Commissioner's Opinion No. 73 / 11F

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. Melvyn Manson
Attorney at Law
Dern and Mason
9465 Wilshire Boulevard
Suite 620
Beverly Hills, CA 90212

Dear Mr. Mason:

The request for an interpretive opinion contained in your letter dated November 22, 1972, as supplemented by your letter dated December 1, 1972, has been considered by the Commissioner. Your letters raise the question whether the arrangements, between Federated Vending Systems, Inc., a California corporation ("Federated") and persons referred to therein and hereinbelow as "owners", 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.

You have represented that Federated has designed and arranged for the production and assembly of manually rotating "point of sale" wire display racks, which are topped by a rotating electric sign reading "Plush Toys/Reg. Values $7.95/Now Only $4.95" and which contain caricatures and likenesses of stuffed animals. The rack is designed to hold 28 stuffed animals.

You have further represented that Federated sells to the owner these racks and an initial quantity of stuffed animals which are sufficient to equip each rack and provide an additional inventory and which Federated purchases from a toy manufacturer. Federated will place each of the racks in retail establishments such as drug stores, grocery stores, etc. at no additional cost. Federated agrees to repurchase the racks at $40 per rack, as well as the initial inventory, within 18 months of installation.

At the time the racks are placed in a retail establishment, arrangements are made with the retailer with respect to restocking and the amount and method of payment for each stuffed animal sold. Usually, the retailer permits the owner to restock it at weekly intervals. When the rack is restocked, the retailer pays the owner an agreed sum per stuffed animal. Any loss attributed to theft, fire or similar occurrence is usually borne by the retailer.

After the initial inventory of stuffed animals is exhausted, the owner may reorder through Federated or directly through the toy manufacturer or any other vendor of stuffed animals. The toy manufacturer will pay to Federated a 2 percent cash discount on reorders placed through Federated or directly. If reorders are made through Federated, the owner will pay slightly more than if he reorders from the manufacturer because Federated will add a freight charge slightly in excess of the actual shipping cost, unless reorders are in excess of $250.

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, the franchisee is required to pay a franchise fee.

A marketing plan or system may be "prescribed" within the meaning of Section 31005, although there is no obligation on the part of the licensee to observe it, where a specific sales program is outlined, suggested, recommended, or otherwise originated by the licensor. In making the determination whether there is a prescribed marketing plan or system, it is necessary to keep in mind the objective of the Law to deal with a multiplicity of business establishments created by the franchisor, for all of which he ostensibly assumes responsibility by causing them to be operated with the appearance of centralized management and uniform standards as regards the quality and price of the goods sold, services rendered, and other material incidents of the operation (Dept. of Corps. Rel. No. 3-F, pp 3, 5).

You have advised us that owner is in no sense required, whether by operation of law, expressly or impliedly, to observe any marketing plan or system prescribed in substantial part by Federated. Owner is free to remove and relocate his racks, enter into any other economic arrangements with the retailer, place racks in any other type of establishment, purchase stuffed animals from any source, and sell goods or commodities other than stuffed animals from his racks; Moreover, there are no geographical restrictions.

No particular facts or circumstances have been brought to our attention, in the instant case, which would indicate that Federated is prescribing a marketing plan or system to be observed by owner in connection with the sale of the products. Under these circumstances, we are of the opinion that the arrangements between Federated and the owner do not constitute "franchises" within. the definition of Section 31005, and are not subject to the provisions of the Franchise Investment Law.

We point out, however, that the opinion expressed by us is based solely on the information contained in your letters, and that it is inapplicable and should not be relied upon if additional or different facts, in accordance with the principles above set forth, indicate that Federated is "prescribing" a marketing plan or system.

We also point out that we are not in a position to conclude that the "business" of the owner is not operated pursuant to any trademark, service mark, logo, trade name or other commercial symbol of Federated. We have noted your representation that no such commercial symbol is in existence and the electric rotating sign delivered with the rack is merely for the convenience of the owner and the owner is free to modify it in any way or to remove it. However, it is possible, as indicated in Policy Letter No. 37-F, that the distinctive shape, size and other features of the rack itself may constitute the sign a commercial symbol of Federated.

Dated: San Francisco, California
March 20, 1973

By order of
Commissioner of Corporations

By __________________
Supervising Corporations Counsel
Office of Policy