Commissioner's Opinion No. 78 / 4F

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. Roland S. Ericsson
1800 East Sahara Avennue
Park Sahara, Suite 105
Las Vegas, NV 89104

Dear Mr. Ericsson:

The request for an interpretive opinion, contained in your letter dated October 18, 1978, has been considered by the Commissioner. Your letter raises the question whether the "Purchase Agreement" between Commercial Resources, Inc., a Nevada Corporation ("CRI") , and persons referred to therein and hereinbelow as "Distributors" is a "franchise" within the definition of Section 31005 and subject to the provisions of the Franchise Investment Law ("Law").

You have represented that CRI is engaged in the business of marketing, selling and servicing toy distributorships. Pursuant to the Purchase Agreement, CRI agrees to acquire one retail location for each display purchased by the Distributor and to secure initial retail accounts in and around a specified territory. In the event that Distributor makes an additional purchase of ten displays or more, CRI agrees to acquire each retail account at $75 per location. Distributor agrees to service all retail accounts on a regularly scheduled weekly basis and to maintain proper records to verify service of the accounts; to comply with all terms and conditions of the Purchase Agreement; to deposit with the Company a specified amount as full settlement for any damages sustained by CRI; and to make all merchandise reorders in minimum quantities of $500. Distributor is not granted exclusive territory.

You have further represented that the toys which are sold off the racks are national brand name toys which are supplied through a national wholesale supplier which is not associated with CRI. A Distributor is not given the right to use the name of CRI in the transaction of its business or in any other manner. CRI does not have a trademark, trade name, service mark, logotype, or commercial symbol.

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.

In Comm. Op. 74/7F, we expressed the opinion that the various manufacturing plants with which the franchisor entered into service contracts, which were later assigned to the franchisees, were "customers" of the franchisees to whom the name of the franchisor was communicated. Accordingly, since the symbol of the franchisor was communicated to customers of the franchisees, the franchisees' businesses were substantially associated with the commercial symbol of the franchisor (see Dept. of Corps. Release No. 3-F (Revised) p. 7). In the instant case, it does not appear that CRI will enter into contracts with the retail locations and assign the contracts to Distributors. Rather, based upon the representations contained in your letter and exhibits submitted therewith, we assume that CRI will merely obtain retail locations on behalf of Distributors. Under these circumstances, it is our opinion that the Distributor's businesses will not be substantially associated with the commercial symbol of CRI.

In conclusion, it is our opinion that the "Purchase Agreement" is not a "franchise" within the definition of Section 31005 and is not subject to the provisions of the Law.

In view of the above conclusions, we express no opinion as to whether CRI is prescribing a marketing plan or system in substantial part or charging a "franchise fee."

Dated: Sacramento, California
November 13, 1978

By order of
WILLIE R. BARNES
Commissioner of Corporations

By __________________
ROBERT E. LA NOUE
Assistant Commissioner
Office of Policy
(916)322-3633