Commissioner's Opinion No. 73 / 50F

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. R. Rucker
NewFangled Piping Hot
Sandwich Machine Co.
3030 - 20th Street
San Francisco, CA

Dear Mr. Rucker:

The request for an interpretive opinion, contained in your letter received by us on August 20, 1973, has, been considered by the Commissioner. Your letter raises the question whether the Independent Wholesale Distributor of Agreements ("agreement") between NewFangled Piping Hot Sandwich Machine Company ("NewFangled") and person referred to therein and hereinbelow as "distributors" constitute franchises within the meaning of Section 31005, and subject to the provision of the Franchise Investment Law. This question is answered in the affirmative.

You have represented that NewFangled is engaged in the business of the preparation, distribution and sale of hot sandwich products. The sandwiches are picked up at its commissary in San Francisco and distributed to various locations by distributors. Most delivery points have a "NewFangled Piping Hot Sandwich Machine", essentially a combination refrigeration-microwave oven for storing and heating sandwiches. A menu, which we assume is used at the various locations, was enclosed with your letter.

The agreement provides that NewFangled will reserve an unspecified number of locations for distributors; although distributor may obtain new locations subject to NewFangled's approval which are not limited to any "particular route or territory" and will establish an unspecified number of locations within 90 days of the agreements. NewFangled agrees to consign to distributor its product for distribution, pay distributor an unspecified commission for each of its "popular" and "deluxe" lines of sandwiches, and notify distributor of the location and identity of each assigned location at least 14 days prior to requiring distributor to service the reserve locations. Distributor agrees to carry a sufficient number of NewFangled sandwiches to meet reasonable demands of customers; observe all sanitary and other laws and regulations and meet all other requirements imposed by any applicable governmental authority; obtain workmen's compensation insurance; hold. NewFangled free and harmless from and against any and all claims arising out of his operation under the agreement; give 30 days written notice prior to termination of the agreement; not represent himself as an employee or officer of NewFangled; make use of logotypes, trademarks and decals at his discretion; not change the ingredients of any NewFangled sandwiches; and heat sandwiches only in government-approved electronic microwave ovens.

You have further represented that distributor may, at his option, obtain his own truck or lease a truck from NewFangled. In connection with any motor vehicle used by distributor in delivering NewFangled sandwiches, distributor agrees to obtain a specified amount and type of insurance; maintain and keep the truck so as not to discredit NewFangled, its sandwiches or its trademark; and immediately cease the use or display of any NewFangled commercial symbols upon termination of the agreement or sale of the truck.

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 tor 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.

The Commissioner has stated that a provision in the agreement to the effect that the franchisee is to be considered as an independent contractor in and of itself is inconclusive, because, though an independent contractor, if he is required by the agreement to observe a marketing plan or system prescribed in substantial part by the franchisor, the agreement, if other requirements of the definition are satisfied, is a franchise (Dept. of Corps. Rel. No. 3-F, p. 4).

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.

In this context, provisions to establish uniformity of prices and marketing terms; and to control warranties and representations in dealings between franchisees and their franchisors, advertising signs, and the appearance of licensee's business premises and the fixtures and equipment utilized therein are significant (Dept. of Corps. Rel. No. 3-F pp. 3,5).

The agreement provides that NewFangled furnishes some locations, which distributors are required to service, requires its approval of additional locations, limits the representations which distributor may make, prohibits the change of ingredients of sandwiches, requires sandwiches to be heated in government-approved ovens; and sets standards with respect to the truck operated by distributor. On the basis of these provisions together with the uniformity of operation and appearance which is achieved through the use of trucks displaying the name and logo of NewFangled, it is our opinion that NewFangled is prescribing a marketing plan or system in substantial part.

You have also represented that, although NewFangled promotes its products under certain trade names, the distributor is not required to display the names. As stated in Comm. Op. No. 73/20F, it is not necessary that the franchisee be required to use the franchisor's symbol; rather the granting of the right to use the franchisor's commercial symbol on material, in such a way as to communicate the symbol to its customers, is sufficient to conclude that the operation of the franchisee's business is substantially associated with the franchisor's commercial symbol.

We do not concur in the opinion expressed by you that distributors do not pay a "franchise fee" because the distributor is not required to pay a security deposit or a prepayment fee. Since the registration requirement of Section 31110 of the Franchise Investment Law applies to an entire arrangement which is offered, even though the sale may involve less than the whole of the arrangement proposed, it is our opinion that the entire arrangement being presented to the purchaser must be considered in determining whether or not there is a "franchise". The Law does not include in the definition of "franchise fee" payments which the franchisee is not required to make but which are optional with him and required only if he elects to lease equipment or other property from the franchisor. However, while a truly optional payment is not a "franchise fee", a payment by a distributor, though nominally optional, may in essence be a required one, if the article, for which payment is made, is essential for the successful operation of the distributorship. If operation of the business as a practical matter is not possible without the item, then the payment is required to be made for the right to enter into the business and is a "franchise fee".

While, in the instant case, the lease of a truck is not an obligation contained in the wholesale distributor agreement; nevertheless, it is a part of the arrangement being presented to the distributor by a supplemental agreement and must be considered in determining whether or not there is a "franchise". If the lease of the truck is essential or necessary for the successful operation of the distributorship, in that event, the lease payment would, in our opinion, be an integral part of the arrangement being presented to the distributor and, as such, would not be "optional". Consequently, such payment would be "required" within the meaning of Section 31011, would be made for the right to enter into the business and would be a "franchise fee" (see Comm. Op. No. 73/6F).

Accordingly, in accordance with the foregoing, we are not in a position to express the opinion that, under the circumstances described by you as outlined above the arrangements being offered by Newfangled to the distributors are not "franchises" within the meaning of Section 31005 and subject to the registration requirement of Section 31110 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
December 17, 1973

By order of
BRIAN R. VAN CAMP
Commissioner of Corporations

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