Gentis v. Safeguard Business Systems, Inc., B110351

Citation71 Cal.Rptr.2d 122,60 Cal.App.4th 1294
Decision Date20 January 1998
Docket NumberNo. B110351,B110351
CourtCalifornia Court of Appeals
Parties, 98 Cal. Daily Op. Serv. 527, 98 Daily Journal D.A.R. 661 Gene GENTIS et al., Plaintiffs and Respondents, v. SAFEGUARD BUSINESS SYSTEMS, INC. et al., Defendants and Appellants.

Schiff, Hardin & Waite and Paula J. Morency, Chicago, IL; Jeffrey J. Buskofsky, Jackson Tufts Cole & Black and Gerald Z. Marer, San Jose; Mayer, Brown & Platt, Lee N. Abrams, Chicago, IL, James C. Schroeder, Irvine, and Jacqueline R. Brady, Los Angeles, for Defendants and Appellants.

Stanbury & Fishelman, Bruce C. Fishelman, George Stanbury, Los Angeles, and Alec B. Wisner, Granada Hills, for Plaintiffs and Respondents.

TURNER, Presiding Justice.

I. INTRODUCTION

Defendants, San Jacinto Holdings, Inc., and its wholly-owned subsidiary, Safeguard Business Systems, Inc. (Safeguard), appeal from a judgment. The judgment declared Safeguard to be a franchisor under the CaliforniaFranchise Investment Law (CFIL), Corporations Code, section 31000 et seq. 1 Safeguard manufactures and sells record-keeping systems and office products. The plaintiffs are members of a class of Safeguard's current and former distributors. Safeguard contends the facts as found by the trial court were insufficient as a matter of law to meet the statutory requirement that plaintiffs were "granted the right to engage in the business of offering, selling or distributing goods or services ...."(§ 31005, subd. (a)(1), italics added.) The parties do not dispute the trial court's factual findings. The sole issue raised on defendants' appeal is that the trial court's factual findings as a matter of law do not permit a conclusion that a franchise relationship within the meaning of the CFIL existed between the parties. Safeguard argues that because plaintiffs lacked the authority to enter into binding sales contracts, did not transfer title to goods, and did not regularly deliver products to customers, they could not be franchisees within the meaning of the CFIL. We disagree. Accordingly, we affirm the judgment.

II. DISCUSSION
A. Definition of a Franchise

The CFIL defines a franchise in section 31005. The statute provides, in pertinent part: "(a) 'Franchise' means a contract or agreement, either expressed or implied, whether oral or written, between two or more persons by which: [p] (1) 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 [p] (2) The operation of the franchisee's business pursuant to such plan or system is substantially associated with the franchisor's trademark, service mark, trade name, logotype, advertising or other commercial symbol designating the franchisor or its affiliate; and [p] (3) The franchisee is required to pay, directly or indirectly, a franchise fee." (§ 31005, italics added.)

Safeguard does not dispute the court's findings that: plaintiffs operated "under a marketing plan or system prescribed in substantial part by" Safeguard; plaintiffs' operation of their businesses "pursuant to such plan or system [was] substantially associated with [Safeguard's] trademark, service mark, trade name, logotype, advertising or other commercial symbol designating [Safeguard] or its affiliate"; and plaintiffs were required to pay a franchise fee. (§ 31005, subd. (a).) The focus of defendants' argument is narrow. They point to the "offering, selling or distributing goods or services" language of subdivision (a)(1) of section 31005, a portion of the marketing plan or system prong of the statute. Defendants contend the trial court erred as a matter of law in holding Safeguard was a franchisor under the CFIL because persons who solicit orders, but lack the authority to enter into binding sales contracts, do not offer, sell or distribute goods or services. Plaintiffs concede they cannot enter into binding contracts or pass title to goods. Nevertheless, they assert, the trial court properly determined they were franchisees. We agree.

Neither the CFIL, which protects consumers in the sale of franchises, nor the California Franchise Relations Act (CFRA) (Bus. & Prof.Code, § 20000 et seq.), which regulates certain events after the franchise relationship has been formed, defines the phrase "offering, selling or distributing goods or services." We have not found any decision of the Commissioner of Corporations which sheds any light on the issue now before us. Further, we have not found any pertinent decisional authority interpreting the statutory phrase "offering, selling or distributing goods or services" as used in the CFIL or the CFRA. 2

Citing well established rules of statutory interpretation, the Court of Appeal discussed judicial construction of the CFIL in Kim v. Servosnax, Inc. (1992) 10 Cal.App.4th 1346, 1355-1356, 13 Cal.Rptr.2d 422 as follows: "Our job in determining the meaning of [the CFIL] starts with ascertaining the intent of the Legislature so as to effect the purpose of the law and construe the statute with reference to the entire law of which it is a part. [Citation.] In enacting the [CFIL], the Legislature declared its concern for protecting prospective franchisees and expressed its intent to prevent franchise sales where it is likely that the franchisor's promises would not be fulfilled. [Citations.] [p] As a general matter, remedial or protective statutes such as the [CFIL] are liberally construed to effect their object and quell the mischief at which they are directed. [Citations.] With regard to the statutory definition of 'franchise,' this means each element should be construed liberally to broaden the group of investors protected by the law and to carry out the legislative intent." (Fn.omitted.)

The Legislature expressed the intent of the CFIL in section 31001 as follows: "The Legislature hereby finds and declares that the widespread sale of franchises is a relatively new form of business which has created numerous problems both from an investment and a business point of view in the State of California. Prior to the enactment of this division, the sale of franchises was regulated only to the limited extent to which the Corporate Securities Law of 1968 applied to such transactions. California franchisees have suffered substantial losses where the franchisor or his representative has not provided full and complete information regarding the franchisor-franchisee relationship, the details of the contract between franchisor and franchisee, and the prior business experience of the franchisor. [p] It is the intent of this law to provide each prospective franchisee with the information necessary to make an intelligent decision regarding franchises being offered. Further, it is the intent of this law to prohibit the sale of franchises where such sale would lead to fraud or a likelihood that the franchisor's promises would not be fulfilled, and to protect the franchisor by providing a better understanding of the relationship between the franchisor and franchisee with regard to their business relationship."

The Legislative history of section 31005 reveals great care was taken in defining a "franchise" because of the countless and varied relationships that could qualify as such. The CFIL was jointly sponsored by the Attorney General and the Commissioner of Corporations. It was a part of former Governor Ronald Reagan's 1970 "Consumer Program." In an article, which was before legislative committees, published in September 1969, the Commissioner of Corporations, Anthony R. Pierno, discussed the need for legislation protecting individuals from the loss of their investments in franchises due to causes ranging from outright fraud to simple incompetence. (Pierno, "Franchise Regulation--The Need for a New Approach," Los Angeles Bar Bulletin, September 1969, p. 501 et seq.) With respect to the definition of a franchise, Commissioner Pierno observed: "One problem that will run through any attempt to draft appropriate legislation to deal with franchises is that of definition. The definition which will be most difficult to devise will be the first one, that of what constitutes a 'franchise[.'] While in a typical drafting situation such as that involved in the preparation of the Corporation Securities Law of 1968 the concern in defining a word or phrase is whether something has been overlooked, it appears that this situation will be unique. In attempting to define the term 'franchise,' which has been in use for so many years and covers so many different concepts, the concern will have to be that many things are not being included which would clearly be excluded if the draftsmen were consciously aware We turn to the words of the statute as enacted by the Legislature, giving the language its usual, ordinary meaning. (Kimmel v. Goland (1990) 51 Cal.3d 202, 208-209, 271 Cal.Rptr. 191, 793 P.2d 524; Dyna-Med, Inc. v. Fair Employment & Housing Com. (1987) 43 Cal.3d 1379, 1386-1387, 241 Cal.Rptr. 67, 743 P.2d 1323.) Significantly, the statutory language at issue is stated in the disjunctive: "offering, selling or distributing goods or services." (§ 31005, subd. (a)(1), italics added.) By using the word "or," the Legislature intentionally broadened the scope of the statute. (Mercer v. Department of Motor Vehicles (1991) 53 Cal.3d 753, 763-764, 280 Cal.Rptr. 745, 809 P.2d 404; Burge v. City & County of San Francisco (1953) 41 Cal.2d 608, 616, 262 P.2d 6.) The double use of the disjunctive recognizes a distinction between: offering goods; selling goods; distributing goods; offering services; selling services; and distributing services. (Cf. Mercer v. Department of Motor Vehicles, supra, 53 Cal.3d at pp. 763-764, 280 Cal.Rptr. 745, 809 P.2d 404; People v. Smith (1955) 44 Cal.2d 77, 78, 279 P.2d 33.) It...

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