Avoiding the Tax Trap in Transferring Installment Sale Obligations

A well-reasoned 2021 court decision handed down by the federal court in Newark demonstrates a sales rep’s broad eligibility to recover unpaid sales commissions.

Faithful readers of this column are familiar with sales representative protection statutes, legal protections provided by legislatures in most states in an effort to level the uneven playing field reps often find themselves forced to play on when contracts with their principals get terminated. These helpful statutes vary state to state, and the stronger ones enable reps to recover three times the amount of commissions not timely paid, plus attorney’s fees and costs.

The significant variances in state statutes can lead a rep who does business in more than one state to look around for the most favorable language. Deciding which statute to invoke should involve evaluating more than just the level of recovery available; prudent reps will also carefully explore whether they are eligible to recover.

California: Strong, but Sometimes Difficult to Access

For example, sales reps deprived of their commissions who seek to sue under the California rep statute, which offers one of the strongest frameworks, sometimes get tripped up over the strict statutory language. It is not enough that the manufacturer does business in California; the rep must also “solicit wholesale orders at least partially within this state.”

Note that the rep does not have to solicit orders exclusively or even primarily in California to avail itself of the statute, nor must it successfully make sales into California. It is sufficient to show that the rep made some effort to sell into California, even if the effort failed. Reps who cannot show sales efforts made in the Golden State, however, do not qualify for recovery there.

Minnesota: Quirky and with Limited Reach

Moving further east, Minnesota’s unique version of the rep statute imposes limitations on a manufacturer’s ability to terminate, and makes arbitration or litigation available to sales reps alleging a violation, but only arbitration to manufacturers. Significantly, the statute applies only to reps who: (1) reside in or maintain their principal place of business in Minnesota; or (2) have a sales territory set out in their contract that includes some or all of Minnesota.

Quite unlike most state statutes, this narrow application means that an out-of-state rep who does business with a Minnesota principal cannot avail itself of the Minnesota rep statute, unless the rep contract expressly enables the rep to sell into Minnesota. Even if the parties’ contract expressly calls for Minnesota law to apply, and the rep has no alternative state statute to rely upon, courts have interpreted the Minnesota statute as unavailable to an out-of-state rep whose territory does not include Minnesota.

Unfortunately for reps based in a state with a weak sales rep statute or none at all, the otherwise advantageous Minnesota scheme offers the state’s manufacturers the chance to avoid any statutory liability by making its contracts subject to Minnesota law, which may lie beyond the reach of out-of-state reps.

Many Other States: Protecting a Rep’s Home Turf

A common provision in other sales rep statutes will subject manufacturers to a state’s jurisdiction, even if they are not resident in the state, if they enter into a contract with a sales rep to solicit orders in the state. This prevents a manufacturer from enlisting a rep to chase business in a location far from its headquarters, and then requires the rep to bring a claim across the country when a commission dispute arises.

While this approach is often helpful when the rep’s locale offers a favorable statute, it does not enable the rep to assert a claim under the statute in the manufacturer’s home state, should it prove more favorable. The state of Washington’s rep statute, for example, among the weakest anywhere, includes such a provision. The Washington statute provides no additional damages when a principal fails to provide a timely commission to its sales rep, rendering its home turf language unlikely to get invoked.

New Jersey: Carefully Considered

In sharp contrast to both Minnesota’s approach and statutes that protect a rep’s home turf, the statute enacted in New Jersey, which leads the nation by making four times the amount of unpaid commissions in damages available to reps, plus attorney’s fees, neither requires the rep to office in New Jersey nor solicit sales there to qualify for its protections. No arbitrary or unreasonable obstacles lie in the path of a rep cheated out of commissions by a New Jersey manufacturer.

A well-reasoned 2021 court decision handed down by the federal court in Newark demonstrates a sales rep’s broad eligibility to recover unpaid sales commissions under the New Jersey Sales Representatives’ Rights Act.

Norcom Research, LLC, a sales rep marketing telephone, energy, and electricity services, is neither a citizen of New Jersey nor solicits sales in New Jersey. On this basis, its principal, Net2Phone Global Services, LLC, moved the court to dismiss Norcom’s claim brought under the New Jersey statute.

After full briefing, however, Net2Phone was unable to convince the court that the New Jersey legislature intended “to limit the statute’s reach to only sales representatives that have a place of business in New Jersey.” Instead, it appeared the legislature intended the statute to apply when either the principal has a connection to New Jersey or the sales rep solicited orders in New Jersey.

Because Net2Phone was based in New Jersey, the court found it was “irrelevant whether [Norcom] has solicited sales in the state.” Additionally, each of the members of Net2Phone Global Services, LLC was a New Jersey citizen, and the governing rep contract called for New Jersey law to apply, so the connections to the state were plentiful.

Accordingly, not only does the New Jersey statute apply if either the rep or the principal is connected to the state, it avoids the flimsy language often found in other statutes by definitively enabling the rep to recover upon a violation. (“A principal who violates . . . this act shall be liable to the sales representative” for the unpaid commissions, plus exemplary damages of three times the unpaid amount.) This kind of strong language commands the respect and attention of unscrupulous principals.

States that currently lack any statute protecting reps, including Delaware, Florida, and Nevada, should not only look to belatedly protect the interests of their sales reps, but would do well to use the New Jersey statute as their model.

Please contact Adam Glazer with any questions at (312) 648-2300 or e-mail at adam.glazer@sfbbg.com.

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