Key Considerations in Assessing Potential Litigation for Independent Sales Reps

Whenever a sales rep contacts our firm about a sales commission dispute, we evaluate several initial factors before deciding whether or not to proceed with a case:

  • What are the known or estimated damages under the contract?
  • Which states’ sales commission protection laws might apply to the dispute?
  • What is the best our client can do, monetarily?
  • What is the worst our client can do, monetarily?

What Are the Known or Estimated Damages?

This can sometimes be difficult to assess because usually customers’ commercial relationships and ordering processes are with the principal, not with the rep. Most often, orders are transmitted directly to the principal without any knowledge by the rep. The lucky reps that receive notifications of orders are rare. If the contract damages are known, that is helpful in assessing the sensibility of proceeding with the case. Depending on the forum of the litigation (arbitration vs. lawsuit), the sales at issue and potential commissions owed are “discoverable” under the typical discovery statutes. Consequently, sometimes our clients have to file suit to ascertain what the damages are.

In most cases, there are more commissions at stake (after receipt of documents and answers to Interrogatories in discovery) than our client realized, and we proceed more happily with the case. Other times, there are less damages at stake than the client estimated, and we have to advise them not to proceed all the way through trial and to try to settle the case early instead. Either way, approximately 98 percent of all sales commission disputes that have been taken by our firm have settled. When I began my practice, dedicated to independent sales reps, in 1989 our minimum contract damages for taking on litigation for a new client was $30,000. Today, that minimum threshold is $75,000. That is not to say that we do not have success taking on and settling cases for less than that value, under non-litigation fee agreements we offer; only that we do not generally advise filing suit or for arbitration for much less than $75,000 in contract damages, depending on the applicable state law provisions concerning the recovery of attorney fees and punitive damages.

Which State Laws Are Applicable to the Dispute?

Many states in the United States have laws protecting sales reps. Some are toothless. Others are a major threat to the potential defendant. Therefore, an assessment of which state laws might apply to a dispute is critical. The most important aspect of this analysis concerns which states comprise the sales rep’s territory. Normally, the laws of all the states in the territory will apply to any commission dispute, simultaneously but alternatively. Meaning, whichever state in the territory has the best damage provisions would be the state law that the plaintiff could take its judgment under, as long as the case qualifies for protection under that particular state’s laws.

After looking at the states comprising the territory, the analysis would next look at which states the sales rep and principal are located in. Depending on the laws of those states, the commission protection statutes in their own state(s) might likewise apply, even if those states are not in the territory assigned to the rep under the contract. It all depends on the definitions and provisions in each particular state’s laws. Some state commission protection laws are territorial, requiring that the state the rep is making the claim under was part of their assigned territory (or at least where they made or solicited sales). Others are not territorial and have no such restrictions.

Finally, we would look at any potential terms in the parties’ written contract assigning a particular state’s laws as the “choice of law” under the contract. However, a choice of law provision will not generally override state laws that would be applicable to the dispute by their own provisions and definitions. In fact, most of the state laws pertaining to sales commission protection for sales reps have non-waiver provisions that provide making a contract subject to the laws of another state will not avoid the provisions of that particular state’s laws.

In one case that comes to mind, we filed a lawsuit in Federal Court, New Jersey, for an Arizona sales agency suing its principal, a New Jersey manufacturer. The assigned territory under the contract was Utah, Arizona and Nevada. However, the law chosen by the parties under the contract was New Jersey. The defendant’s challenge to our claim under the New Jersey sales rep protection statute was overruled by the court based on the fact that the defendant was a New Jersey manufacturer who had selected New Jersey law for the choice of law under the parties’ written contract. Since the New Jersey statute is not a territorial statute, it was irrelevant that New Jersey was not part of our client’s assigned geographic territory.

This would not have been possible had the defendant resided in or had the contract been subject to the laws of other states, particularly California and New York, which are territorial statutes limiting their application. California’s statute, for example, states:

“Whenever a manufacturer, jobber, or distributor is engaged in business within this state and uses the services of a wholesale sales representative, who is not an employee of the manufacturer, jobber, or distributor, to solicit wholesale orders at least partially within this state, and the contemplated method of payment involves commissions, the manufacturer, jobber, or distributor shall enter into a written contract with the sales representative.”
California Civil Code §1738.13(a).

What Is the Best the Client Can Do, Monetarily?

After evaluating which state laws might apply, this part is somewhat less difficult: New Jersey, for example, has a mandatory punitive damage provision that requires a court to award four times the contract damages proven by the sales rep, plus the sales rep’s reasonable attorney fees incurred in the lawsuit. See New Jersey Statutes §§2A:61-A1, et seq. California is another state with a mandatory punitive damage provision, requiring an award of triple the contract damages proven, for a violation of its defined terms. California Civil Code §1738.15. Texas likewise has a mandatory triple damage provision. Texas Bus. and Com. Code Ann. §54.004.

Other states have punitive damage provisions, also. However, many of them are not mandatory. Illinois, Georgia, Pennsylvania, and other key industrial states have discretionary damage provisions allowing a court to award up to double or triple the damages proven, thus leaving it to the discretion of the particular court to decide what is equitable. Nonetheless, at least a range of damages can be derived under those discretionary statutes.

What Is the Worst the Client Can Do, Monetarily?

Many states have “prevailing party” provisions that leave a sales rep exposed to having a judgment taken against them for the other side’s attorney fees, if the sales rep is not found to be the “prevailing party.” Most notably, California and New York have statutes that award attorney fees to the prevailing party. Certain states, most notably Texas, do not have any provisions by which the defendant/principal could be awarded its attorney fees. Other states take a moderate approach and allow the defendant/principal to recover its attorney fees, only if the lawsuit filed by the sales rep is found to be “frivolous.” New Jersey, Pennsylvania and Georgia, e.g., have such provisions. The strength of one’s case would determine whether they would want to risk being exposed to counter damages for the defendant’s attorney fees, depending on the particular state’s provisions.

One caveat: A sales rep should check with a lawyer well-versed in this area of law in order to evaluate whether a statute is territorial or non-territorial. Case law, in the form of appellate court rulings, sometimes sheds light on statutes that are absent of any explicit territorial limitations, resulting in a finding that they are territorial statutes that will limit the plaintiff/sales rep to having their provisions applied only if sales were made (or solicited) within that state. This can be a sophisticated analysis that should be undertaken before jumping into the potentially treacherous (although usually rewarding) waters of litigation concerning sales commissions.

The bottom line is, before firing the proverbial “first shot across the bow” of your principal, you had better know what targets you can hit and whether the target defendant can hit back!