Shocking but Not Uncommon Abuse of a Salesman
A genetic testing company and a sales/marketing specialist sign a contract naming the individual as VP of sales and marketing. The two-page contract provides for an annual base salary of $145,000 and for “at-will” employment. It also states: “Your commission will be 3.5% of your net sales.” The contract is slim and is absolutely silent on the issue of further commission rights upon termination.
The VP (as specifically requested by the company) negotiates a supply contract amendment with the number one purchaser of the company’s products, to greatly extend a minimum purchase agreement. It winds up becoming the largest contract in the genetic testing company’s history!
The VP immediately informs company leadership of this huge win, upon which the CEO requests a meeting with him. The VP is ready to share in the caviar and cigars with the CEO at the meeting; but instead he is fired! The very next day, the company signs the supply contract amendment negotiated and procured by the VP!
The Procuring Cause Doctrine (a quasi-contract claim that allows reps to collect post-termination commissions under certain circumstances) was the foundation for a lawsuit filed by the VP against the company shortly after the termination – when they refused to pay further commissions on the sales he had set up through the amendment, cutting him off on the effective termination date.
The Procuring Cause Doctrine can be both highly supportive and at the same time somewhat convoluted. Why is that? Mostly because State Courts have historically applied different criteria for when they are willing to consider the doctrine, so it varies from State to State. For instance, some States will only apply it when a written contract clearly defines when the rep’s commission becomes “earned.” Other States will apply it even if the contract does not define when commissions become earned, as long as there is no written contract provision barring the sales rep’s rights to post-termination commissions.
A Guiding Light From The Lone Star State
A 2022 decision by the Texas Supreme Court, based upon these facts, lends some clarity to the sometimes confusing Procuring Cause Doctrine. In Perthuis v. Baylor Miraca Genetics LLC1, a Texas Trial Court entered judgment on a jury verdict in favor of the Plaintiff, Perthuis (the VP referenced above). The trial court ordered that Perthuis receive $962,336.89 as compensatory damages from Baylor Miraca. The Defendant company appealed, and the Texas Court of Appeals reversed the jury’s decision, finding that the at will termination provision trumped the Procuring Cause claim, cutting Perthuis off from commissions on sales after the effective termination date.
Perthuis then appealed to the Texas Supreme Court, and the Court held: 1) the Procuring Cause Doctrine applied to the parties’ contractual relationship, and; 2) the “at will” provision in the parties’ contract did not displace the Procuring Cause Doctrine. The Texas Supreme Court thus reversed the judgment of the Court of Appeals.
In reversing this matter in favor of Perthuis, the Court noted the well rooted history of the doctrine:
This Court most clearly articulated the procuring-cause doctrine in Goodwin v. Gunter over a century ago, describing it as a “settled and plain” rule. [Citation omitted]. The doctrine provides nothing more than a default, which applies only when a valid agreement to pay a commission does not address questions like how a commission is realized or whether the right to a commission extends to sales closed after the … relationship ends.
The Court then laid out a three question test that determines whether a plaintiff can recover commissions on post-termination sales:
- Does the doctrine apply to the particular transaction? The court found that the “the minimum prerequisite for the doctrine to apply is an agreement to pay a commission on a sale.”
- Is there explicit contract language that overrides the doctrine? The court noted that “Parties certainly may condition the obligation to pay a commission on something other than procuring the sale—they need only say so…”
- Was the rep the procuring cause of the sales at issue? In the case of Perthuis, negotiating and landing the supply contract amendment was rightfully found to be the procuring cause of all further sales to this customer.
So, contractual silence on the issue of post-termination commission payments can be golden to a sales rep! Oral agreements, agreements executed through informal correspondence or even skimpy written contracts may also offer a sales rep a remedy under the Procuring Cause Doctrine.
Another Texas Court Follows Perthuis, Awarding Procuring Cause Damages
The decision in the Perthuis case was strictly followed by the Texas Court of Appeals in another sales rep commission dispute, Five Star Electric Motors, Inc. v. Patlovany2, a 2024 case.
Upon resigning his position, Thomas Patlovany (a sales rep) sued his former employer, Five Star Electric Motors, Inc. (a sales agency) for breach of contract – alleging that the company refused to compensate him for sales made after his termination which were based on services he had rendered before he resigned. After a bench trial, the trial court rendered a judgment awarding Patlovany $749,906.02 in damages plus costs. The defendant appealed, but the Court of Appeals affirmed the trial court judgment.
One key fact in the Court’s decision was that Five Star Electric Motors acted as an agent of Siemens, representing them in sales to customers. Because these were sales of designed in equipment to meet the specific requirements of each customer, sales from these transactions generally continued for a substantial time.
Patlovany was an account manager/salesman employed by Five Star Electric Motors to handle Siemens. As in Perthuis, the parties executed a two-page employment agreement in 2012, and Patlovany was hired as the Senior Director of Major Products. The employment agreement stated that Patlovany was an at-will employee, and that he would be paid “… a base salary of $160,000 per year.” And that “Total annual compensation will be the greater of your base salary at $160,000 or 35% of the net profit received on your accounts and project sales.”
Patlovany greatly increased sales under his watch, and the Court noted that:
The parties’ dispute centers on whether Patlovany is entitled to the “35% of the net profit received on” his “accounts and project sales” for sales made before his resignation even though the profit was not received by Five Star Electric Motors until afterward. The employment agreement does not expressly address this issue.
The court found in favor of Patlovany, relying on and citing the decision in Perthuis, and stating:
Five Star Electric Motors does not dispute that Patlovany was the procuring cause of the sales at issue. At trial, its position was that he would have been entitled to all the commissions he sought had he not resigned.
Nonetheless, even though he did resign, the Court found that the defendant had admitted at trial that he was the procuring cause of the sales at issue and that he was therefore entitled to the commissions.
Every rep who has been terminated needs to look closely at the provisions in their contract to see if they are limited to commissions on sales for any given period of time. If not, the Procuring Cause Doctrine should apply to their dispute. Also, if a rep who’s been terminated has been working under an oral agreement, then the Procuring Cause Doctrine will almost certainly apply in case of any dispute.
