Commissioner's Opinion No. 73 / 40F

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. Robert A. Gamble
Attorney at Law
Gamble, Riepe, Webster & Fletcher
500 Bankers Trust Building
Des Moines, IA 50309

Dear Mr. Gamble:

The request for an interpretive opinion contained in your letter dated August 10, 1973, has been considered by the Commissioner. Your letter raises the question whether the Dealership Agreements ("Agreements"} between Windtie Corporation, an Iowa corporation ("Windtie"), and persons referred to therein and hereinbelow as "Dealers", are franchises within the definition of Section 31005 and subject to the provisions of the Franchise Investment Law. This question is answered in the affirmative.

It appears that Windtie was organized in June 1972, and is engaged in the business of assembling and selling devices known as "Wind-tie Mobile Home Tie-Down Devices" ("devices"). You have represented that the Dealers through whom these sales are effected, are independent and that each is granted an exclusive territory pursuant to the Agreement.

On appointment, each Dealer pays an initial license fee of $5,500. For this payment he receives twenty-eight devices plus an auger used for installation. If the Dealer sells the twenty-eight devices at the suggested retail price, he will recover a substantial portion of the license fee. An annual renewal fee of $750 is charged for which the Dealer receives five additional devices. The sale of the devices will generate revenue sufficient to recover a substantial portion of the renewal fee. Additional devices may be purchased by the Dealer at the current wholesale price established from time to time by Windtie. Dealers are required to pay for devices so purchased within 10 days of invoice.

Dealers are granted the right to use the term "Authorized Dealer of Windtie Mobile Home Tie-Down Units", preceded or followed by the Dealer's name and address. They are prohibited from using the name "Windtie" or "Windtie Mobile Home Tie-Down Units" as a part of their business name or from representing that they have any affiliation with Windtie other than that created by the Agreement.

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.

You have expressed the opinion that Windtie does not prescribe a marketing plan or system in substantial part. In this connection you have represented that it is a new company and has no particular merchandising policies at this time. It requires Dealers to promote the sale of devices in their respective territories, to provide advertising material, and to make all advertising satisfactory to Windtie. You have represented that Windtie makes no requirements with respect to Dealers' inventory or sales organization, the amount expended for advertising or promotion as long as it is reasonable for effective distribution, or with respect to Dealers, promotional activities or their participation in promotional programs recommended by Windtie. Specifically, you have stated that the Agreement "contains no requirement with respect to the manner in which tie-down devices are to be sold or serviced."

In making the determination whether there is a prescribed marketing plan or system within the meaning of Section 31005, 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 material incidents or the operation. The marketing plan or system is prescribed by the franchisor as one of the important means by which the appearance of centralized management and uniform standards is achieved.

Consequently a marketing plan or system may be "prescribed" within the meaning of Section 31005, although there is no obligation on the part of the franchisee to observe it, where a sales program is outlined, suggested, recommended or otherwise originated by the franchisor in such a way that the franchisee may be expected to, and with the result that he does, actually follow it. In this connection, it makes no difference whether the franchisee is cast in the role of an employee or an independent contractor.

Therefore even in view of the representations concerning the manner in which Windtie operates its business, as reflected above, we cannot concur in your opinion that it does not prescribe a marketing plan or system. The recommendations with respect to advertising and promotional programs which Windtie will make to Dealers, though not compulsory on Dealers, the requirement that Dealers promote the device in their respective territories and that all advertising be made in a manner satisfactory to Windtie, and the authorization of Dealers to describe themselves as "Authorized Dealers of Windtie Mobile Home Tie-Down Units", all these features are apt to result in the establishment of a series of dealerships with the appearance to the public, of a centralized sales operation and uniform standards for the devices and services offered. This result is characteristic of a franchise system and the "prescribed" marketing plan inherent in such a system.

From your letter and the materials submitted by you, especially the statement that only a portion of the license and renewal fees will be recoverable by the sale of devices at suggested retail prices, it is clear that the payments made by Dealers on account of. such fees, are "franchise fees" within the meaning of Section 31011, and that they cannot be regarded as made entirely on account of the purchase price of the devices. Therefore, the exemption of Subdivision (a) of the second paragraph of Section 31011 with respect to the purchase of goods at a bona fide wholesale price, is not available. In this connection, we refer moreover to the provision of Section 31153 of the Law, which places the burden of proving an exemption or exception from a definition, upon the person claiming it.

We have noted your representation that Windtie contracts with "regional representatives" who are responsible for contacting prospective Dealers and making their recommendations to windtie as to their qualification. Though not authorized to make agreements, the regional representatives receive for their services a fee of $825 for each new Dealer appointed to their area and a commission based on sales by Dealers in their area. In this connection, we call your attention to Section 31008 of the Franchise Investment Law which defines "area franchise" to mean my contract or 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 of or on behalf of the franchisor. Section 31009 of the Law defines a "subfranchisor" as a person to whom an area franchise is granted. In accordance with these provisions, the contracts between Windtie and the regional representatives are "area franchises" and subject to the provisions 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 made in the opinion, and since there can be no such reliance where 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
October 29, 1973

By order of
BRIAN R. VAN CAMP
Commissioner of Corporations

By __________________
HANS A. MATTES
Assistant Commissioner
Office of Policy