Commissioner's Opinion No. 73 / 16F

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. Henry W. Leeds
Attorney at Law
Mason. Femwick & Lawrence
1730 Rhode Island Avenue, N.W.
Washington, DC 20036

Dear Mr. Leeds:

The request for an interpretive opinion, contained in your letter dated February 1, 1973, has been considered by the Commissioner. Your letter raises the question whether the License Agreements between London Dry, Ltd., a South Carolina-corporation ("London Dry"), and persons referred to therein and hereinbelow as "licensees" call for payment of a "Franchise fee" within the definition of Section 31011 of the Franchise Investment Law. Based upon the assumptions stated below, we concur in your opinion that this question is to be answered in the negative, and that for that reason, the agreements in question do not constitute franchises within the definition of Section 31005 and are not subject to the provisions of the Franchise Investment Law.

You have represented that, pursuant to the agreement, London Dry grants licensee the exclusive right to manufacture, distribute, sell and advertise the specified carbonated beverages identified by the trademark "London Dry" in a specified territory. Licensee agrees to comply with all of the standards of quality and/or formulation as London Dry furnishes; to use only beverage bases obtained from or approved-by London Dry; to submit such analysis and samples of finished beverages and/or ingredients that London Dry may request; and to permit London Dry to inspect his premises, facilities and equipment during normal business hours.

All labels, containers, advertising and other promotional matter of licensee bearing the trademark "London Dry" are subject to the prior written approval of London Dry before their public use. Licensee is required to meet certain standards of cleanliness and sanitation in its plant and agrees that it will sell a specified minimum number of cases of London Dry Beverages in its territory.

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 purchases or agrees to purchase goods at a price other than the bona fide wholesale price, if the total payment in excess of the bona fide wholesale price computed on an annual basis does not exceed $100.

We understand you to represent that since the cost of the base for London Dry beverages, which licensee is required to use, is competitive to similar bases, the purchase price of the base is a "bona fide wholesale price". We assume that the beverage base is the only "goods," within. the meaning of Section 31011(a), which licensee is required to purchase and that he is not required to purchase more beverage base than is reasonably necessary. As stated in the Commissioner's Opinion No. 73/1F, to the extent the licensees under their agreement with a licensee are required to purchase specified amounts of beverage based or to purchase such specified amounts within a specified period, the exceptional provision of Par. 2(a) of Section 31011 is not available, if the amount so required to be purchased, exceeds the quantity which a reasonable man normally would purchase by way of a starting inventory or to maintain a going inventory. Payment-for such excessive purchases is made by the franchisee not because he has a present need or wants to acquire the goods; it is understandable only as intended to secure the right of selling under the franchise agreement and for that reason constitutes a franchise fee. (Miattes, The Franchise Concept, California State Bar Journal, Vol. 47, p. 348.)

Assuming that the price paid by the licensees for the beverage base is in fact the bona fide wholesale price of these goods, it is our opinion that, under the circumstances described by you and assumed by us as outlined above, the agreements between London Dry and the licensees are not "franchises" within the definition of Section 31005 and are not subject to the provisions of the Franchise Investment Law.

We have noted that the agreement provides that the licensee may not sublicense without the prior written approval of London Dry. In this connection, we call your attention to Section 31008 of the Law which defines "area franchise" to mean an agreement between a franchisor and a subfranchisor whereby the subfranchisor is granted the right, for consideration given in whole or in part for such right, to sell or negotiate the sale of franchises in the name or on behalf of the franchisor. Section 31009 of the Law defines "subfranchisor" to mean a person to whom an area franchise is granted. Accordingly, if the agreements between London Dry and licensees were to be considered "franchises" within the meaning of Section 31005 because the beverage base was sold at other than the bona fide wholesale price, such agreements would be "area franchises" within the meaning of Section 31008 and be subject to the provisions of the Franchise Investment Law.

Dated: San Francisco, California
April 2, 1973

By order of
BRIAN R. VAN CAMP
Commissioner of Corporations

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