Commissioner's Opinion No. 73 / 13F

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. Eric Green
President
G & M International
286 Aptos Beach Drive
Aptos, CA 95003

Dear Mr. Green:

The request for an interpretive opinion contained in your letter dated October 30, 1972, as supplemented by your letter dated January 13, 1973, has been considered by the Commissioner. Your letters raise the question whether the distributorship agreements between G & M International, a California corporation ( "G & M" ), and persons referred to therein and hereinbelow as "distributors", are franchises within the definition of Section 31005, and subject to the provisions, including the registration requirements of Section 31110, of the Franchise Investment Law.

The agreement you have submitted provides that G & M has the sole and exclusive right to manufacture and sell a product line of fuel and oil additives, known as E/C 100 for reciprocating gasoline engines and E/C 200 for diesel engines and jet fuel turbine engines (the "products"). Pursuant to the agreement, G & M grants distributors the non-exclusive right to sell the products to distributor's clientele. G & M agrees to protect distributor in the sale of its products through abstaining from direct sales to known customers of the distributor and by not knowingly allowing sales to such customers to be made by other distributors. In order to enable G & M to have complete records of products sold, distributor agrees to furnish quarterly, or at such other intervals as agreed, a report of all sales made. At the request of distributor, G & M may make direct shipments to distributor's customers; however, distributor will be responsible for all billings.

The agreement further provides that distributor will have all advertising and printed matter relating to the products approved prior to printing. In addition, he agrees not to give false or misleading information concerning products and/or G & M.

Distributor, at his own expense, is required to prepare, execute and file reports, returns and/or forms, required by any governmental authority with respect to the receipt, holding, selling or transferring of the products and at all times to abide by governmental requests and requirements with respect to the holding, selling, advertising and distribution of the products. Distributor will at his own expense prosecute any "suits for breach of any resale contract", i.e., suits against the distributor's clients for failure to pay for products received, and will indemnify G & M against damages, costs or expenses arising from the prosecution of such suits. All products will be purchased from G & M, F.O.B., Los Angeles, California and/or Oklahoma City, Oklahoma at price schedules established by G & M.

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. 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 and 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 distributor will engage in the business of selling G & M products under a marketing plan or system prescribed in substantial part by G & M. As stated in Commissioner's Opinion No. 72/9F, 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 distributorships are not made pursuant to a marketing plan or system prescribed by G & M, the agreements are not subject to the provisions of the Franchise Investment Law.

Further, were not advised of any proposal for the payment of proposal for the payment of a "franchise fee" to G & M by the distributor, other than such "franchise fee" as may be inherent in the purchase by them of products by G & M. We assume that the products will be sold by the distributors under the trademark . E/C 100 and E/C 200.

According to Section 31153, G & M has the burden of proving the exemption provided by Section 31011(a) or the exception in Rule 011. If G & H is in a position to prove that the price charged by it for the products does not exceed the bona fide wholesale price of the goods, payment of such price by the distributor does not constitute a "franchise fee", and the agreements are not "franchises" and are not subject to the provisions of the Franchise Investment Law. On the other hand, if G & M is in a position to prove that the price paid exceeds the bona fide wholesale price of the goods by a sum of less than $100 when computed on an annual basis, and presuming there is a marketing plan or system prescribed in substantial part by G & M, the agreements are "franchises'' within the definition of Section 31005 but are exempt from the registration requirement of Section 31110 of the Law by virtue of Rule 011.

Dated: San Francisco, California
March 20, 1973

By order of
BRIAN R. VAN CAMP
Commissioner of Corporations

By __________________
J. DOMINIQUE OLCOMENDY
Supervising Corporations Counsel
Office of Policy