In Gentis v. Safeguard Business Systems, the California Court of Appeal issued an opinion which has been depicted in the national press as a substantial broadening of the definition of "franchise" under the California franchise disclosure law.

The case involved an appeal from a trial court judgment in which it was held that defendant Safeguard is a franchisor. For years, Safeguard had operated on the assumption that its large network of distributors are not franchisees and that compliance with the franchise law was therefore unnecessary. California Corp. Code § 31005 defines “franchise” as:

Safeguard argued that Safeguard distributors do not have the authority to enter into binding sales contracts or to pass title to goods and therefore do not “offer, sell, or distribute” goods or services as required by the franchise definition. The appellate court disagreed. It pointed out that although the distributors might not sell or even offer goods or services, they certainly distribute them and therefore their contracts with Safeguard meet this portion of the definition. Responding to the defendants' argument that the opinion improperly broadens the franchisee concept to include marketing representatives, the court discussed the various functions performed by the Safeguard distributors and concluded that their responsibilities go beyond those of mere order-takers.

The applicability of this decision in states such as Illinois and Wisconsin, which define franchises more narrowly than California, will be limited. Nevertheless, the opinion should be studied by any manufacturer or supplier that distributes goods or services through California dealers, distributors, or marketing representatives.