If your company makes use of commissioned independent sales representatives to sell its products, or if you are a commissioned independent sales representative, you need to understand your rights and obligations under various states’ Independent Sales Representative statutes. California, like 35 other states, including Washington and Oregon, has an Independent Sales Representative statute that is designed to protect independent sales representatives. These statutes go by various names, but they share the common goal of making sure independent sales representatives are timely paid the full amount of their commissions.

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As a manufacturer or distributor, failing to understand and comply with your obligations can subject you to enhanced or treble (triple) damages as well as a significant attorney fees award, over and above the fees you will pay your own attorney to defend you. These fee and damage awards will often dwarf the amount of the unpaid commission, thus considerably raising the stakes where there is a dispute over a commission, even if the disputed amount is relatively small.

As an independent sales representative, you should be aware of your rights and understand the special protections you have under various states’ laws to make sure you are timely paid the full amount of all commissions you are owed, no matter how large or small.

The key components of most Independent Sales Representative statutes are as follows: (1) a written contract requirement; (2) an enhanced damages provision; (3) an attorney’s fees provision; and (4) a non-waiver provision. The foregoing provisions are typical, but are not included in every state’s statute. Therefore, it is important to understand which state’s law will govern your agreement in the event of a dispute over commissions, keeping in mind that it could be, but is not necessarily going to be (a) the state in which the manufacturer or distributor is located; (b) the state in which the sales representative is located; (c) the state to which the goods are sold; or (d) the state designated by the agreement as governing any disputes related to the agreement. As discussed below, the choice of law issues are often complex and uncertain, requiring competent counsel to evaluate which state’s law will apply on a case-by-case basis.

Written Contract Requirement

Many states, including California and Washington, require that any agreement between a manufacturer or distributor and a commissioned sales representative be in writing. This requirement, of course, is consistent with best practices for any contract, in order to avoid disputes over the terms of the contract. Given this requirement, any purported oral modification, such as one allegedly made over the telephone, will be very difficult, if not impossible to enforce unless it is reduced to a writing that is signed by both parties. Note also that purported modifications made and confirmed in an e-mail can also be insufficient in many cases to change the terms of the written contract.

Enhanced Damages

Most states that have independent sales representative statutes include an enhanced damages provision, which varies by state, but often provides for up to three times the amount of the unpaid commissions. For example, California’s statute provides for treble damages where a manufacturer or distributor has “willfully” failed to pay a commission when due. So, if the actual unpaid commission is $25,000, per the California statute, that amount will be tripled to $75,000 if the commission is not paid when it was due, and if the failure to pay it was intentional as distinct from a clerical error, for example. In other words, under California law, “willfulness” does not require ill will, fraud or malicious intent.

Attorney’s Fees Provision

Most Independent Sales Representative statutes also provide for an award of attorney’s fees to the prevailing party. This provision, of course, can raise the stakes on both sides because the disputed amount can often end up being dwarfed by the attorney’s fees incurred in litigating the dispute. Using again the example of a delinquent or unpaid commission in the amount of $25,000, if the sales representative wins at trial, he or she will recover a judgment in the amount of $75,000, plus prejudgment interest, plus attorney’s fees, which can easily exceed $100,000 if the case is litigated to judgment. Thus, in the foregoing example, the manufacturer will end up with a judgment well in excess of $175,000, or seven times the amount of the originally disputed commission, not including its own attorney’s fees, which will also likely be in the six-figure range. Consequently, when there is a disputed commission, it is critical that each side understand which state’s law will govern the dispute, a question that can often be more complicated than it first appears, as discussed below.

Non-Waiver Provision

Many Independent Sales Representative statutes have a non-waiver provision, which provides that an independent sales representative may not, by contract, waive his or her rights under the statute. Ordinarily, the way this comes up is within the context of a choice of law provision placed in the parties’ agreement by the manufacturer or distributor, which calls for the application of a different state’s law in the event of a dispute. So, for example, even though California law would ordinarily govern a particular independent sales representative agreement, the agreement itself may call for application of Delaware law, a state that has no independent sales representative statute.

This is where the analysis becomes more complicated. It is often the case that a choice of law provision can be defeated where it offends a given state’s public policy. That is arguably the case with California’s Independent Sales Representative statute because the statute itself is prefaced with a statement declaring that “independent wholesale sales representatives are a key ingredient to the California economy.” The preface further declares, among other things, that “it is the intent of the Legislature to provide security and clarify the contractual relations between manufacturers and their nonemployee sales representatives.” Consequently, a strong argument can be made that a choice of law provision will not defeat a sales representative’s right to treble damages and attorney’s fees where California law would otherwise govern the dispute.

This is a significant pitfall and trap for the unwary. Even if no sales were ever made to a California customer, the mere fact that the sales representative in question was soliciting customers in California can be enough to bring the dispute within California law, notwithstanding the fact that the disputed commission involves a sale of goods to a different state.

Moreover, unsuspecting manufacturers or distributors may believe they are protected from treble damage or attorney’s fees awards because they placed a favorable choice of law provision into their agreement calling for the application of the law of a state that has no Independent Sales Representative statute. As explained above, those choice of law provisions can often be defeated, depending on how they are worded and whether they would be deemed by a court to “subvert a fundamental policy of the state” whose law would otherwise govern the dispute.

Take Aways

Whether or not your company is doing business nationwide, if you are a manufacturer or distributor who works with commissioned independent sales representatives, you will want to be sure you have a written contract with your sales representatives. This will not only satisfy any statutory requirement for a written agreement, but it will also help you avoid disputes over what commissions are owed and when they are due.

Keep in mind that even if the form agreement you use has a provision calling for the application of a particular state’s law, that provision may not be applicable to a given dispute, depending on how the provision is worded and the particular facts giving rise to the dispute. Accordingly, unless you are highly confident that no additional commission is owed, you will want to get competent counsel involved, someone who is familiar with Independent Sales Representative statutes, so that you don’t unintentionally subject your company to treble damages and an attorney’s fee award that will often make the original disputed amount look like peanuts.

Likewise, if you are an independent sales representative, you will want to have experienced counsel evaluate which state’s laws govern your right to a commission, so that you can determine what’s at stake and whether you can afford to enforce your rights. Keep in mind that not all attorneys are aware that Independent Sales Representative statutes exist, much less are they familiar with the correct way to analyze the inevitable choice of law issues that arise when there is a dispute over whether a commission is owed, how much is owed and when it is due.

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