Commissioner's Opinion No. 82 / 2F

State of California Department of Corporations

Geraldine D. Green, 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.

Jonathan Miller
Goodman, Miller & Miller
23777 Greenfield Road, Suite 488
Southfield, Michigan 48075-3174

Dear Mr. Miller:

The request for an interpretive opinion contained in your letter dated August 24, 1982, as supplemented by your letters dated October 4, 11 and 18, 1982, has been considered by the Commissioner. Your letters raise the question of whether the offer and sale of "dealerships" to sell the TVR sports car involves the offer and sale of a "franchise" under the Franchise Investment Law (the "Law" ).

You represent that TVR North America, Inc. (the "company"), a Georgia corporation, was recently formed to sell and distribute to dealers throughout the United States a sports car presently being manufactured in the United Kingdom under the trade name "TVR". The prospective dealers of the TVR sports car will be already engaged in the sale of other automobiles.

The dealer agreement provides that a prospective dealer will be appointed as a "TVR dealer" obligated to provide prompt, effective and superior service to those who have purchased the TVR sports car. The dealer will be granted a nonexclusive right and license to use the trademarks of the TVR product lines in connection with the sale of the TVR sports car under the dealer agreement. In addition, the dealer agreement provides that the Company will formulate and implement marketing, service and related standards and policies to which all dealers must adhere.

The dealer will be required to purchase TVR sports cars and related equipment at the suggested retail selling price less a discount, as well as pay to the Company reasonable charges for the preparation of the motorcar, if any, warehousing, handling for distribution and delivery, "plus a sum equivalent to any tax imposed by any law of the United States, or any state, municipality or other taxing authority on the manufacture, ownership, distribution, use or sale of any of the products sold to the dealer". The Company also will grant a special discount to the dealer for the purchase of demonstrator cars. You represent that the dealer's price will be the company's bona fide wholesale price of the TVR sports car.

In addition, the dealer will be required to stock certain spare parts for the TVR sports car; these minimum spare parts will enable the dealer to correct the most serious emergency situations or make major repairs. The minimum spare parts purchase is $5,000. You represent that these spare parts will be sold to the dealer at the "bona fide wholesale price"; that is, if the Company maintains the parts in its warehouse in Georgia, then the spare parts will be sold to the dealer at the wholesale price; if the Company must purchase a necessary part from a distributor, then the part will be sold to the dealer at the Company's cost.

Additionally, you represent that if the dealer requires tools or overhaul equipment, the Company will provide these tools and overhaul equipment at the lower of its bona fide wholesale price or cost. Since prospective dealers will be already engaged in the business of selling automobiles, and since tools and overhaul equipment will be already possessed by the prospective dealer, the Company does not expect any substantial purchases of tools or overhaul equipment.

We disagree with your conclusions that the proposed sale of TVR dealerships does not involve the right to engage in business under a marketing plan or system prescribed in substantial part by the Company. Also, we disagree with your opinion that the operation o£ the dealership will not be substantially associated with the Company's trademark or other commercial symbol of the Company.

In this connection, we believe it is necessary to keep in mind that the objective of the Law is to deal with a multiplicity of businesses created by franchisors, which operate with the appearance of some centralized management, uniform standards with respect to the quality and price of the goods sold, and services rendered, and other materials incident to the operation of the business. In our opinion, a marketing plan or system prescribed by a franchisor is one of the most important means by which the appearance of centralized management and uniform standards is achieved. See, Commissioner's Release 3-F (Revised), pp. 6 & 7.

In this case, the dealer agreement requires the dealer, among other things: to furnish the Company quarterly and fiscal year-end financial statements; the Company has the right to reject orders for TVR sports cars made by the dealer or reduce the quantities of a particular model requested by the dealer; dealer must establish and maintain suitable facilities for the sale, service and repair of the TVR motorcars and assemblies, parts and accessories therefor; dealer, at its own expense, must send representative employees to Company training schools for training in servicing and repair of the TVR products; dealer must comply with all of the rules and regulations issued by the Company in relation to providing service both in and out of warranty to TVR owners; dealer agrees to participate in the TVR sales promotion program; the Company has the right from time to time to inspect the dealer's premises and its records and accounts with respect to the sales and servicing of the TVR motor vehicles and to make recommendations concerning the maintenance and operation thereof and the methods of displaying and selling TVR motorcars; and the dealer must prominently display the Company's warranty, which shall be incorporated as a condition of each sale made by the dealer.

Granting, as you suggest, that the requirements set forth above are normal for automobile dealership agreements, these requirements nevertheless establish a detail and comprehensive marketing plan or system which is prescribed by the Company, as well as being substantially associated with the Company's trademark or other commercial symbols.

Nevertheless, Corporations Code Section 31005 defined "franchise" to mean a contract which includes three elements (two of which have been discussed above) , including the requirement that the franchisee pay directly or indirectly a franchise fee. Section 31011 of the Corporations Code defines "franchise fee" to mean:

"Franchise fee" means 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.

However, the following shall not be considered the payment of a franchise fee:

(a) The purchase or agreement to purchase goods at a bona fide wholesale price if no obligation is imposed upon the purchaser to purchase or pay for a quantity of such goods in excess of that which a reasonable businessman normally would purchase by way of starting inventory or supply or to maintain a going inventory or supply.

The payment of a franchise fee is an essential element in determining whether or not the sale of a franchise is contemplated. As set forth above, the dealer must purchase TVR automobiles and a minimum of spare parts. You represent that the dealer's purchase price of the TVR sports car, spare parts and other products will not exceed the bona fide wholesale price of these goods. Therefore, based on your representations it is our opinion that the dealers are not required to pay a franchise fee and the dealer agreement proposed by the Company does not constitute an offer or sale of a franchise.

On the other hand, if the price paid by the dealers for the TVR sports car, spare parts and other products, including any special charges, exceeds the bona fide wholesale price of these products, then it is our opinion that these payments will amount to a franchise fee, since we believe the payments will be made for the right to enter into the business of selling the TVR sports car, parts, equipment and accessories.

Dated: Sacramento, California
November 23, 1982

By order of
Commissioner of Corporations

By __________________
Assistant Commissioner
Office of Policy