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Sales representatives are skilled at knowing and understanding the product they are selling, listening, reading a customer’s interest, promoting a product and being persistent. However, a sales representative’s enthusiasm to obtain a new principal or product line often results in a cursory or brief review of the actual sales representative agreement (referred to in this article as the “SRA”) which is usually prepared and presented to the sales representative by the principal. Failing to understand and participate in the negotiation and preparation of the terms in a written SRA can significantly affect the business of the sales representative during and after the SRA has expired or been terminated.
The purpose of this article is to highlight some — but certainly not all — of the terms and language our office has seen over the years which are problematic to independent manufacturers’ representatives and which can significantly affect its business and bottom line. The goal is that if a sales representative takes the time to understand the terms of a principal’s SRA, it can be in a better position to negotiate better terms and a better SRA.
Legal Entity of Sales Representative
The vast majority of sales representatives we have worked with are corporations or limited liability companies. It is rare to see a sales representative conducting business as a sole proprietor. Doing so, subjects him or her to significant risk. When formed and organized properly, a corporation or limited liability company can provide protection to its owner(s) from being named individually in a lawsuit. It is not common, but occasionally a principal will attempt to include the individual owner of a corporation or limited liability company as a party to an SRA. The sales representative should not sign an SRA in such a personal capacity because it creates personal liability to the individual owner. A sales representative should carefully review an SRA to insure that the full legal name of its business entity is identified (e.g.: XYZ, Inc., a Minnesota corporation). In addition, the signature block at the end of the SRA should also state the full legal name of the business entity, and identify the signor as an officer of the corporation or limited liability company, who is signing on behalf of the business entity.
Is the SRA Exclusive?
Sales representatives can experience problems when an SRA is non-exclusive. Our office suggests exclusivity in a designated territory. For those who have an SRA based upon specific accounts, it should also be exclusive. There should be language preventing a principal from sharing in split commissions. If there are house accounts, the principal should not be able to convert other accounts into house accounts without the written consent of the sales representative. We have seen language in an SRA that allows a principal to convert non-house accounts into house accounts by giving the sales representative 30-90 days’ notice. This language should be avoided by the sales representative. Such language can result in a sales representative’s accounts and commissions being significantly reduced.
Duration of SRA
On numerous occasions, an SRA will have inconsistent language regarding the term, or length of the agreement. For example, sometimes an SRA will state the term is one year, renewable annually, unless either party provides written notice a certain amount of days prior to the end of the year. The same SRA may also state that either party can terminate by giving thirty (30) or sixty (60) days written notice. A sales representative should discuss such inconsistent terms with the principal to understand the reason for such language. Unless there is good cause to prematurely terminate an SRA, a sales representative should take the time to consider what time period is acceptable for its business, taking into consideration the investment the representative will make in representing the principal. There may also be statutes in the representative’s territory that regulate and restrict how and when a sales representative can be terminated. It is beneficial for a sales representative to review the laws of the state of its principal place of business and the states comprising the territory.
Confidential Information
It is not unusual for an SRA to have a confidentiality section which prohibits a sales representative from disclosing trade secrets, product plans, designs, agreements, etc., of the principal. Such provisions need to be taken seriously by the sales representative. A definition of confidential information will also usually include customer lists. It is important for the sales representative to have exceptions regarding confidential information. Those exceptions include: (1) information that is in the public domain (through no fault of the sales representative); (2) information that becomes available to the sales representative on a non-confidential basis from a third party with right to disclose; (3) information independently developed by the sales representative without reference to a principal’s confidential information; (4) information known by the sales representative prior to entering into an SRA with the principal; and (5) information required to be disclosed by law (although many principals will require the sales representative to immediately notify the principal so that it can first obtain a protective order.)
Non Solicitation/Non Competition Provisions
When a sales representative is granted an exclusive right to solicit sales in a given territory, it is not unusual for an SRA to contain a provision stating that the sales representative will not solicit a product which is competitive to the product the representative is soliciting for the principal. However, problems can arise when the SRA contains language that restricts the sales representative from soliciting sales on a broad scale. For example, some principals are large companies which have numerous product lines, or have a number of divisions, subsidiaries, and affiliates. Signing a broad non-solicitation or non-compete restricting the sales representative from soliciting sales for products that the sales representative never solicited for the principal can seriously affect the sales representative’s business. Sales representatives should be aware of, and avoid signing, a post termination or post-expiration non-solicitation, or non-competition provision. Our office has reviewed SRAs which include a one- or two-year post termination non-solicitation or non-compete provision. We counsel our clients to avoid such post termination restrictions which can seriously affect the sales representative’s business. An exception to this general rule may be when the sales representative continues to receive substantial post-termination commission for the same period of time.
Indemnification Clauses
It is customary for the principal to hold its sales representative harmless and indemnify the sales representative from and against liabilities, damages and expenses which a sales representative may incur as a result of a third-party claim arising out of or relating to principal/manufacturer’s product, or intellectual property. Sometimes, a principal will insert terms in an SRA that may require the sales representative to indemnify the principal regarding problems relating to the principal’s own product. Unless indemnification specifically relates to the sales representative’s obligation to pay its own tax obligations as an independent contractor, or to the intentional misconduct/fraud of a sales representative, a sales representative should avoid indemnifying the principal.
Post Termination/Expiration Commissions
Many SRAs have minimal post termination/expiration terms. We encourage sales representatives to consider negotiating a reasonable post termination and post expiration commission clause. Depending on the industry, and the territory, it can vary on length and amount. An attorney who practices in this area of law can benefit the representative by suggesting reasonable and fair terms and proposing those terms to the principal.
Choice of Law/Venue
A sales representative should know what kind of protection, if any, is provided in the state’s law that will govern the SRA. Although this can be a challenge, a sales representative should suggest that the laws of the state in which the sales representative’s principal place of business is located should govern a dispute. If this is not acceptable to the principal, a sales representative should suggest that the venue of a dispute be in the home state of the sales representative or its assigned territory on the basis that such venue is appropriate where the representative is actively soliciting sales. It is also important to know and understand that there are a number of commission protection laws and/or termination statutes which may require the principal to comply with the laws of the state in which the sales representative’s principal place of business is located or which includes the territory assigned to the sales representative by the principal.
Sales representatives are well advised to retain an attorney who practices in this area of law to review and assist the sales representative with understanding the terms of an SRA. An attorney can identify harsh or unfair terms and propose revisions or new language to make it a win-win agreement. Being a member of MANA can provide a number of resources on this subject.
Disclaimer: This article does not render any legal or other professional advice. Any person seeking such advice should hire an attorney who practices in this area of law.
