration, personal relationship, limited, small, offer
- Opinion No. 73 / 13F - March 20, 1973
Summary: Commissioner opined that a marketing plan or system may be determined to be prescribed under Section 31005 even if it is not compulsory, but is informally suggested, recommended or otherwise originated by the distributor. Commissioner determined that sales of distributorships not made pursuant to a prescribed marketing plan or system were not franchises. In the alternative, if the price charged by distributor for the products does not exceed the bona fide wholesale price of the goods, or is less than $100, payment of such price by distributor did not constitute a franchise fee and the distributorships were not franchises.
Key Words: 31005, 31110, 31011, 31011(a), Rule 011, 31153, prescribed marketing plan or system, bona fide wholesale price, $100, compulsory, suggested, optional
- Opinion No. 73 / 14F - March 21, 1973
Summary: License Agreements are exempt from registration where licensor had a net worth, on a consolidated basis, of not less $1M and the parent company of licensor had a net worth, on a consolidated basis of not less than $5M.
Key Words: 31110, 31005, 31101(c), Rule 310.100, wholly-owned subsidiary, large net worth, parent, exempt, registration
- Opinion No. 73 / 15F - May 21, 1973
Summary: Commissioner determined that under a distribution agreement, a deposit along with other payments which sales representatives were required to pay were deemed by Commissioner to be charges for the right to engage in the business of becoming sales representatives of distributor and offering services to customers. These payments constituted franchise fees. Even though the initial performance deposit of $15,000 by the sales representative was refundable, it deprived them of the use of the money during a 5 year period. In addition, sales representatives were required to pay costs of attending conventions each year, and may have been required to pay an operative fee of 8% of gross volume of the sales representative, and $2,500 as liquidated damages for the failure to perform certain activities prior to the termination of distribution agreement.
Key Words: 31011, 31011(a), Rule 011, 31110, 31005, franchise fee, refundable deposit
- Opinion No. 73 / 16F - April 2, 1973
Summary: If the price paid by licensees for beverages which licensee was licensed to manufacture, distribute, sell and advertise, was the bona fide wholesale price of these goods, the agreements between the licensor and licensee were not franchises.
Key Words: 31011, 31005, 31011(a), Rule 011, 31008, 31009, bona fide wholesale price, license, manufacture
- Opinion No. 73 / 17F - May 1, 1973
Summary: A marketing plan or system may be deemed prescribed by franchisor where franchisor supplies franchisee with sales aid or detailed instructions, especially when it is supported by elaborate training material, courses or seminars. A franchise fee may be payable in a lump sum. In addition, payments for advertising constituted the payment of a franchise fee even though the payments were not made directly to the franchisor, since the payments are made to enhance the business of franchisor and thus benefitted franchisor. Finally, the CFIL contains no exemption for a nonpublic offering in which franchisor proposes to establish 10 or fewer distributorships.
Key Words: 31005, 31011, 31011(a), Rule 011, prescribed marketing plan or system, centralized management, uniform standards, franchise fee, lump sum, payments for advertising, nonpublic offering
- Opinion No. 73 / 18F - May 2, 1973
Summary: Commissioner opined that for the operation of distributor's business to be substantially associated with a supplier's commercial symbol, the symbol must be communicated to distributor's customers. Commissioner declared that a trademark which a supplier only uses in invoices or in advertising to distributors but which distributors are not permitted to show in dealings with customers was not substantially associated with supplier's operation. Where distributors did not use supplier's' commercial symbol on any display racks, signs, fliers and/or envelopes no franchise existed.
Key Words: 31005, substantial association with commercial symbol, trademark, distributor
- Opinion No. 73 / 19F - May 18, 1973
Summary: Commissioner considered whether a large franchisor exemption applied. Commissioner determined that where franchisor has a net worth in excess of $5M, and it had at least 25 franchisees conducting business at all times during the past 5 years, the exemption applied provided that franchisor also complied with the disclosure requirements of subdivision (c) of Section 31101 as a condition of the exemption from registration. Commissioner also opined that no exemption from registration exists for the sale of a new franchise to an existing franchisee and/or high-level employee
Key Words: 31110, 31101, 31018, existing franchisee, high-level employee, exemption, large franchisor
- Opinion No. 73 / 20F - May 21, 1973
Summary: A marketing plan or system may be prescribed although there is no obligation on the part of distributors to observe it, where a specific sales program is outlined, suggested, recommended or otherwise originated by franchisor. Provisions regarding an exclusive territory, limitations on activities outside of the territory or on selling similar products, the furnishing of sales aides and the sharing of activities, may all be considered in determining whether there is a prescribed marketing plan or system. A distributor's business may be substantially associated with a commercial symbol even if distributor was not required to use franchisor's commercial symbol. The granting of the right to use franchisor's commercial symbol on material in such a way as to communicate it to its customers is sufficient to conclude that the business is substantially associated with franchisor's commercial symbol. To the extent that distributors may be required to purchase specified amounts of product, whether initially or as a prerequisite to a continued exclusive territory, the bona fide wholesale price exemption is not available if the amount required to be purchased exceeds the quantity which a reasonable person would purchase. Payment for excessive purchases would constitute a franchise fee.
Key Words: 31005, 31008, 31110, Rule 011, 31011, 31153, 31009, area franchises, prescribed marketing plan or system, substantially associated with a commercial symbol, bona fide wholesale price, excessive purchase requirement, initial franchise fee
- Opinion No. 73 / 21F - May 21, 1973
Summary: Commissioner determined that if none of the agent's forms, advertising brochures or literature which company agreed to provide the agent for delivery to customers contained any of company's commercial symbols, then the agreements between the company and agent are not franchises. Provisions in the agreements with respect to limitations on territory and insurance programs, forwarding of applications and commissions to company, payments required to be made to student sales personnel, and training and consulting by company are characteristics of a prescribed marketing plan.
Key Words: 31005, commercial symbol, prescribed marketing plan, agent, advertising, territory, insurance, training, consulting
- Opinion No. 73 / 22F - May 21, 1973
Summary: Commissioner determined whether insurance agency contracts between granting agency and independent agents were franchises. Under the contracts agents were granted semi-exclusive territories, and required to conform with the certain business formats, including underwriting requirements. Agents also paid granting agency an advertising fee (between $100 and $1,000 per year for the first 3 years - although the fee could be offset in the 2d and 3d years). Commissioner determined that if agents did not use granting agency's commercial symbol or name in any way (e.g., not in marketing materials, forms or signs), the insurance agency contract was not a franchise. If the agents used the granting agency's commercial symbol, then the elements of a franchise are present.
Key Words: 31005, insurance, agent, commission, territory, advertising, fee, identification, independent contractor, agency, business format, commercial symbol, trademark
- Opinion No. 73 / 23F - May 31, 1973
Summary: Company licensed plumbers to use its trademarked product to de-scale pipes. Plumbers were granted a territory and required to follow specified procedures for using the product (management, supervision) and marketing the product and service. Plumbers paid 10% of their gross revenue from de-scaling jobs to company. Company also provided training and equipment to plumbers pursuant to a published price list. Commissioner determined that the arrangement was a franchise.
Key Words: 31005, fee, gross revenue, percent, training, advertising, prescribing, marketing plan or system, elements, territory, trademark, royalty, plumber
- Opinion No. 73 / 24F - May 31, 1973
Summary: Company owned 4 pizza restaurants, and operated another as a joint venture under the name "Chico's Pizza Parlor." Question posed to Commissioner was whether additional joint ventures (JV) would be franchises. JVs were up to 49% owned by investor; manager was required to purchase at least 20% of the JV, and to devote full time to the operation of the restaurant. Company chose the manager. Restaurant must be operated as directed by company, including menu items served, recipes, food quality, and prices. JV paid Company 3% of its gross revenues. Commissioner determined that the JV satisfied all the elements of a franchise.
Key Words: 31005, 73/4F, restaurant, joint venture, marketing plan, fee, prescribed, substantial part, control, percent, gross revenue, royalty
- Opinion No. 73 / 25F - June 26, 1973
Summary: Company sold subscriptions to a service through multiple levels of distributors. Distributors at each level "sponsor" lower level distributors (salespeople). Salespeople were required to make an initial investment of $67.17 to purchase the "Service, Kit, and Sales Materials" from a distributor which along with an operating manual and mandatory compliance therewith constituted a prescribed marketing plan or system according to Commissioner. The $67.17 initial payment constituted a franchise fee - as it was a payment for services, not "goods." It appeared that payments for services would exceed $100 annually, so no exemption under Rule 011 existed. Since the detailed sales and marketing materials and operating manual referred to the use of company's commercial symbol Commissioner determined that a trademark license existed. Distributors purchased certificates from company at a discount from the suggested retail price, and received a sliding scale discount on other purchases based on the level of the prior month's sales. Distributors were responsible for training, motivating, directing and supplying their salespeople, and repurchasing materials from salespersons they sponsored, if requested. Company was obligated to repurchase if the distributor failed to. Commissioner also opined that the distributors were area franchisors based on their right to sponsor other distributors.
Key Words: 31005, 31008, area franchise, 31010, 31110, 31011, substantially associated, commercial symbol, goods, services, training, distributor, marketing plan, prescribed, advertising, sales materials, suggested retail price, rules, policies, Rule 011, developer, sponsor, multi level
- Opinion No. 73 / 26F - June 26, 1973
Summary: Ice cream distributor had two types of arrangements with "independent" retailers: 1. Retailers rented truck from distributor (at daily rate designed to cover distributor's costs of maintenance, repairs and insurance), and purchased ice cream at the established wholesale price ;and 2. Retailer owned own truck, and purchased ice cream at established wholesale price. Each arrangement was available daily at retailer's option, and there is no sharing of revenue with distributor. Each retailer received an area in which to operate. The trucks displayed distributor's tradename. With respect to the first arrangement Commissioner determined that distributor prescribed a marketing plan due the assignment of areas of operation and the uniform appearance achieved through the use of specific types of trucks bearing the distributor's tradename through a trademark license. Commissioner also determined that the truck rental payment was a franchise fee, thus the first arrangement is a franchise. Commissioner determined that the second arrangement was not a franchise if distributor could satisfy its burden of demonstrating that retailers were charged the bona fide wholesale price for the ice cream.
Key Words: 31005, 31011, Rule 011, marketing plan, prescribed, bona fide wholesale price, centralized management, uniform standards, franchise fee, rent, burden, truck, ice cream, distributor
- Opinion No. 73 / 27F - June 9, 1973
Amendment of Commissioner's Opinion 73/27F
Summary: Original Opinion 73/27F amended to add the "not an Interpretive Opinion" paragraph as the last paragraph thereof.
Summary: Commissioner considered whether company that was established to allow independent real estate brokers to participate in joint advertising was a franchise. Brokers paid $1,000 membership fee, $100 a month operation fee, and their pro rata share of the group's advertising costs. Were permitted but not required to use company's name, and received lawn signs, forms and other promotional materials. Commissioner found that due to the fee payments, it "can be assumed" that the members will make use of the name and advertising, with the effect of "giving a uniform appearance to the members' businesses. Thus, Commissioner concluded the arrangement was a franchise since a fee, prescribed marketing plan and trademark license were present.
Key Words: 31005, marketing plan, advertising, voluntary, prescribed, uniform appearance, optional
- Opinion No. 73 / 28F - July 9, 1973
Summary: Collision damage appraisal franchisor charged $10 initial fee, and 20% royalty, with partial royalty refund for any quarter in which franchisee's gross revenues were less than $2,400. Franchisor requested exemption from registration requirement, despite being unable to satisfy the net worth requirements of Sec. 31101(a). Commissioner stated that no authority to grant exemptions in individual cases existed. Exemptions were only available pursuant to a generally applicable published regulation or standard. Because no published standard provided for an exemption based on asserted low financial risk to franchisees, the exemption request was denied.
Key Words: 31005, 31101, 31110, exemption, registration, net worth, generally applicable regulation or standard, commissioner, individual
- Opinion No. 73 / 29F - July 18, 1973
Summary: Marketer of indoor golf system (previously deemed a franchise in Comm. Op. 73/17F) revised agreement with distributors and again requested ruling that arrangement was not a franchise. Under the new agreement marketer granted exclusive territory and allowed distributor to purchase systems for sale at a bona fide wholesale price. Distributor paid $17,7000 (which included $2,000 cost of training an installation and repair service company selected by distributor, and $8,000 as non-refundable deposit on ten units). Distributor had option of purchasing ten units in lieu of paying the deposit. Commissioner determined that both the non-refundable deposit and the ten unit purchase option constituted franchise fees (because they deprived franchisee of the use of its capital before it would otherwise pay marketer for the units). Although marketer did not impose a specific system on its distributors, it "prescribed" a marketing plan by granting territories, furnishing printed materials to the distributors, making installation and maintenance knowledge available, and through the use of its trade-name and logo. Thus, Commissioner concluded that the arrangement constituted a franchise.
Key Words: 31005, 31101, marketing plan, prescribed, fee, appearance of centralized management, uniform standards, territory, wholesale price, starting inventory, nonrefundable, deposit, 72/3F, 73/7F, 73/17F
- Opinion No. 73 / 30F - July 18, 1973
Summary: Manufacturer of wall paper removing system granted exclusive territories to distributors. Distributors were not permitted to use manufacturer's product name in its business's name, were required to make minimum purchases, and to maintain "adequate inventory" and equipment to service its territory. Distributors were prohibited from selling competitive products and using their own advertising materials without manufacturer's approval. Manufacturer specified the retail price, sold catalogs and other advertising materials to distributors, and had right of first refusal if distributor decided to sell the distributorship. Commissioner held that the arrangement was a franchise. The limitations on use of name, territory, price, advertising and sale of competitive products constituted a prescribed marketing plan. The fee requirement was satisfied by the payment of a $1.00 per month per tank in inventory fee, and by the charge for advertising materials (which distributor "may" purchase).WHERE IS MARK?
Key Words: 31005, 31011, fee, marketing plan, prescribed, right of first refusal, sales aids, royalty, territory, advertising, prior consent, 73/7F, 73/17F, optional
- Opinion No. 73 / 31F - July 18, 1973
Summary: A manufacturer of jewelry sold its products through distributors. Distributors hosted informal house parties to sell the jewelry. Distributors purchased the product at 30 percent less than retail, which the manufacturer said was a bona fide wholesale price, only after a retail order was made. Other than purchasing product, distributors were not required to pay any amounts to the manufacturer. Because manufacturer required the distributors to purchase products for their first party without any discount, the sale was not at a bona fide wholesale price. Commissioner opined that manufacturer could prove the payment for the initial product was less than the $100, under Rule 011 the franchises would be exempt from the registration requirement of Section 31110. Commissioner determined there was a franchise fee and therefore the arrangement was a franchise. Commissioner noted that the burden to prove an exception to the CFIL is on the person claiming it. Manufacturer also had arrangements with executive distributors they could recruit and manage to operate subdistributorships beneath them. Commissioner found that these arrangements were area franchises and determined the executive distributors were also subfranchisors unless the manufacturer could prove the exception in Rule 011.
Key Words: 31005, 31110, rule 11, Opinion No. 73/7F, fee, bona fide wholesale, exception, burden, Penal Code section 327
- Opinion No. 73 / 32F - July 18, 1973
Summary: Manufacturer marketed home health products to be sold in units by a distributor to dealers and thereafter by dealers to retail customers. Each dealer was under the direction and guidance of a distributor. Commissioner determined the relationship was a franchise because the manufacturer required that dealers purchase literature and sales aids from a distributor, limited the use of the literature and sales aids, required attendance at distributor sponsored sales and success meetings, and required the use of the trade name and logo. Thus manufacturer prescribed a marketing plan or system in substantial part, and was substantially associated with the franchisor's commercial symbol. With regard whether a franchise fee existed, based upon the fact submitted Commissioner could not determine whether the cost of goods were at a bona fide wholesale prices and therefore within the exception or if the amount paid was below the threshold of Rule 011. Commissioner further noted that the exception of Section 3l011(a) is not available if the amount required to be purchased exceeds the quantity which a reasonable business person would purchase by way of a starting inventory or to maintain a growing inventory. Manufacturer also had arrangements where distributors and dealers could sponsor other dealers. Commissioner found that this the arrangement was selling area franchises and determined the participating sponsors were also subfranchisors.
Key Words: 31005, 31110, rule 11, Opinion No. 73/7F, franchise fee, bona fide wholesale, marketing plan, logo, marks, exception, burden, Penal Code section 327
- Opinion No. 73 / 33F - August 15, 1973
Summary: Commissioner considered whether exclusive management agreements between the seller of mobile homes and branch managers were franchises under Section 31005. Seller granted to branch managers exclusive non-transferable right to use the seller's mark, business plan, methods, systems and tools. Branch managers received intensive training in the operation of the business. Advertising or promotional materials and signs needed to be approved by seller. Branch managers paid to seller 20% of all profits for the rights and privileges granted and a processing fee of $25 per mobile home contract sale. Branch managers could be required to spend a specified % of gross sales for advertising supplied or approved by seller. Commissioner concluded that the agreements were franchises under Section 31011(a) and Rule 011. A marketing plan and system was prescribed through the system, methods, sales tools and training. The payments required of branch managers including those for advertising constituted franchise fees and seller's mark was licensed to branch managers.
Key Words: 31011, Rule 011, marketing plan, trademark, franchise fee, Release No. 3-F
- Opinion No. 73 / 34F - September 19, 1973
Summary: Commissioner concluded that distributorships between the manufacturer of dietary food products and hosts that were authorized to sell the products through various clubs in protected territories were franchises. Under the arrangement, hosts were trained on how to organize clubs, sell products, recruit new members and collect payments. Hosts were required to purchase products from manufacturer as well as brochures and sales aids and other tools. Hosts remitted a portion of the member fees and weekly dues to manufacturer. Hosts could receive travel points to be redeemed for travel tickets for signing up new members or could transfer the travel points to nonprofit organizations. Commissioner determined that the training and detailed instructions as to how to distribute the products was a prescribed marketing plan even if there was no obligation to observe the information provided and it was merely suggested or recommended. Commissioner determined that franchise fees existed and payment in lump sum or installments was irrelevant to this determination. If prices for products were at bona fide wholesale prices, it would be the burden of manufacturer to prove this. Commissioner was not in a position to determine whether sales aids purchased by hosts were goods under Section 31011(a), in which case Commissioner determined that such payments were for the right to engage in the franchised business. Purchase prices paid for initial inventory of products would constitute franchise fees if such amounts were for excessive purchases beyond what a reasonable business person would purchase to start a business.
Key Words: Section 31005, Section 31011(a), Release 3-F, prescribed marketing plan or system, franchise fee, installment bona fide wholesale price, Rule 011, Comm. Ops. Nos. 73/7F and 73/32F
- Opinion No. 73 / 35F - September 19, 1973
Summary: Commissioner considered whether contracts between licensor of a mark to be used by licensees on seedling plants constituted a franchise. The agreement did not require that licensees purchase goods from licensor and the payment of money was limited to a royalty of a set amount for each 1,000 seedlings sold under the trademark. Licensee was required to grow the seedling plants in accordance with licensor's specifications for high quality plants however licensor did not control the distribution of the plants in any way. Commissioner determined that license agreements were not franchises as licensees were not required to follow specifications prescribed by licensor and the control was limited to ensuring high quality plants were associated with licensor's trademark. Commissioner noted that a franchise fee could be present by virtue of the royalty payment and but for the absence of the prescribed marketing plan or system the contracts could be a franchise.
Key Words: Section 31005, Section 31011, prescribed marketing plan or system, franchise fee
- Opinion No. 73 / 36F - Sept 19, 1973
Summary: Commissioner determined that a contract under which distributors were permitted to purchase from seller a proprietary dispensed french fried potato mix and dispensing machine constituted a franchise. Under the contract, distributors purchased a certain amount of products and paid in full for the first order plus paid a non-refundable advance on future purchases equal to the cost of the machines, shipping and import duties, cost of parts and holding cases. Commissioner concluded that it was unable to determine whether prices paid were at bona fide wholesale amounts and that this is a question of fact that Commissioner would not determine. Commissioner stated that advance payment deprived distributors of the use of their funds and was therefore a franchise fee. The requirement that distributor commit to certain minimum purchases could be a franchise fee if it was for more than a reasonable person would purchase for a starting inventory or to maintain a growing inventory. Commissioner determined that a marketing plan was prescribed even though there was no obligation for distributors to follow the plan. The objective of the law is to deal with a multiplicity of business establishments created by manufacturer to cause the appearance of centralized management and uniform standards as was the case here. Under Release 3-F factors supporting the existence of a prescribed marketing plan included area-wide distribution grid on exclusive basis, similar appearances of businesses and decor and uniformity of operation.
Key Words: Section 31110, Section 31011(a), Section 31005, Release 3-F, Rule 011, prescribed marketing plan, franchise fee, centralized management, exclusive basis, bona fide wholesale prices, non-refundable advance payments, required purchases
- Opinion No. 73 / 37F - September 20, 1973
Summary: Franchisor of termite and pest control businesses requested that it be permitted to offer to its California franchisee the right to substitute its existing franchise agreement for a new agreement without registering or disclosing under the CFIL. Commissioner concluded that the offering of a new contract, even though it was optional, did not qualify for the renewal exemption to registration and disclosure and otherwise constituted the offer or sale of a franchise. Commissioner concluded that the experienced franchisor exemption was not applicable which required franchisor to have a net worth of not less than $1M and its parent a net worth of not less than $5M according to audited financial statements, franchisor or parent had at least 25 franchises in operation, and either franchisor or its parent to be in the franchised business for for 5 years immediately preceding the proposed offer or sale. Although franchisor's parent had the required net worth and franchisor met the franchisee operation requirement, the length of time in business was not met and it is unclear whether audited statements of franchisor were provided to meet required threshold. Commissioner declined to grant a discretionary exemption allowed under Section 31100.
Key Words: Section 31018, Section 31110, Section 31101, Comm. Ops. Nos. 72/15F, 73/19F, Policy Letter 45F, Comm. Op. Nos. 72/12F, 72/29F
- Opinion No. 73 / 38F - October 25, 1973
Summary: Commissioner reaffirmed previous Op. Nos. 72/6 and 73/5F concluding that licensor of miniature golf courses to operators were franchises. Seller submitted a revised brochure eliminating any reference to national advertising or training programs, sponsorship of tournaments or charges for the use of the courses. Brochure stated that buyers would benefit from a meeting at seller's office and factory on all matters relevant to the possible appointment as an operator. Commissioner stated that this assertion may have the effect of or tended toward prescribing a marketing plan. However Commissioner noted that the material submitted did not indicate whether a sign would be placed on the golf courses showing the manufacturer's name and if no trademark identification was present the agreements would not be franchises.
Key Words: Comm. Ops. Nos. 72/6F, 73/5F, Section 31005, Release 3-F
- Opinion No. 73 / 39F - October 25, 1973
Summary: Contracts between licensor of businesses that used an exclusive system and materials for degreasing, cleaning and flame retarding of exhaust fans, chimneys and ductwork and service directors were deemed to be franchises. Licensor granted non-exclusive territories, charged an initial payment of $5,000 for equipment, provided training in operations and bookkeeping and a manual. Licensees paid 65% of gross receipts to licensor for research, development, bookkeeping and collection of accounts. Commissioner declared that the object of the law is to deal with a multiplicity of business establishments and the appearance of centralized management. Even if no binding instructions were given but the appearance of uniformity is the result, a prescribed marketing plan or system may exist. The initial payment of $5,000 was a franchise fee for training and other benefits. Also Commissioner cautioned that area directors are granted licenses and those arrangements constituted area franchises.
Key Words: Section 31005, Section 31011(a), Section 31008, Section 31009, Release 3-F, Comm. Op. Nos. 73/2F, 72/36F, prescribed marketing plan, multiplicity of business establishments, franchise fee, area franchises
- Opinion No. 73 / 40F - October 29, 1973
Summary: Licensor who assembled and sold mobile home tie-down devices through dealers to sell in exclusive territories were determined to be franchises. Each dealer paid an initial license fee of $5,500 and renewal fee of $750. If dealers sold 28 devices at suggested retail prices a substantial portion of the license fee would be recovered by dealers. Dealers were required to promote advertising materials, and to make all advertising satisfactory to licensor even though licensor argued it had no particular merchandising policies. Commissioner noted that a prescribed marketing plan may exist whether or not a licensee is required to use marketing materials or whether it is simply recommended or suggested and it makes no difference. Label of independent contractor or employee in contract did not influence analysis. Because licensor provided advertising and required that it be satisfactory to licensor a prescribed marketing plan existed. Franchise fees were charged as goods were not offered at bona fide wholesale prices because payments were only partially for devices and the remainder were franchise fees. Commissioner also noted that licensor had contracts with regional representatives who were responsible for contacting prospective dealers and recommending them to licensor. Commissioner cited Section 31008 that defines area franchises and Section 310009 that defines subranchisors.
Key Words: Section 31011, Rule 011, Section 31110, Section 31153, Section 31008, Section 31009, franchise, franchise fee, prescribed marketing plan, area franchise, subfranchisor
- Opinion No. 73 / 41F - October 29, 1973
Summary: Distributor of cosmetics, fragrances and food supplements through independent sales directors who sold products at retail and recruited, trained, serviced and sold to independent distributors were franchises. A prescribed marketing plan existed by virtue of the offering of a marketing plan through a layered system of directors and distributors and the pyramid plan to sell products door to door was deemed to be sufficient to meet this definitional element. A franchise fee existed by virtue of a membership of $3 paid per member and a one time charge of $44 for the sales kit in addition to paying certain prices for the goods a various prices with various discounts without proof that such prices were bona fide wholesale prices. Also Commissioner noted that the 3% charge imposed by distributor for warehousing, handling and promoting sales of the products needed to be included in the pricing to determine whether the bona fide wholesale price was being charged. Finally Commissioner noted that the ability of sales directors to recruit other sales directors and distributors who may still recruit others could be area franchised under Section 31008 or subfranchises under Section 31009.
Key Words: Section 31005, Section 31011(a), Section 31110, rule 011, Section 31153, Section 31008, section 31009, franchise, prescribed marketing plan, bona fide wholesale price, area franchise, subfranchisor
- Opinion No. 73 / 42F - November 12, 1973
Summary: Limited partnership agreements between California corporations and persons were not franchises according to Commissioner. Corporation contributed initial 33 1/3% in capital, the use of the name, menu for the restaurant concept, and all services needed to select the lease and location for the restaurant, design, layout and equipment as well as staff. Limited partners contributed 66 2/3% interest in cash not to exceed $180,000 for the construction, equipment and fixtures of the restaurant and working capital for its operation. Management of restaurant was undertaken by a wholly owned subsidiary of the general partner. Profit, losses and tax benefits were allocated according to ownership percentages. Commissioner determined that general partner had exclusive control of the business, including rights to enter into contracts. Because limited partners were not called upon to render any services to the partnership and general partner was required to devote time necessary to operate the restaurant and its sole compensation was the share of the profits to which it was entitled, Commissioner concluded it was evident that the agreement was not a franchise.
Key Words: Section 31005, Release 3-F, franchise fee, limited partnership
- Opinion No. 73 / 43F - November 12, 1973
Summary: Oregon company sought an opinion in the wake of litigation by a licensee, determining that it had not sold a franchise under the definition of Section 35008. Commissioner concluded that in accordance with Release No. 2-F, interpretive opinions under Section 31510 are only issued for to provide the public protection against liability for acts done or omitted in good faith in reliance upon the administrative determination made by Commissioner. No such reliance may be made after the agreement has already been entered into and therefore Commissioner declined to express an opinion.
Key Words: Release 2-F, Section 315010, principal purpose of providing opinions
- Opinion No. 73 / 44F - November 12, 1973
Summary: Commissioner considered whether arrangements between a medical health management corporation and various clinics were franchises. The clinics engaged in the treatment of patients and in research on methods of psychological treatment focused primarily on biofeedback. Partners contributed $5,000 to be sole stockholders in local partnerships and the management corporation provided training in biofeedback including manuals and information on techniques. Clinics paid between $5,000 and $10,000 plus 20% in the local partnership for the training. Management corporation did not attempt to impose the use of its commercial symbols on any clinics. Commissioner concluded that assuming that the clinics in fact do not use the commercial symbols associated with the management corporation, the arrangements were not franchises.
Key Words: Section 31005, Release No. 3-F, substantially associated with the commercial symbol
- Opinion No. 73 / 45F - November 12, 1973
Summary: Commissioner concluded that the sale by a franchisee of franchises and area franchises that had originally been sold under a registered franchise offering, assuming that such sale was effected for his or her own account and not by or through franchisor was exempted from the registration requirement of Section 31110 by virtue of Section 31102.
Key Words: Section 31110, Section 31102, franchise sale for his or her own account and not by or through franchisor, exemption
- Opinion No. 73 / 46F - November 12, 1973
Summary: Commissioner reconsidered Opinion No. 73/79F as to whether an agreement between licensor and distributors of electronic golf devices constituted franchises. Commissioner confirmed prior Opinion Nos. 73/17F and 73/129F that the agreements were franchises. The prescribed marketing plan or system existed through optional use of promotional literature, brochures and direct mail materials since Commissioner concluded that such materials were essential to the operation of the franchisee. Additional optional training also constituted part of a marketing plan. A franchise fee existed by virtue of an advance payment of funds against additional device purchases plus the payment for the complete installation and erection, maintenance and repair facilities for which no exclusion exists.
Key Words: Section 31005, Comm. Ops. 73/17F and 73/29F, Section 31011(a), prescribed marketing plan, franchise fee
- Opinion No. 73 / 47F - November 12, 1973
Summary: Licensor of men's clothing and related items granted to licensees the right to use licensor's name and marks and to sell licensor's merchandise at retail locations. Licensees paid a non-refundable one time fee of $3,000 to licensor and quarterly license fees of 2% of net sales. Commissioner concluded that the arrangement was a franchise. The prescribed marketing plan included restrictions on advertising and catalogs and prohibition of mail order business. The several fees were franchise fees and licensor licensed the use if its mark.
Key Words: Section 31005, franchise fee, prescribed marketing plan or system
- Opinion No. 73 / 48F - December 17, 1973
Summary: Commissioner considered whether an arrangement whereby seller sold to operators automatic beverage vending machines. The vending machines bore medallions identifying a well known beverage not manufactured or sold by seller. Operators purchased the vending machines at an 80% markup covering seller's services in securing suitable locations for such vending machines. Seller agreed to repurchase the vending machines if the net profit during first 18 months did not cover the cost of the vending machine if during that time operator purchased all beverage supplies from seller. Commissioner concluded that the arrangement did not constitute a franchise on the assumption that no commercial symbol of seller was communicated to the public or otherwise displayed on the vending machines.
Key Words: Section 31005, Release 3-F, substantially associated with franchisor's commercial symbol
- Opinion No. 73 / 49F - December 17, 1973
Summary: Commissioner determined that a contract by which glass plate replacement company granted to glaziers the exclusive right to service accounts in chain stores within defined areas for a one year period that could be extended, constituted a franchise. Commissioner concluded that a prescribed marketing plan existed in that company provided nation-wide marketing, an exclusive territory, pricing for the products and services, the requirement that glaziers provide 24 hour service and a prohibition on glazier's operating any competitive businesses. Commissioner determined that even though glaziers operated under their own business names, company's name was used in the nation-wide marketing and sales force solicitation of the business that was provided to glaziers within his or her exclusive territory. Commissioner determined that the annual payment of $200 constituted a franchise fee for the right to engage in the operation of the business and to service national accounts. Commissioner did not think that company's offer of a pro rata reduction of this fee or waiver in ensuing year if 1,000 square feet of glass was not sold by glazier, was significant or changed the existence of the franchise fee. Even if totally refunded, a payment that deprives licensees of the use of money for a period of time while in the hands of licensor is a franchise fee.
Key Words: Section 31005, Policy Letter 33F, Comm. Op. 73/15F, prescribed marketing plan or system, franchise fee, substantial association with franchisor's commercial symbol
- Opinion No. 73 / 50F - December 17, 1973
Summary: Under contracts provided for review by Commissioner, company prepared, distributed and sold hot sandwich products through distributors who picked up the sandwiches at a commissary and delivered them to distribution points where a refrigeration-microwave machines provided by company had been installed. Contracts stated that distributors were independent contractors, they were assigned locations for distribution of the sandwiches and could obtain new locations themselves with company's approval. Company consigned its sandwich to distributors and paid them a commission for sales. Distributors were required to follow applicable laws, obtain workmen's compensation insurance, give 30 days' notice prior to termination of the contract, may use company's trademarks at his or her discretion, obtain his or her own truck or lease a truck from distributor, maintain the truck in such a way as to not discredit company, and not change any of the sandwich ingredients. Even though not required to use company's trademarks, distributors were permitted to do so therefore a trademark license was present. A prescribed marketing plan was present because company furnished locations to service, prohibited changes in ingredients, and set standards for the operation of the trucks. Commissioner determined that a franchise fee was present by virtue of the option that distributor could lease the truck from company even though not required to do so. If the lease of the truck was essential or necessary for the successful operation of the distributorship the lease payment would not be optional and would be a franchise fee. Commissioner could not provide an opinion on these facts concluding that the arrangement was not a franchise.
Key Words: Section 31105, Section 31011, Release No. 3-F, Comm. Op. No. 73/20F, Section 31110, Comm. Op. No. 73/6F, prescribed marketing plan, franchise fee, bona fide wholesale prices, trademark license, optional versus required payments, multiplicity of business and appearance of centralized management
- Opinion No. 73 / 51F - December 20, 1973
Summary: Arrangements involving medical and dental assistant training schools were franchises under Section 31005, where the arrangements included payment of an initial fee, a right to use licensor's name, and a prescribed marketing plan or system. For purposes of Section 31013, an offer or sale of a franchise was not deemed made in California solely by reason of the fact that the franchised business will be operated in the state.
Key Words: 31005, 31013, franchise defined, sales, exempt, medical, dental, training fee, location, in state, school