Commissioner's Opinion No. 82 / 1F

State of California Department of Corporations

Geraldine D. Green, Commissioner
In reply refer to: File No. _____

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

Joseph W. Sheyka
Rudnick & Wolfe
30 North La Salle Street
Chicago, Illinois

Dear Mr. Sheyka:

The request for an interpretive opinion contained in your letter dated April 9, 1981, as supplemented by your letters dated September 18, 1981 and November 12, 1981, has been considered by the Commissioner. Your letters raise the question whether the Dealership Agreement offered by Thrush Incorporated, a Canadian corporation ( "Thrush" ), involves the offer and sale of a franchise subject to registration under the Franchise Investment Law (the "Law").

You represent that Thrush was organized in 1962 and is in the business of manufacturing and distributing replacement and specialty mufflers and related exhaust system products in the United States and Canada. These products are presently distributed through independent distributors and retailers.

At the present time, Thrush is contemplating establishing a "dealer network" in various parts of the United States, including California. The dealers would be existing businesses currently selling a variety of automotive products, including Thrush brand products. To become a Thrush dealer, a business would be required to enter into the Dealership Agreement ( "the Agreement") with Thrush. Under the terms of the Agreement, a dealer would be granted the right to sell and install Thrush products and identify the business premises as an authorized Thrush dealership by placing a Thrush sign in the window or, at the option of the business, by attaching a sign to the exterior of the business premises.

To become a Thrush dealer, the business must agree to honor Thrush warranties issued by other dealers (for which the dealer will be reimbursed) and, at the option of the dealer, offer Thrush warranties on Thrush products sold by it. You emphasize that the dealer is not obligated to offer Thrush warranties on Thrush products sold by it, and may offer its own warranty on the Thrush products which, it is assumed, would not be honored by other Thrush dealers or by Thrush, itself. The ability of a dealer to offer its own warranty notwithstanding, paragraph 13 of the Agreement provides that the dealer may not make or permit to be made any representation or warranty, express or implied, concerning Thrush products other than those authorized in advance in writing by Thrush. If a dealer elects to offer the Thrush warranties, the dealer must purchase Thrush warranty forms from Thrush at a cost of $2.50 per warranty form.

Furthermore, you represent that under the Agreement, a dealer must maintain a service department for installing and servicing Thrush products. The department must be kept in a clean and attractive condition. The dealer must also use its best efforts to "vigorously advertise and promote" the sale of Thrush products.

As part of the Agreement, Thrush offers a cooperative advertising program. This program entitles a dealer to reimbursement of 50 percent of the cost of its advertising of Thrush products up to a maximum of 2 percent of the dealer's purchase of Thrush products. The dealer, however, is not obligated to participate in any advertising program conducted by Thrush, but Thrush, pursuant to the terms of the Agreement must approve all advertising to be used by a nonparticipating dealer. While Thrush agrees to cooperate with a dealer's advertising program, paragraph 3 of the agreement provides that Thrush will do so only in accordance with its published policy in effect "from time to time".

Finally, you represent that no franchise fee is paid to Thrush upon execution of the Agreement. The only obligatory purchase of a dealer upon execution of the Agreement is a Thrush window sign for the price of $95. However, Thrush offers various additional items to dealers, including Thrush warranty forms, hats, belts, work estimate forms, decals, shirts, giveaways, announcements, in-store displays, banners, invoices, outdoor display signs, pipe benders to custom fit exhaust systems to automobiles, and assistance for advertising campaigns. These "optional" programs range from a price of $495 up to $6,995.

Section 31005 of the Law defines "franchise" to mean:

"Franchise" means a contract or agreement, either express or implied, whether oral or written, between two or more persons by which:

(a) 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; and

(b) The operation of the franchisee's business pursuant to such plan or system is substantially associated with the franchisor's trademark, servicemark, tradename, logo type, advertising or other commercial symbol designating the franchisor or its affiliates; and

(c) The franchisee is required to pay, directly or indirectly, a franchise fee.

"Franchise fee" is defined by Section 31011 of the Law 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."

You make three arguments as to why the Thrush dealership Agreement does not involve the offer and sale of a franchise subject to registration under the Law: (1) the dealer is not required to make any payments to Thrush in excess of $100 (a reference to Rule 310.011 which provides that any offer or sale of franchise which would be subject to registration solely because the franchisee is required to pay directly or indirectly, a franchise fee on an annual basis does not exceed the sum of $100); (2) Thrush will not exercise "significant controls" over the dealer's "over-all business operation" (e.g., site approval, site design or appearance requirements, requirements relating to hours of operation, accounting practices, personnel policies and practices, advertising campaigns and (3) the dealership will not be "substantially associated" with Thrush's name.

With respect to the first argument, it is our opinion that the "optional programs" contain elements which in fact are required purchases by the dealer for the successful operation of the Thrush dealership. See, Release 3-F (Revised) at 11. Thrush ostensibly represents that the only "required purchase" by the dealer is the window sign at a price of $95. However, Thrush also offers, among other items necessary for the successful operation of the dealership, warranties on its products, which warranty forms must be purchased by the dealer from Thrush at a cost of $2.50 per form. In our opinion, it is unreasonable to assume that a dealer to will not elect to participate in the Thrush warranty program and unreasonable to assume that a customer will purchase Thrush products, especially automobile mufflers and exhaust systems, from a Thrush dealer who does not extend the Thrush warranty. See Comm Op. 73/1F at 3-4. Moreover, we believe it reasonable to assume that a Thrush dealer will purchase more than two warranty forms in the first year; consequently, the exemption afforded by Rule 310.011 will be unavailable. Since the exemption afforded by Rule 310.011 is unavailable, the exemption afforded by Rule 310.011.1 is also unavailable; the Rule 310.011 exemption being a condition thereto.

The second argument, advanced by Thrush, in our opinion is without merit. The Agreement, either by express or implied limitations set forth therein (see specifically, pages 1, 2, and 4), coupled with the general statement that the operation of the dealership is subjected to Thrush policies in effect from "time to time", indicate to the Department that Thrush will exercise significant controls over the dealership identical to a marketing plan or system prescribed in substantial part by a franchisor. See Comm. Op. 73/39C at 3.

The final argument that the dealer is not required to operate its business, specifically the sale of Thrush products, pursuant to a plan or system substantially associated with the trademark, etc. of Thrush ignores the grant of rights to and imposition of obligations on the dealer set forth on pages 1 and 2 of the Agreement. In our opinion, the control exercised by Thrush over its dealers with respect to advertising Thrush products (and the Thrush trademarks, etc. thereby) is characteristic of a franchise, which when coupled with the prescribed marketing plan is directed to the establishment of a series of dealerships with the appearance, to the public, of a centralized sales operation and uniform standards for the products and services offered. See Comm. Ops. 73/5F, 73/20F; see also Comm. Op. 73/40F at 3.

Therefore, based on the foregoing, it is our opinion that the Agreement proposed by Thrush involves the offer and sale of a franchise which must be registered under 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 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: Sacramento, California
January 11, 1982

By order of
GERALDINE D. GREEN
Commissioner of Corporations

By __________________
ROBERT E. LA NOUE
Assistant Commissioner
Office of Policy
(916)322-3553