Continuing a discussion on how a sales rep might recover post-termination sales commissions under a terminable representation agreement, and having previously discussed Procuring Cause, I turn now to Bad Faith (BF).

Bad Faith

A claim for BF in a principal-agent relationship will be more readily available. First, because there are fewer limitations on bringing such a claim, such as the limitation on a PC claim if the contract at issue addresses post-termination commission rights. With a claim for BF, a principal may follow a contract’s termination provisions to a tee, but a claim for BF may still be a winning claim for a terminated sales rep.

Although the doctrine’s criteria change, somewhat, from state to state, a claim for BF requires that the principal engage in an “opportunistic discharge,” intended to avoid the payment of commissions. The following cases, by jurisdiction, are exemplary.

• Illinois

  In Illinois, the courts have shown a reluctance to eviscerate the at-will doctrine, which has traditionally allowed one to terminate an employment/agency contract for any reason or no reason at all.

  Although, in Wilson v. Career Education Corporation, 729 F.3d 665, at p. 675 (7th Cir. 2013) the U.S. Court of Appeals decided a case under Illinois law based on BF and held that an employer’s discretion to terminate and refuse to pay unearned commissions (“bonuses”) was limited by the reasonable expectations of the parties, stating:“…When one party’s contractual obligation is “contingent upon a condition particularly within the power of that party,” the controlling party’s discretion in bringing about the condition is limited by the implied covenant of good faith. It bears emphasizing that CEC can breach the implied covenant of good faith even though the Plan gave CEC the unambiguous discretion to terminate… and not pay unearned bonuses.”

  Ultimately, the court in Wilson decided for the defendant. However, the door has at least been left open for such a claim on behalf of sales reps, based upon the rationale used in this and other similar cases.

• California

  California Courts have long recognized that although a party has the benefit of a contractual option, including an option to terminate a contract, it may not exercise that option in any way that violates the reasonable expectations of the other party, or else it may violate the covenant of good faith and fair dealing.

  For example, in Cleary v. American Airlines, Inc., 111 Cal.App.3d 443, at p. 445 (1980) the California Court of Appeals held:“…There is an implied covenant of good faith and fair dealing in every contract that neither party will do anything which will injure the right of the other to receive the benefits of the agreement…On occasion, it may [thus] be incumbent upon an employer to demonstrate good faith in terminating an employee….”

  California is more liberal in its application of the BF doctrine, than Illinois. However, in New Jersey “Fuggedaboutit.” It beats them both.

• New Jersey

  In Sons of Thunder, Inc. v. Borden Inc., 148 N.J. 396 (1997), the Supreme Court of New Jersey, deciding a case between a distributor of seafood, and a seafood harvesting super corporation, allowed a claim for BF by the plaintiff distributor when it was terminated, notwithstanding that defendant followed the termination provisions of the contract, exactly. In so holding, the court stated as follows: “The obligation to perform in good faith exists in every contract, including those contracts that contain express and unambiguous provisions permitting either party to terminate the contract without cause…[A] party to a contract may breach the implied covenant of good faith and fair dealing in performing its obligations even when it exercises an express and unconditional right to terminate.”

  The court then went on to hold that the jury’s award of $412,000, approximately one-year’s profit, for the breach of the implied covenant, was reasonable and fair given the circumstances.

  It must be noted that one of the rationales for awarding such damages was the plaintiff’s expenditures to assist in its contractual relationship with the defendant (it purchased a ship), which led to the reasonable expectation that it would not be prematurely terminated without cause. Certainly, this case could be cited as persuasive authority in other jurisdictions, outside of New Jersey, with these or similar facts.

• Massachusetts

  In one case decided under Massachusetts law, the U.S. Court of Appeals held, and stated:“[A]n employee who would be entitled to a bonus or commission based on his past performance and who is deprived of it by a discharge without “good cause” may recover the sum already “earned” … [based on] … an implied obligation of good faith and fair dealing.” Joyal v. Hasbro Inc., 380 F.3d 14, at p. 20-21 (1st Cir. 2004).“Massachusetts decisions hold that even without a malign motive, a discharge without ‘good cause’ is enough to make the defendant liable for contingently due bonuses….”

  In another case, Fortune v. National Cash Register Company, 373 Mass. 96, at 101-102 (1977) the plaintiff, a former salesman of the defendant “brought suit to recover sales commissions… under the parties’ written contract of employment. Fortune argued that, in spite of the literal wording of the contract (a 30-day termination provision, at will) he was nonetheless entitled to a jury determination on NCR’s motives in terminating his services….”

  The Massachusetts Supreme Court agreed, and stated:

  “We hold that NCR’s written contract contains an implied covenant of good faith and fair dealing, and a termination not made in good faith constitutes a breach of the contract … we believe that where, as here, commissions are to be paid for work performed by the employee, the employer’s decision to terminate its at will employee should be made in good faith.”

  So, the standard for a BF claim in Massachusetts is pretty minimal. All the sales rep or commissioned employee would need to prove is that they were terminated without good cause, and thereby lost commissions or bonuses for past work performed.

Conclusions

Although an agent can be terminated on 30-days’ notice, the principal may be liable for commissions on all sales in the pipeline, or for a reasonable period of time, if a violation of the good faith covenant is found to have occurred. Or, in Massachusetts, if there was no good cause for the termination.

In the context of an agent representation agreement, where it often takes months or even years to earn sales commissions, the exercise of an option to terminate the contract must not be undertaken by a principal to deprive a sales agent of commissions.
If a sales rep is lucky enough to have a contract which does not specify the right to post-termination commissions, the PC doctrine may come into play and allow commissions on post-termination sales.

However, protective contract terms such as those discussed in Part I (January 2018, Agency Sales) are one’s best protection.