Hell Hath No Fury Like a Principal Scorned

by | Aug 3, 2020

In the lengthy annals of sales rep-principal relationships ending badly, the shabby treatment Eliot Essagof received from his principal deserves exceedingly prominent mention.

The business of Essagof and his Connecticut sales rep firm, Trade Links LLC, doesn’t roll easily off the tongue. They promote the sale of products in the thermoset and plastics industry, focusing on urea and melamine molding compounds.

For decades, Trade Links represented Claudio Columbo’s companies located in Mexico and Italy. The Mexican facility is owned by BI-QEM Mexico, which Columbo also owns.

BI-QEM and Trade Links entered into a sales representative agreement (SRA) in 1999 that renews annually, provided Trade Links exceeded minimum sales requirements. Each year, Trade Links did so and remained in full compliance with the SRA.

Background

In 2008, Columbo moved production and sales to a facility he purchased in Florence, Mass., that became BI-QEM Florence. Colombo agreed that Trade Links would serve as the exclusive sales agent for the new Florence operations and that the existing SRA would cover their business relationship involving BI-QEM Florence. And indeed, Trade Links did receive monthly commissions on BI-QEM Florence sales at rates set under the SRA.

The trouble began in late 2017 when Colombo apparently tired of paying commissions as required in the parties’ contract, and approached Essagof about terminating the SRA and joining BI-QEM as an in-house sales executive. The job offer would have yielded considerably lower compensation, making it easy for Essagof to turn down. Upset by this response, Colombo reduced the role of Trade Links in the business and threatened to withhold commissions.

Further, Essagof was asked to coordinate thinly disguised “meet and greets” between key customers and both BI-QEM’s sales manager and the new sales rep BI-QEM engaged in the Trade Links territory. Essagof protested this flagrant effort to take over its accounts without a response from BI-QEM.

Seeking dialogue with Colombo, Essagof wrote to him in May 2018 proposing they modify the SRA to enable both parties to satisfy their mutual goals. In response, Colombo sent a notice to Essagof dated May 31, 2018, that BI-QEM would not renew the SRA when it expired at year-end.

When Essagof reminded Colombo that the SRA renewed automatically unless Trade Links failed to meet its minimal sales goal and that it always had, Colombo acknowledged the contract provision but claimed it no longer applied because BI-QEM had not set minimum sales goals in recent years. The SRA, however, vested BI-QEM with no such ability to avoid its automatic renewal.

Trade Links continued to protest the increasing efforts to marginalize its role, and Essagof was then summoned to the Florence production facility where a BI-QEM official suggested to him that the termination notice was a “negotiating tactic” intended to soften him to Colombo’s request. He was also reminded of Colombo’s superior ability to sustain prolonged litigation should he continue to resist.

The very same day, Trade Links exercised its contractual right to demand arbitration against both BI-QEM Mexico and BI-QEM Florence for interfering with its rights under the SRA.

BI-QEM Mexico’s response took the form of filing suit in New York state court seeking to put a hold on the arbitration proceedings, while BI-QEM Florence did the same in Massachusetts state court. Both efforts proved unsuccessful.

The BI-QEM entities then asked the American Arbitration Association (AAA) to halt the proceedings, an attempt that also failed. The AAA hearing proceeded in October 2018, and BI-QEM chose not to attend. Instead, facing a certain adverse arbitration decision, BI-QEM withdrew its notice of termination one day after Essagof testified before the arbitration panel.

With termination no longer looming, the parties settled their dispute, and Trade Links dismissed its arbitration claim. In January 2019, Essagof and Colombo met in Switzerland to discuss their business relationship and the SRA. Rather than developing any newfound respect for his longtime sales rep, Colombo presented Essagof with a new operations manual enabling BI-QEM to strictly micro-manage Trade Links’ activities.

To no surprise, Essagof rejected this approach and countered by inquiring about overdue commissions. Colombo’s response was to threaten to “shut down Mexico and Florence” and file for bankruptcy “so that you get nothing,” or to “liquidate and reincorporate under a new legal entity so that Trade Links no longer ‘has a contract with anyone.’”

Then, BI-QEM continued telling customers over the following months, to place orders with it directly, and to provide Trade Links with no sales and order information. Commissions due on these orders also remained unpaid.

Trade Links then terminated the SRA based upon BI-QEM’s many breaches and filed suit in Connecticut federal court alleging, among other claims, breach of contract, breach of the covenant of good faith and fair dealing, and violations of the Connecticut sales rep protection statute.

The BI-QEM entities moved to dismiss.

Trade Links contract claim readily survives

Organized after the SRA was signed, BI-QEM Florence argued it neither was an affiliate of BI-QEM Mexico, who signed the SRA, nor did it have an independent contractual relationship with Trade Links, and therefore, it had no liability under a breach of contract theory.

The rejoinder from Trade Links was that under the applicable law, BI-QEM Florence did indeed qualify as an “affiliate,” and that having lived under the terms of the SRA when it served its interests to do so, a “course of dealing” was established that precluded BI-QEM Florence from suddenly contending it was not bound by the SRA’s terms.

In a written decision released in March 2020, the court rejected this attempt to dismiss the contract claim. At the early motion to dismiss stage of the proceedings, all that was necessary was that Trade Links allege the elements of a breach of contract claim and its complaint adequately pleaded each element. Such allegations are accepted as true when a motion to dismiss is brought, and they satisfied the court that Trade Links adequately stated a claim for breach of contract. The rest could be sorted out at trial.

Good faith and fair dealing allegations are sufficient

The Trade Links Complaint pled four distinct violations of the duty of good faith and fair dealing, a duty implied into every Connecticut contract (similar to most states). Trade Links alleged that BI-QEM wrongfully: 1) impeded its rights under the SRA; 2) sent its notice of termination in bad faith; 3) pressured Trade Links to stop the arbitration; and 4) withdrew its termination notice to avoid an unfavorable arbitration decision.

BI-QEM sought dismissal on the grounds that these claims were duplicative of the breach of contract allegations, but the court found that allegations 3) and 4) were not included in the complaint’s contract theory, and therefore, this claim was not sufficiently duplicative to warrant dismissal. A separate claim for breach of the implied duty of good faith and fair dealing was adequately set forth by Trade Links.

Trade Links entitled to seek relief under Connecticut’s sales rep statute

Like most states, Connecticut provides statutory protection to sales reps who have their commission payments withheld after termination. The Connecticut statute entitles reps to seek recovery of two times the amount due when a principal “willfully, wantonly, recklessly or in bad faith fails to pay” commissions, and also enables recovery of attorney’s fees and court costs.

Seeking to dismiss the claim brought by Trade Links under the Connecticut sales rep statute, which applies “after a contract between a principal and a sales representative is terminated,” BI-QEM contended that it had rendered the statute inapplicable by withdrawing its notice of termination before it became effective. This argument required the court to crawl a little deeper into the Connecticut statute.

“Termination” is defined in the statute to mean “the end of the business relationship between a sales representative and principal, whether by the principal or the sales representative …” The court found that Trade Links “plausibly alleged that its business relationship with BI-QEM ended on May 31, 2018,” the date BI-QEM sent its notice of termination.

Although BI-QEM purported to withdraw it, Trade Links set out in the complaint how the effort “was not really a withdrawal.” BI-QEM continued to marginalize the Trade Links role and continued withholding commissions, which certainly resembled a termination. As a consequence, BI-QEM would continue to face potential liability for the double damages made available under the Connecticut rep statute.

Takeaway

In a significant victory for Trade Links and the larger sales rep community, the motion to dismiss was accordingly denied for each of these common sales rep theories against non-paying principals. Threats to “shut down” the company to avoid paying commissions or to file for bankruptcy “so that you get nothing” are generally doomed ploys by unscrupulous principals intended to intimidate inexperienced reps.

 

This article appears in the The Representor

[DISCLAIMER – This information is solely for information purposes and does not constitute legal advice. Please contact SFBBG with all legal questions.]