Risk analysis leads court to overturn unfriendly reading of rep contract
by ERA Legal Counsels
Gerald M. Newman and Adam Glazer
Gerald M. Newman, partner in the Chicago law firm of Schoenberg, Finkel, Newman & Rosenberg, LLC, serves as general counsel to ERA and is a regular contributor to The Representor. He participates in Expert Access, the program that offers telephone consultations to ERA members. Gerry co-authored this article with Adam Glazer.
You can call Gerry Newman or Adam Glazer at 312-648-2300 or send email to them at firstname.lastname@example.org or email@example.com.
Sales rep law articles do not only address recovering commissions. Primarily, yes, but not solely.
Before a commission claim can be brought, the contract language must favor the rep and prove enforceable. This was the obstacle independent sales rep William J. Burford confronted.
Burford agreed to market and promote the purchase and sale of accounting practices for a company called Accounting Practice Sales, Inc. or “APS” in Louisiana, Alabama, Mississippi, Tennessee and Kentucky. This was a new sales territory for APS, and the parties’ contract included a clause stating Burford would not compete in it for one year after termination.
The appellate court went so far as to caution against the danger posed by APS’s interpretation of the contract, which “would threaten to deprive Burford of the economic basis for the bargain he struck.”
APS later terminated Burford without cause, leading him to file a federal lawsuit in the small southern Illinois city of Benton, alleging his termination violated the parties’ contract.
Asserting its termination of Burford was proper under the contract, APS moved for summary judgment on his complaint, a common tactic designed to win a case based on legal briefs and thereby avoid a trial. The federal trial court granted the motion and Burford appealed.
The contract terms: avoiding no-fault divorce
The parties’ contract contained an “evergreen” clause, providing that “it renews automatically on each anniversary date of this agreement for another period of 12 months.” Such contracts that renew without either party taking action, and are for an indefinite term, are ordinarily viewed by courts as terminable at will by either party, “the business equivalent of no-fault divorce.”
Significantly, while the contract enabled Burford to terminate at any time by giving 30 days’ notice, no such right was conferred upon APS. The contract expressly stated: “APS cannot terminate this agreement unless it is violated by Burford.” Relying on this language, Burford argued the parties’ agreement overcame the presumption that APS could terminate the contract at will.
In a decision handed down last year, the federal appellate court in Chicago, unlike the trial court, agreed with Burford on this point. “By allowing APS to terminate only when Burford had breached, the contract made as clear as could be that APS could not terminate the contract at will.” No confusion existed either. The parties knew how to give a party the right to terminate at will as evidenced by the language allowing Burford to terminate at any time on 30 days’ notice. They made the decision to give Burford that right, but not APS.
A staple in contracting: both sides can minimize risk
The appellate court went so far as to caution against the danger posed by APS’s interpretation of the contract, which “would threaten to deprive Burford of the economic basis for the bargain he struck.” With unusual clarity, the court noted how “the type of relationship found here — where a sales representative builds a territory on the other party’s behalf — poses significant risks to both sides if either party is free to walk away at any time without consequence.”
The parties’ allocation of this risk proved central to the court’s analysis. It recognized that Burford could spend his time at APS simply building goodwill in the territory, and then walk away to capitalize on the goodwill with another company or even for himself.
APS was protected against this risk via the contract’s one-year non-compete provision. As further protection to APS in case Burford underperformed, the contract provided that poor sales performance gave it good cause to terminate him.
Meanwhile, Burford needed protection against the risk that APS would allow him to spend time and resources developing the territory, only to then reassign it to a lower-paid rep. His risk was minimized by APS contractually agreeing not to terminate him unless he violated the agreement.
It was the parties’ careful risk allocation in their agreement that gave the court comfort in reversing the trial court’s order granting summary judgment, and concluding that APS breached the parties’ agreement by terminating Burford at will. In claiming a right it did not possess under the parties’ arrangement, APS upset the balancing of risk in the agreement, an action it could not sustain.
The practical lesson: preserve the taste of peanut butter
An important takeaway from this rep victory is the fundamental concept and benefit of holding principals to the terms of carefully negotiated rep agreements. What is gained at the pre-contract bargaining table ought not be snatched away by a short-sighted principal’s greed or hotheadedness.
And a premise of protecting the “carefully negotiated rep agreement” is, of course, to ensure that pre-contract negotiations with the principal include a risk allocation that protects both parties. Burford would have been in no position to prevent the APS termination had he signed a one-sided contract rather than securing the right to be terminated only for breaching the rep contract.
One-sided rep contracts are almost as undesirable as one-sided love, and as Charlie Brown of “Peanuts” fame once remarked: “Nothing takes the taste out of peanut butter quite like unrequited love.”