The 14-Day Rule and the Signed Acknowledgment
On March 1, 2025, a franchisor's sales representative emails a prospective franchisee a complete FDD. The prospect signs a receipt acknowledging delivery that same day. On March 10, the prospect calls the sales rep with questions about Item 19 financial performance representations. The rep answers verbally and emails a supplemental FAQ document that contains new earnings claims not in the FDD. The prospect signs the franchise agreement on March 12. The franchisor's California registration is effective, and no exemption applies. The prospect later claims the 14-day waiting period was violated and that the FAQ was a prohibited earnings claim. The franchisor argues the prospect signed the receipt on March 1 and the agreement on March 12, which is more than 14 days later, so the waiting period was satisfied. The prospect also says the FAQ was delivered only 2 days before signing, so it should have restarted the clock.
1. Did the franchisor violate the 14-day waiting period under California law? Analyze the timing and the effect of the supplemental FAQ.
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Under California Corporations Code section 31115, a franchisor may not sell a franchise until at least 14 days after the prospective franchisee receives the FDD and all material supplements. The receipt signed March 1 starts the clock. The agreement was signed March 12, which is 11 days after March 1 (March 1 to March 12 is 11 days), not 14. The franchisor's argument that March 12 is more than 14 days later is incorrect because counting begins the day after delivery. Therefore, the 14-day period was not satisfied. Additionally, the FAQ containing new earnings claims is a material supplement. Under section 31115 and the DFPI's guidelines, if a material supplement is delivered after the initial FDD, the 14-day waiting period restarts from the date the supplement is received. The FAQ was delivered March 10, and signing occurred March 12, only 2 days later. Thus, even if the original period had been met, the new earnings claims restarted the clock. The franchisor violated the waiting period. The franchisee may have a right to rescind the franchise agreement under section 31300 et seq. and the franchisor may be subject to administrative action by the DFPI.
2. What are the compliance risks of the sales representative's verbal answers and the FAQ document containing new earnings claims?
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Verbal earnings claims are prohibited under California law unless they are also included in the FDD and delivered in compliance with the waiting period. Corporations Code section 31200 makes it unlawful to make any untrue statement of a material fact or omit a material fact in connection with the offer or sale of a franchise. The FAQ with new earnings claims is a material change to Item 19. Under section 31115, a material change requires an amendment to the FDD and restarting the 14-day waiting period. The sales representative's verbal answers, if they included earnings claims not in the FDD, are also violations. The DFPI may view this as a willful violation, leading to fines, suspension or revocation of the registration, and rescission rights for the franchisee. The franchisor should have updated the FDD and delivered it with a new receipt, waiting 14 days before signing.