Toying with rep over post-termination commissions ends in ‘game over’ for opportunistic principal
by ERA Legal Counsels
Gerald M. Newman and Adam Glazer
Gerald M. Newman and Adam J. Glazer are partners in the law firm of Schoenberg Finkel Beederman Bell & Glazer LLC, and they serve as general counsel to ERA. They are also regular contributors to The Representor, and participate in Expert Access, the program that offers telephone consultations to ERA members.
Tech 4 Kids Inc. makes toys but was unable to play to U.S. retailers.
So T4K reached an oral agreement with Northern Group Inc., an independent sales representative with offices in the Midwest, to promote its toy products. With no T4K market share, the parties understood that Northern would have to enter “pioneering mode” because it would take years to generate sales.
The parties reach an agreement and Northern sets out creating demand
The oral agreement, reached in 2008, provided that Northern would receive a 5 percent commission on sales it procured for T4K. Not surprisingly, the parties never discussed such details as to how long the agreement would last, or what terms would apply upon termination.
Over time, Northern successfully penetrated major retailers, like Walgreens, Kmart, Fleet Farm and Shopko on behalf of T4K, and generated millions of dollars in sales. Commissions were paid to Northern only after the retailer paid T4K.
In October 2016, the toy deal broke. T4K terminated Northern over the phone, effective immediately, and offered to pay commissions for orders received through the end of the year. By October, retailers already had the holiday products they needed in stock and would not place new orders in the waning months of the year, leading Northern to reject the offer out of hand.
Northern believed it had obtained orders not only through 2017 from Walgreens, Kmart, Fleet Farm, and Shopko, but that it had already obtained commitments for orders from these retailers into 2018. Accordingly, it countered by demanding commissions on programs it already secured that were scheduled to run through 2018.
In the end, T4K paid on the few reorders that came in through 2016 and paid no commissions on orders thereafter. It also allegedly replaced Northern with a rep commissioned at a lower rate.
Believing it put T4K on the map in the U.S. and generated over $2.4 million in sales in 2017 alone, Northern was ready to challenge this unfair treatment and filed suit in federal court in Green Bay, Wis. Among its various claims were: breach of the oral contract, breach of the duty of good faith and fair dealing, recovery under the “procuring cause doctrine,” and recovery under Wisconsin’s sales rep protection statute.
Seeking to avoid going to trial on any of these claims, T4K moved for summary judgment, a procedure that enables a resolution — before a jury is even empaneled — should the court find no material dispute of facts exists and T4K is entitled to judgment as a matter of law.
Breach of contract
Northern asserted that, under the parties’ oral agreement, T4K owed commissions on the commitments to purchase it obtained pre-termination. T4K denied breaching on the grounds that it paid all commissions due before termination, and that pursuant to the parties’ agreement and their history, commissions were not due until it was paid from the retailer.
Arguing for summary judgment, T4K further claimed that Northern had not procured the sales by the time of termination because the specific quantities and types of toys to be purchased were not determined. Though the retailers had committed to purchase, additional work remained.
Northern did not dispute that it was fully paid during the term of the agreement and that commissions did not become due until T4K received payment. Instead, Northern’s position was it earned commissions whenever the pre-termination commitments to purchase it obtained from Walgreens, Kmart, Fleet Farm and Shopko translated into sales. And Northern asserted that by obtaining the commitments to purchase, it had duly earned its commissions on that business.
The court easily rejected summary judgment on the contract claim, finding logically enough that just because “T4K had not previously paid commissions until the sale had been finalized does not mean that Northern Group had not completed most, if not all, of its bargained-for performance. It simply means the amount of its compensation could not be determined until payment had been made.”
Dismissing T4K’s assertion that more work remained to be done, the court ruled: “the record is not clear as to what remained to be done and how significant that work was in relation to the whole.” Thus, the jury would get to decide whether Northern had procured the relevant sales at the time of termination and whether T4K breached by failing to pay commissions.
Breach of the duty of good faith and fair dealing
Wisconsin follows the common practice of reading an implied duty of good faith and fair dealing into every contract. In the words of its highest court, the implied duty of good faith means parties to a contract cannot “do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.”
Northern argued that T4K breached this implied duty by choosing to terminate the oral agreement — effective immediately — during the period between Northern obtaining commitments to purchase and T4K shipping the toys to retailers. Upon considering the timing of the termination, together with Northern’s contention that it was replaced with a rep at a lower rate, the court found that an appropriate resolution of these disputed issues would require a jury.
Therefore, Northern’s breach of the implied duty of good faith claim also withstood summary judgment.
The procuring cause claim
As regular readers of Legally Speaking know, in many states the procuring cause doctrine can render a terminated sales agent eligible to recover commissions on orders procured pre-termination, but not shipped or paid for until after termination, unless the parties’ agreement limits or precludes post-termination commissions. T4K essentially sought to avoid the procuring cause doctrine’s reach by pointing to its termination of Northern before the orders came in.
Termination before the orders came in was, of course, the whole point. Wisconsin courts recognize that when a rep successfully accomplishes the result sought by the principal, the resulting commission obligation cannot be averted by conveniently terminating the rep.
And as the federal appellate court has ruled, the procuring cause doctrine “stands as well for the equally fundamental proposition that a party to a contract will not be permitted to take steps designed to prevent the other party from being compensated for the performance that he has already rendered.”
Although it was undisputed that at the time of termination, no retailer had committed to purchase a designated quantity of products, Northern asserted that it had obtained commitments to purchase pre-termination that formed “the basis for all future product shipments and revenue to T4K for the life of the retail programs.” Northern further asserted that the parties’ oral agreement did not include any limitation on the recovery of commissions post-termination.
This was sufficient to raise a material dispute of fact as to whether the alleged commitments yielded sales for T4K, and to defeat summary judgment. The court concluded, “T4K cannot avoid paying Northern Group for commissions if it terminated the oral agreement in order to not pay Northern Group commissions.”
The Wisconsin sales rep statute
Most states have enacted sales rep protection statutes, and Wisconsin’s version enables sales reps to recover up to three times the amount of unpaid commissions, plus attorneys’ fees. When no written contract exists in Wisconsin, commissions become due under the statute according to the past practices followed by the principal and rep.
In addition, the Wisconsin statute requires principals to provide 90 days’ notice of termination, unless a written contract provides otherwise.
T4K contended that the past practice was it would only pay commissions upon receipt of payment from the retailers and shipment of product; therefore, no commissions were due upon termination. However, the court recognized that upon termination, T4K had offered to pay commissions on certain orders received and products shipped after termination, calling into question its claim about past practices, and creating factual disputes inappropriate for resolution on summary judgment.
Additionally, T4K did not dispute that it terminated Northern effective immediately, despite the statutory requirement to provide 90 days’ notice. The court left the door open to the possibility that this “may have resulted in further damages,” and denied summary judgment “for this reason, as well.”
After T4K’s motion for summary judgment was denied in its entirety, it took a hard look at the facts it would have to confront before a jury, including allegations of terminating its long-time rep to avoid paying the commissions due. Set back on its heels by the court’s ruling, T4K was suddenly done toying with Northern, and the parties quickly reached a pre-trial settlement.
Alas, reaching an urgent, pressure-packed deal after losing on summary judgment comprises a not uncommon result when manufacturers refuse to consider an early, reasonable settlement and insist on playing the game all the way through summary judgment.