Commissioner's Opinion No. 74 / 1F

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. Ronald C. Hufft
Attorney at Law
Rathke and Hufft
2057 Mt. Diablo Boulevard
Walnut Creek, CA 94596

Dear Mr. Hufft:

The request for an interpretive opinion, contained in your letter dated September 27, 1973, has been considered by the Commissioner. Your letter raises the question whether the arrangements between Round the World Products Co. ("Round") and persons referred to by you and hereinbelow as "buyers" are franchises within the definition of Section 31005, and subject to the provisions of the Franchise Investment Law on the assumptions stated below, this question is answered in the negative.

You have represented that Round advertises and sells two brands of pantyhose at wholesale with buyer purchasing the pantyhose for $7.20 per dozen. Initially, buyer is required to purchase twenty dozen for $144, two floor racks at $25 each and one set of stamps to label boxes for $5. After the initial purchase, buyer may reorder the pantyhose at $7.20 per dozen in any quantity he wishes and additional racks at $25 each.

You have further represented that each buyer is encouraged to retail products under his own name and is advised that he may not use the name "Round the World Products Co." However, you have not indicated the name of the brands of pantyhose nor the relationship between their manufacturer and Round.

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.

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 (Dept. of Corps. Rel. No. 3-F, pp. 3, 5).

In this connection, you have expressed the opinion that there is no marketing plan or system prescribed by Round. You have advised us that buyer is responsible for finding his own retail location or to make direct sales in whatever manner he chooses.. Round gives no direction for finding retail locations or does it specify the territory in which buyer may market the pantyhose. If buyer desires assistance in locating retail outlets, he is advised to make direct contact with Thomas Sales Co. in Los Angeles in order to obtain the addresses of potential locations. Round is not involved in this transaction and receives no proceeds or percentage therefrom.

If Round exercises no control, directly or indirectly, as above stated, in regard to the manner in which the buyer sells pantyhose, it is our opinion that there is no marketing plan or system prescribed for sales by buyer. In that event, the arrangements between Round and buyers are not "franchises" within the definition of Section 31005 and are not subject to the provisions of the Franchise Investment Law.

In view of the above conclusion, we express no opinion as to whether Round requires the payment of a franchise fee or whether the operation of buyer's business is substantially associated with a commercial symbol of Round or an affiliate of Round.

Dated: San Francisco, California
January 24, 1974

By order of
Commissioner of Corporations

By __________________
Supervising Corporations Counsel
Office of Policy