Commissioner's Opinion No. 73 / 9F

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. Bruce J. Christenson
Attorney at Law
Christenson, Hedemark & Langum
111 West St. John., Suite 709
San Jose, CA 95113

Dear Mr. Christenson:

The request for an interpretive opinion contained in your letter dated October 24, 1972, has been considered by the Commissioner. Your letter raises the question whether the purchase agreements to be entered into between Romaine of California, Inc., a California corporation ("Romaine"), and persons referred to therein and hereinbelow as "Satellites" are franchises within the definition of Section 31005, and subject to the provisions, including the registration requirement of Section 31110, of the Franchise Investment Law. On the assumptions stated below, this question is answered in the negative.

You have represented that, pursuant to the agreement, Satellite purchases "Hot legs" pantyhose from Romaine at $7.56 a dozen satellite arranges for the pantyhose to be displayed on racks in various retail stores in a nonexclusive territory, which racks are also purchased from Romaine. The retailer collects the retail price and sales tax from the ultimate consumer and then remits to satellite $11.18 per dozen hose, which is the retail price of the hose ($16.68 a dozen), less 33% as the retailer's profit.

You have further represented that Romaine may assist Satellite in obtaining retailer locations by telling him how to approach a retailer and, on occasion, giving him an actual demonstration. No fee is required for this service nor is there any guarantee that Romaine will obtain retail outlets. Satellite is required to install, service and maintain displays and has the right to relocate his displays to other locations, provided said locations are noncompetitive with other Satellites. Satellite is required to immediately inform Romaine of the addresses of any location obtained. If Satellite uses the display racks for the sale of merchandise not purchased from Romaine, the display materials shall be altered by satellite in such a way that the public will not be confused as to the source and trade name of the product.

Section 31110 of the Franchise Investment Law imposes a registration requirement on the offer or sale of any franchise in this state, unless an exemption is available. Rule 011 provides an exemption from this requirement but not from the other regulatory provisions of the Law for the offer or sale of a franchise if the franchise fee on an annual basis does not exceed $100. 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).

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 the 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 incidence of the operation (Dept. of Corp. Release No. 3-F, pages 3,5). Whether a particular plan or system produces the appearance which, in accordance with these criteria, would be indicative of a franchise, is a mixed question of fact and law which must be resolved upon a review of all surrounding circumstances in the light of the legal principles outlined above.

You have represented that Satellite is required to purchase display racks and to install, service and maintain such display racks. Romaine may assist the Satellite by showing him how to approach the retailer and, on occasions, Satellite may be given an actual demonstration. You have further represented that Romaine must be advised of the addresses of all locations, whether new or relocations and that relocations may not be made that are competitive with other Satellites. Taken together these factors would tend to establish a prescribed marketing plan or system within the meaning of Section 31005. At the very least, we are unable to state that the agreement does not contain the elements which may cause the Satellite's business to be operated pursuant to a marketing plan or system prescribed by Romaine.

In this connection, we understand your representation, that Romaine will always maintain "a legitimate wholesale price" although such price may change to reflect increased costs to Romaine, to mean that Romaine will sell the pantyhose at their bona fide wholesale price. Your letter, however, gives no indication as to whether the display racks will be sold at the bona fide wholesale price. The Commissioner has stated that the exception provided by Section 31101(a) of the Law is applicable to the purchase of goods which the franchisee is authorized to distribute by the franchise agreement and of fixtures, equipment, and other articles to be utilized in the franchised business, such as display cases {Dept. of Corps. Release No. 3-F, p. 8).

As stated in Commissioner's Opinion 72/2F, we make no finding whether the prices do or do not exceed the bona fide wholesale price because this is a question of fact concerning which issuance of an interpretive opinion, limited as it must be to the consideration of legal questions, would not be appropriate.

According to Section 31153, Romaine has the burden of proving that the price paid by Satellite does not exceed the bona fide wholesale price. If it fails to meet this burden, the payments for the pantyhose and the display racks are franchise fees, and in that case the agreement, in our opinion, is to be regarded as a "franchise", since the agreement contains the other essential elements required by Section 31005. Moreover, in that case, if the excess over the bona fide wholesale price computed on an annual basis exceeds $100, the agreement is subject to the registration requirement of Section 31110; if it is less than that amount, the agreement need not be registered but is subject to all other regulatory provisions of the Franchise Investment Law.

If the price paid by satellite does not exceed the bona fide wholesale price, the agreement is not a "franchise" within the definition of Section 31005 and is not subject to the provisions of the Franchise Investment Law.

Dated: San Francisco, California
March 8, 1973

By order of
Commissioner of Corporations

By __________________
Assistant Commissioner
Office of Policy