Clean sweep for independent rep in commission action offers valuable lessons to industry

Raise your hand if this sounds familiar:  A rep agreement plainly provides for a fixed commission rate.  After the rep secures orders, the principal claims the parties orally agreed the rep would accept a lower commission rate on those orders.  The rep disputes making any such agreement, but the commissions get paid at the lower rate. 

Wow, that’s a lot of hands.

What’s a rep to do?  Reject the lower rate, get terminated and wind up with nothing?  Recognize that something is better than nothing, and meekly go along?  Storm the office of the VP of Sales and overturn over his desk, while he’s seated behind it?

Meet Independent Rep Kathleen Brown

The choice made by the owner of rep firm 181 Sales, Inc., Kathleen Brown, was to make her principal, Karcher North America, Inc., answer in court, and even obtained exemplary damages.  Here’s how it went down.

181 Sales entered into a Manufacturer Representative Agreement (“MRA”) with Karcher, a manufacturer and distributor of pressure washers and other cleaning equipment.  The MRA provided for a 4% commission on the net invoice amounts billed to two large customers: Menards and Fry’s Electronics. 

Try as she may, Ms. Brown was unable to sell Karcher’s products to Fry’s at several of its California locations.  She did, however, land over $1.5 million in sales to various Menards stores in Wisconsin, Illinois and Iowa.

After these Menards sales were secured, Karcher claims it called 181 Sales to insist upon a modification to the MRA lowering the commission to 1% because the products sold were part of a Menards “closeout sale.”  Karcher claims this was consistent with the industry standard, and that 181 Sales reluctantly went along.

“Karcher simply made that up,” retorted Ms. Brown.  Not only didn’t 181 Sales accept the reduction, it objected each time Karcher brought it up.  This was borne out by several e-mails from Ms. Brown reminding Karcher that the contractual 4% rate applied.

Oral Modifications to Rep Agreements Are Not Reliable

Vastly underpaid, 181 Sales brought suit in the San Francisco federal court charging Karcher with breaching their contract and violating California’s independent sales representative statute.  It then moved for summary judgment, urging the court to find that no trial was necessary because the evidence was so one-sided it supported only a finding in favor of 181 Sales. 

Responding to the motion, Karcher did not dispute failing to pay a 4% commission, but maintained the parties amended the MRA in their phone call.  As noted, 181 Sales denied any such agreement was reached.

The federal trial judge concluded it was unnecessary to decide what occurred in a purported phone call based on a standard clause contained in the MRA:  “This Agreement shall not be amended, altered or qualified except by memorandum in writing signed by the Company and the Representative”. 

Karcher could not claim the alleged amendment was “in writing signed by the parties,” and as a result, any modification purportedly reached by phone was insufficient to lower 181 Sales’ commission rate.  Similarly, the assertion that a lower commission rate applied to “closeout” items was also not considered because the MRA unambiguously provided that 181 Sales would receive 4% on all sales made to Menards. 

The Solicitation of California Sales, Not their Procurement, Triggers Its Sales Rep Statute

The court also granted 181 Sales summary judgment on its claim under the California independent sales representative statute.  California’s rep statute, a version of which is also found in most other states, enables a sales rep who is not paid under a contract with its principal to collect three times the amount of unpaid or late paid commissions.  To be eligible, the rep must “solicit wholesale orders at least partially within” California.

Karcher resisted application of the statute to the unpaid commissions on sales to Menards on the grounds that those sales were all made outside California.  U.S. District Judge Michael S. Tigar again refused to let Karcher wriggle off the hook, noting that 181 Sales qualified by soliciting orders in California, albeit unsuccessfully, to Fry’s. 

As he explained, “Karcher used the services of 181 Sales to solicit wholesale orders from Fry’s Electronics (in California) as well as Menards (outside California).”  This was sufficient to make Karcher liable for three times the amount of unpaid commissions on the Menards business under California’s rep statute.

The ‘Choice of Law’ Provision Must Be Specific

One other point from Judge Tigar’s well-reasoned decision also deserves mention, although a touch on the technical side.  The strong California sales rep statute, under which 181 Sales collected exemplary damages, did not get invoked without a fight. 

Karcher argued Delaware law should apply, relying on the MRA’s formidable-sounding choice of law provision:  “This Agreement shall be made and construed in accordance with the laws of the State of Delaware”.  Not surprisingly, Delaware is one of a handful of states without a sales rep statute.

181 Sales argued convincingly that the contract language pointing to Delaware law was limited to the making and construing of the contract, and did not include language (often found in other manufacturer-drafted contracts) specifying that any disputes related to the contract will be governed solely by Delaware law. 

Accordingly, Judge Tigar concluded that “while the narrowly worded choice of law clause in the MRA is sufficient to govern interpretation of the contract, it does not bar non-contractual causes of action of another state, including 181 Sales’ claim under” California’s sales rep act.  This key finding enabled 181 Sales to avail itself of California’s statute rather than get mired in Delaware law.

With this triumph, it was a complete sweep for 181 Sales.  Summary judgment was entered in its favor for three times the amount of unpaid commissions, plus attorney’s fees, costs, and prejudgment interest, and a trial was avoided.  Perhaps more importantly, racking up this impressive victory signals to the larger sales rep industry the potential availability of the legal relief scored by 181 Sales.  Based on all the hands raised earlier, it seems there are plenty of similarly mistreated reps who may want to draw upon one or more of the pro-rep rulings found in this legally significant decision.

This article appears in the The Representor. Click here for a printable version of this article.

Related Articles

Avoiding the Tax Trap in Transferring Installment Sale Obligations

Avoiding the Tax Trap in Transferring Installment Sale Obligations

Question: I just sold stock in my corporation to a third party and received a cash payment upfront with the balance of the sale proceeds to be paid to me in the future. Since I do not need the additional funds, can I make a gift to my children of the right to the future payments?

Creative Retirement Designs for Small Business Owners

Creative Retirement Designs for Small Business Owners

For many small business owners, the key retirement plan decision is not what type of plan to adopt, but where the 401(k) plan funds should be invested. While 401(k) plans are the overwhelmingly popular plan of choice for employers, consider that alternative plan design options are available to maximize benefits for company owners with both 401(k) plans and other types of qualified retirement plans.

Obstacles in Establishing Non-Qualified Deferred Compensation Plans

Obstacles in Establishing Non-Qualified Deferred Compensation Plans

Question: I want to create a deferred compensation plan for certain highly paid employees of my company to provide additional benefits for them, separate and apart from the company profit sharing and 401(k) plan. Can you advise what obstacles I must be concerned with?