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Defining Moment

A new franchise definition?

A recent decision by a California Court of Appeal has many companies shaking their fists and shaking in their boots. Choosing to uphold a lower-court decision, the Court of Appeal found that independent sales agents for Dallas-based Safeguard Business Systems Inc. are protected under the California Franchise Investment Law.

In 1992, 10 distributors brought a class-action suit with 17 claims against office products manufacturer Safeguard. The court tried only one issue: whether the distributor/Safeguard business relationship constituted a franchise agreement. A California judge ruled for the plaintiffs, granting each of them a $6,000 settlement. Safeguard then took the case to the Court of Appeal, but it upheld the prior decision--and Safeguard filed a new petition with the California Supreme Court in March.

According to Safeguard, if this case stands as it is, it could set a precedent in jurisdictions nationwide, opening up businesses with distribution forces or independent sales agents to retroactive criminal penalties, civil suits and recision suits. David J. Kaufmann, a senior partner with New York City law firm Kaufmann, Feiner, Yamin, Gildin & Robbins LLP, says, "This type of relationship, an independent contractor sales force, is common but has never before been held to constitute a franchise relationship. The California court pushed the envelope on this further than anyone had ever thought possible."

The plaintiffs, however, maintain that Safeguard operated as a franchisor without registering as such and that the decision protects distributors and franchisees. "There is nothing startling about this decision," says Bruce C. Fishelman, the plaintiffs' attorney and a partner with Los Angeles law firm Stanbury & Fishelman Inc. "I think it has virtually no effect on any business that uses true manufacturer's representatives."

Contact Sources

Kaufmann, Feiner, Yamin, Gildin & Robbins LLP, 777 Third Ave., 24th Fl., New York, NY 10017, (212) 755-3100

The Pizza Maker Inc., (248) 698-1414,

RFC Inc., 1013 Obispo Ave., Coral Gables, FL 33134,

Stanbury & Fishelman Inc., (310) 278-1800, fax: (310) 278-1802.

This story appears in the May 1998 issue of Entrepreneur. Subscribe »