Commissioner's Opinion No. 75 / 5F
State of California Department of Corporations
Willie R. Barnes, 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. Robert K. Steinberg
Attorney at Law
Steinberg & Bugliosi
9171 Wilshire Boulevard, Suite 332
Beverly Hills, CA 90210
Dear Mr. Steinberg:
The request for an interpretive opinion, contained in your letter dated March 25, 1975, has been considered by the Commissioner. Your letter raises the questions whether the agreements between Sinmast of America, Inc. ("Sinmast" ) and persons referred to in the material submitted herewith and hereinbelow as "Dealers" are "franchises" within the meaning of Section 31005 and subject to the provisions of the Franchise Investment Law ("Law"), and whether the Agreements between Sinmast and persons referred to as "Distributors" are "franchises" and/or "area franchises" within the meaning of Section 31008 and subject to the provisions of the Law.
We understand that Sinmast is engaged in the business of distributing, applying and selling a binding material for concrete that is used in highway and bridge construction, building construction, and building transportation restoration projects. Sinmast products are sold in industrial quantities only, the smallest unit being 2 gallons, and delivered to Dealers in two chemical components which must be properly mixed and prepared for actual application with cement. The Dealers, with whom Sinmast enters into "Dealer Agreements", are usually large, established construction firms who utilize substantial quantities of their products in their own businesses. The Dealers are also permitted to sell Sinmast products to their subcontractors or other users; however, this secondary sales operation is usually a small part of the total business of the Dealers, who are primarily engaged in construction rather than the sale of construction materials.
The Agreement grants Dealer the right to apply, service and sell Sinmast products in a designated area; provided, the Dealer may make application and sales to any governmental department or any local authority or to a "chain-type" operation even though not located in the designated area.. Sinmast will furnish Dealer instruction concerning the basic physical properties of Sinmast products and the proper application thereof "in order to foster a firm understanding of the products and their use" Such instruction will be given to Dealers at an instructional center operated by Sinmast near the Dealer. Dealer agrees that he will buy and sell Sinmast products acquired only from Sinmast and that he will apply same only in strictest compliance with the terms and specifications dealing with their proper application as furnished by Sinmast The Dealer usually pays a fee of $20,000 of which $19,000 is refundable by a reduction in the purchase price of products bought from Sinmast.
We further understand that Sinmast is contemplating establishing distributorships whereby one of the largest Dealers in a state will be given an exclusive distributorship for that state and become Sinmast's state-wide representative. The Distributor will warehouse the products and have the responsibility of setting up the instructional training programs. In consideration of an additional fee paid by Distributor, he will receive a percentage of all sales made in the state to other Dealers. The Distributor will not be allowed to establish a marketing plan or system for Dealers in his state, and the only connection the Distributor will have with the Dealer is "one of supply of the products and facilities for training".
Section 31005 of the 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.
We understand you to concede that both Dealers and Distributors pay a "franchise fee" (see Dept. of Corps. Release No. 3-F (Revised) pp 7-12). Moreover, since the Dealer Agreements require the display of the Sinmast trade name by the Dealers, it is our opinion that the commercial symbol of Sinmast is substantially associated with the operation of the Dealers' and Distributors' businesses (ibid pp 6-7).
The material submitted with your letter indicates that all "marketing and sales or products and internal procedures relating to the products", by which we assume you mean the handling of the products with respect to sales, are those of the Dealer and Sinmast does not, dictate or advise in theses areas. In addition, the Distributor will not be allowed to establish a marketing plan for Dealers in his state. Dealers are free to sell or promote the products in any manner and, in fact, are free under the Agreement not to resell or promote the products at all. The only instructional programs of Sinmast concern the proper application and use of the products and said instruction does not cover any marketing, sales or accounting techniques. Under these circumstances, it is our opinion that Sinmast is not prescribing a marketing plan or system in substantial part (ibid pp. 2-6). Accordingly, it is our opinion that the Agreements between Sinmast and Dealers as well as Distributors are not "franchises" within the meaning of Section 31005 and are not subject to the provisions of the Law.
In view of the above conclusion, it is also our opinion that the Agreements between Sinmast and Distributors are not "area franchises", defined in Section 31008 of the Law to mean an Agreement by which a franchisor, for a consideration, grants to a sub-franchisor the right to sell or negotiate the sale of franchises in the name or on the behalf of the franchisor.
Dated: Sacramento, California
July 2, 1975
By order of
WILLIE R. BARNES
Commissioner of Corporations
ROBERT E. LA NOUE
Office of Policy