Let’s face it. When it comes to sales rep-principal relationships, sustainability often boils down to “What have you done for me lately?”
That answer, unfortunately, is oftentimes “Not enough.” Or, we sometimes hear the term that principals want “added value” from their sales reps, which usually comes up when an agent is earning their hard-earned commissions on a longer-term basis. Having previously written about expedited terminations of sales reps, and having recently litigated some of these issues, in various jurisdictions throughout the United States, there are two different possible means to protect sales reps who must sign representation agreements with 30-day termination provisions, aside from protective contract provisions:
- Procuring Cause.
- Bad Faith.
This article will be divided into two parts because, as we know, lawyers are very wordy. Part I will cover Procuring Cause, and Part II (in next month’s issue) will cover Bad Faith. Both these doctrines can garner post-termination sales commissions in different ways. Lawsuits can be more long-term and emotional, oftentimes with a wide range of possible results. Whereas, protective contracts to prevent litigation can be attained in certain situations, most notably when a sales rep has a high degree of wherewithal, and/or a large book of business in an industry. I will therefore discuss protective contract clauses, initially. However, sometimes manufacturers are unwilling to deviate from the contracts prepared by their corporate counsel, in which case contractual protection is not attainable, and the more sophisticated alternatives of proving either Procuring Cause or Bad Faith are all that are available.
To begin, here is a general definition of both, although this may vary from state to state:
- Procuring Cause (“PC”) — allows a sales agent to receive commissions for post termination sales that were “procured” prior to termination, under certain circumstances. Namely, when there is no contract term specifying the duration of the agent’s right to sales commissions, should it be terminated. Or, in some jurisdictions, if the contract fails to specify when commissions become due and payable.
- Bad Faith (“BF”) — an abbreviated way of referring to a breach of the covenant of good faith and fair dealing, which is a covenant (promise) implied in most every contract. This theory prohibits “opportunistic discharges.” Meaning, although a contract may allow for termination with no further commissions on 30-days’ notice, courts may add a requirement that the discharge was not opportunistically undertaken, to avoid the payment of commissions.
Both doctrines are followed in most of the progressive business states, as discussed below. However, neither are fail proof means of collecting post-termination commissions. The best bet on that is to negotiate and include protective contract provisions. To follow are some ways to do that.
In order to avoid lawsuits where PC and BF have to be litigated, sales reps should negotiate better, if they have any leverage, at the inception of the relationship with a new principal.
- Post-termination commissions based on length of service. Sometimes one month of additional commissions for every year of service has been negotiable.
- Post-termination commissions based on length of cultivation period vs. length of payout prior to termination. Sometimes we have been able to obtain agreements by the manufacturer to pay commissions for as long as it took to cultivate sales.
- Of course, Utopia for any sales rep would be Life of Part (LOP) commissions. Meaning if the rep brought on board a new customer that its principal did not previously have business dealings with, and that particular customer is important to the principal, the sales rep may be able to negotiate LOP commissions for landing such an account. But don’t bet on it. Over many years of practice, I’ve seen perhaps two or three LOP cases, out of the thousands of cases that have been presented.
- Finally, “buyouts” based on prior year’s annual sales commissions can sometimes be negotiated. Such provision would pay a terminated sales rep a liquid amount agreed to at the time the parties sign their contract, and could be modified year to year depending on the business developed.
The California Supreme Court has stated the rule, as follows:
“…an agent selling goods on commission is entitled to a commission on goods sold by him during the continuance of the agency, although the goods were not delivered or paid for, or even where the orders were not received by the principal, until after the termination of the relationship… ‘Where the services to be performed by the agent are severable, he may, in the absence of contrary provision in the agency contract, recover for services performed before the termination of the relationship’” … Zinn v. Ex-Cello Corp., 24 Cal.2d 290, 149 P.2d 177 (1944).
The term “severable” is another way of saying terminable at will. So, any sales agent in California with an at will termination provision, and a contract without language limiting the duration for which the principal must pay sales commissions, may use the PC doctrine to seek commissions on post-termination sales.
“… a party may be entitled to commissions on sales made after the termination of a contract if that party procured the sales through its activities prior to termination. The rule applies, however, only if the contract does not expressly provide when commissions will be paid.” Technical Representatives, Inc. v. Richardson-Merrell, Inc., 107 Ill. App.3d 830 (1982).
“In Michigan… the agent is entitled to recover his commission whether or not he has personally concluded and completed the sale, it being sufficient if his efforts were the procuring cause of the sale ….” Reed v. Kurdziel, 352 Mich. 287 (1958).
The U.S. District Court — Michigan, relying on the seminal Reed case, later stated:
“The point of the procuring cause doctrine is to prevent a principal from “unfairly taking the benefit” of the agent’s services by terminating the arrangement in order to avoid paying commission. The doctrine has been applied to allow post-termination commissions to independent sales representatives, sales agencies, and employees.” Brown v. Jason Inc., Case No. 08-11446, U.S. District Court, (E.D. Michigan, 2009).
So, slightly different standards and analysis may apply, state to state, but commissions on post-termination sales are attainable, if the PC doctrine can come into play.