Commissioner's Opinion No. 74 / 4F

State of California Department of Corporations

Robert L. Toms, Commissioner
In reply refer to: File No. _____

This letter is not an Interpretive Opinion for the reasons stated below.

Mr. Martin N. Daniel
Attorney at Law
315 South Beverly Drive
Suite 515
Beverly Hills, CA 90212

Dear Mr. Daniel:

The request for an interpretive opinion, contained in your letter dated November 16, 1973, has been considered by the Commissioner. Your letter raises the question whether the arrangements between Rat-A-Way Western, Incorporated, a California corporation ( "Western") , and persons referred to by you and hereinbelow as "dealers" are franchises within the meaning of Section 31005, and subject to the provisions of the Franchise Investment Law. This question is answered in the affirmative.

You have represented that Western has entered into a contract with the Rat-A-Way Division of A.D.C. Sales, Inc. whereby Western is granted the exclusive right to sell an ultrasonic rodent control device, known as "Rat-A-Way" ("device"), in California and ten other western states. Western proposes to establish exclusive dealerships within California, each of which will be sold for $3,750 cash.

You have further represented that upon payment of said sum, each dealer will receive an 8 millimeter exclusive motion picture covering the facts on the rodent problem and a Rat-A-Way demonstration on laboratory and wild mice and rats showing the effects of sound on these animals; an attache case technicolor viewer with sound and film cartridge; 1,000 mail out sheets; information on various laws regarding rodent control, diseases, distribution, and installation, etc.; one decibel meter; ten devices, each consisting of a master unit and three satellites with cords; and leads to customers in the "protected area". Retail prices of the devices will be suggested by Western but the dealer will be under no obligation to follow same. Dealer is not required to account for its profits, losses or expenses nor submit advertising or conform in any way to the advertising policy set by Western. The dealer may, but will not be required to, utilize the name "Rat-A-Way" in its sales promotion. In order to retain his dealership, dealer will be required to purchase ten Rat-A-Way units per month. The prices paid by dealer will be determined by Western.

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). 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. Further, Rule 011.1 of the Commissioner exempts from such registration requirement any offer or sale of a franchise which would be subject to the registration solely because the franchisee is obligated to pay, in addition to the payment under Rule 011, a sum not exceeding $1,000 annually on account of the purchase price or rental of fixtures, equipment or other tangible property to be utilized in, and necessary for, the operation of the franchised business, if the price or rental so charged does not exceed the cost which would be incurred by the franchisee acquiring the item or items from other persons or in the option market.

In our opinion, the arrangements between Western and dealers contain all of the essential elements of a "franchise". We have noted your representation that the dealers will be free to conduct their own business with no interference or policy decisions being made from Western whatsoever. In this connection, the Commissioner has stated that 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 specific sales program is outlined, suggested, recommended or otherwise originated by the franchisor. Thus, a sales program may be "prescribed" by the franchisor where he supplies the franchisee with sales aids or props, such as, demonstration kits or films or detailed instructions, or personal introductions or presentations of the product. Provisions contemplating a nation or area-wide distribution grid on an exclusive or semi-exclusive basis and arrangements designed to establish uniformity of price and marketing terms are significant (Dept. of Corps., Release No. 3-F, pp. 3-5).

In our opinion, the aforementioned provisions regarding exclusive territories, sales aids and suggested retail prices tend toward the conclusion that Western is "prescribing" a marketing plan in substantial part.

As indicated above, the dealer may, but is not required to, use the name "Rat-A-Way". In this connection, the Commissioner has stated that for the operation of a franchisee's business to be substantially associated with the commercial symbol of the franchisor, it must be communicated to the customers of the franchisee (Ibid, p. 6). As stated in Comm. Op. No. 73/20F, it is not necessary that the franchisee be required to use the franchisor's commercial symbol; rather, in our opinion, the granting of the right to use the franchisor's commercial symbol on material in such a way as to communicate such 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.

In connection with the requirement of the franchise fee, you have represented that dealers must make an initial payment of $3,750 for which they receive various sales aids as well as ten devices. Whether the prices which dealers under the agreement are required to pay for Western products exceed a bona fide wholesale price (or exceeds it by amounts in excess of the allowances tolerated by Rules 011 and/or 011.1) is a question of fact which we will not resolve in an interpretive opinion, since such opinions are limited to interpretations of, and the determination of legal questions arising under, the Law (Dept. of Corps. Release No. 2-F).

Section 31153 imposes the burden of proving an exemption or an exception from a definition upon the person claiming such exemption or exception. Accordingly, the burden of establishing that Western is selling its products at their bona fide wholesale price is upon Western. Moreover, as the Commissioner stated in Comm. Ops. Nos. 73/7F and 74/2F, the exception in Section 31011(a) is based on the rationale that no substantial prejudice will come to a person buying a business and paying only the bona fide wholesale price for merchandise which he proposes to sell in that business, since he can readily turn goods of established value into cash, should the franchisor fail, in any way, to provide the promised support. Well known trademarked goods, of course, can be liquidated much easier than little-known products manufactured by a new franchisor not having a substantial market identity.

Moreover, as indicated above, dealers are to receive ten devices as part of the consideration for their initial payment and are required to purchase ten devices a month in order to retain their their dealerships. In our opinion, the exceptional provision of Section 31011(a) is not available if the amount so required to be purchased, exceeds the quantity which a reasonable man 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 for or wants to acquire the goods; it is understandable only as intended to secure the right of selling them under the franchise agreement and, for that reason, it constitutes a "franchise fee" (see Comm. Ops. Nos. 73/7F and 73/26F).

In conclusion, therefore, it is our opinion that the arrangements between Western and dealers are "franchises" within the meaning of Section 31005, 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
March 26, 1974

By order of
ROBERT L. TOMS
Commissioner of Corporations

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