Commissioner's Opinion No. 73 / 15F

State of California Department of Corporations

Brian R. Van Camp, Commissioner
In reply refer to: File No. _____

This letter is not an Interpretive Opinion for the reasons stated below.

Mr. J. Roger Myers
Attorney at Law
Rains & Myers
Community Professional Building
168 North Brent Street
Suite 304
Ventura, CA 93003

Dear Mr. Myers:

The request for an interpretive opinion, contained in your letter dated January 25, 1973, has been considered by the Commissioner. Your letter raises the question whether the Sales Representative Agreements ("Agreements") between Engineering Corporation of America, a California corporation ("Engineering"), and persons referred to therein and hereinbelow as "Representatives" constitute the payment of a franchise fee within the meaning of Section 31011 of the Franchise Investment Law. This question is answered in the affirmative.

You have represented that Engineering has at its disposal a service and system known as the Automatic Personnel Selector and/or Instant People ("The System"). The System consists of a specialized data processing system for use in the engineering field and profession. Pursuant to the Agreement, Engineering appoints Representative as one of its sales representatives for the purpose of selling engineering and related services from Representative's business address for a period of five years, unless earlier terminated or extended pursuant to terms set forth therein. Engineering will provide a central data processing service; assist Representative in his administrative, managerial, operational and sales programs; provide mailing service and a suggested letter at a cost of $.02 per letter; coordinate sales materials between its various offices; initially supply Representative with envelopes, stationery, business cards, brochures, order forms, hire-in forms, an operations manual and other materials; and will service and have responsibility for the payroll of persons whose employment by Customers, i.e. persons availing themselves of engineering and related services, is attributable to Representative's efforts.

The Agreement further specifies numerous guidelines and requirements to be followed by Representative and permits Representative to use the names and/or the initials "Engineering Corporation of America", "ECA", "The System", or any parts thereof, only in matters arising out of this Agreement and only while said Agreement is in effect.

Section 31005 of the Franchise Investment Law defines "franchise" to include are 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.

We understand you to concede that the Agreements contain all of the elements of a "franchise" except the required payment of a "franchise fee", defined in Section 31011 of the Law 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, an 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 this connection, in addition to the aforementioned $.02 per letter charge plus postage, Representative is required to pay costs of attending up to three conventions a year, a minimum of $5 for any information called in to the home office by Representative which is inaccurate and on which Engineering relies in processing information, one percent of any invoice not paid by the Customers within four weeks and all or any invoice not paid by Customers within eight weeks. In addition, he may be required to pay a "Set-up" fee of $10, an operating fee of 8% of the gross volume of the Representative, which fee shall be not less than $160 per week within eight weeks, and liquidated damages of $2,500 for failure to perform certain activities during the 90-day period prior to termination of the Agreement. Moreover, Representative agrees to pay a performance deposit of $15,000 which will be returned by Engineering after a five-year period less any amount remaining after deductions for fees owing Engineering. while denominated a "performance deposit" and subject to conditional refunding on the part of Engineering, this payment, even if totally refunded, deprives them of the use of the funds for five years (see Comm. Op. No. 72/3F).

In Comm. Op. No. 72/29F, we concluded that fees charged to licensed real estate brokers were "franchise fees" because, among other things, they granted the brokers the right to sell real estate under the marketing plan and system, including the use of the commercial symbol, of the franchisor. In the instant case, the aforementioned deposit, as well as the other payments which Representatives are required to pay, are charges for the right to engage in the business of becoming sales representatives of Engineering and offering Engineering services to Customers. Accordingly, it is our opinion that these payments constitute "franchise fees" within the meaning of Section 31011 of the Franchise Investment Law.

Inasmuch as interpretive opinions are issued for the principal purpose of providing a procedure by which members of the public can protect themselves against liability for acts done or omitted in good faith in reliance upon the administrative determination the Commissioner asserts jurisdiction with respect to a particular situation or determines that a legal requirement is applicable, advice to that effect, as contained in this letter, does not constitute an interpretive opinion.

Dated: San Francisco, California
May 21, 1973

By order of
BRIAN R. VAN CAMP
Commissioner of Corporations

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