A manufacturers’ representative calls me. He tells me that he began representing a manufacturer when it started 25 years ago. Joe had called him that morning. Joe is the son of good old Marty, the founder and owner of the company. Joe is fresh out of business school, and decided to take the company’s sales operations direct.

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“I gave this company 25 years of my life, I took it from nothing to five million a year in my territory and now they’re firing me. How can they do that?”

I asked him to e-mail me his representative agreement and he asks me what good is that, he signed it 25 years ago. He is not sure he can still find it and “isn’t there something that keeps them from firing me after all the years that I gave them?”

While there may be some unusual situations where oral promises, anti-discrimination laws or peculiar facts may preclude immediate termination or termination without cause, the answer, almost always, is that the contract controls.

The law, and judges in particular, generally provide that if two business people sign a contract, that contract controls the relationship. Therefore, if a representative signs a contract allowing the manufacturer to terminate the relationship without cause on 30 days’ notice, that provision almost always controls. So when the manufacturers’ representative who had called me sent me the contract, and the contract had a provision allowing termination on short notice without cause, and there were no helpful facts, Joe could do what Joe wanted to do.

This client, and others who have called me, say that manufacturers will not negotiate with sales reps and the rep contract is given on a take-it-or-leave-it basis. My answer to that is if you are so insecure that you sign whatever representative agreement is put in front of you, you deserve to be fired by Joe.

Negotiate From the Beginning

Usually the only time when an effective negotiation of a representative sales contract is possible is before the relationship begins. Our law firm, when it represents clients in this situation, prepares a letter listing the problems in the proposed contract, how those problems can be resolved, and the reason that they are problems. Then, depending upon what our client wants, either we negotiate the terms of the contract or the client sends our letter to the manufacturer and he negotiates changes to the contract. We have never had a manufacturer who refused to negotiate or who wouldn’t make any changes. The fact is that when a manufacturer comes to a representative for representation, if the representative is confident in its ability and its reputation, it has bargaining power. This is particularly true in dealing with start-up companies. The manufacturer needs you more than you need it and if you actively negotiate the contract, the manufacturer will know that you are serious about representation of the product.

Which brings me to a recent situation involving a well-established representative organization and a start-up manufacturer. While I will not use the names of the manufacturer or the representative, my client gave me authority to tell this story. The manufacturer was a start-up company and had invented a medical device which improved patient outcomes. My client was a long-established medical representative company with a strong salesforce and deep contacts in its territories’ medical community. The manufacturer offered what I considered to be a typical sales contract, favoring the manufacturer and allowing the manufacturer to terminate the representative without cause on short notice. A change of control buyout was one of the things that we negotiated and got agreement on.

Additional Issues

There were issues involving length of contract, indemnification in the case of third-party lawsuits, insurance, allowable causes for termination, determination of quota and other details. The negotiations continued for a couple of months and the manufacturer finally agreed to most of what we wanted. The supposed final contract arrived from the manufacturer and had two serious problems. It still contained a provision saying that the contract could be terminated by the manufacturer without cause on 90 days’ notice. The second problem was a provision that if the representative sued the manufacturer for breach of contract or for any other claim, the representative’s recovery was limited to the amount of commissions it had received in the prior six months.

Both of these provisions made the contract pretty much worthless. If the manufacturer can terminate a contract on short notice, it can notify the representative that the contract is terminated, but if the representative agrees to changes in such things as commission rates, it will continue the relationship. The limitation on damages means that the company can violate the contract and it would not pay the representative to contest this action since its recoverable damages were so limited.

After we received the new contract, my client called me and asked me what he should do. In the letter accompanying the contract, the manufacturer made it clear that it felt that this was the final contract, not subject to change. My advice to my client was to e-mail the manufacturer, emphasize that he is interested in representing it and that he has no question that he can successfully introduce the product into the marketplace. He should point out that he has already scheduled appointments with hospitals to look at the product. Further, he was to tell the manufacturer that unless those two provisions are deleted from the contract, he would walk away from this opportunity. My client did that. Within one hour, and with no discussions with the manufacturer, we had a new contract with those two provisions eliminated.

Inferiority Complexes

In my experience, most manufacturers’ representatives are confident when dealing with customers and potential customers. But they suffer from inferiority complexes when dealing with manufacturers. By showing no willingness to negotiate, no willingness to insist on a fair and reasonable relationship, they indicate that they are willing to agree to whatever the manufacturer puts in front of them. I have seen terrible contracts signed by manufacturers’ representatives and even more terrible amendments to such contracts also signed by manufacturers’ representatives. I have seen situations where the manufacturers’ representatives sign a terrible sales contract with a manufacturer even though it already had a better contract that had not expired with that manufacturer.

I have also seen the effect of contracts that had been negotiated by clients. Once the client is terminated because the manufacturer is sold or a new sales manager decides to take the sales force direct, the client is paid a fair sum of money. Usually, the sum is based on sales made or commissions earned. The client generally agrees to cooperate in a seamless transition of the territory.

Important Provisions

The main question is what types of provisions in the agency contract are really important to the sales agent. In part, that depends on what the agent’s needs and desires are. For example, in most cases, we look at the length of the contract and the circumstances as to when and why the contract can be terminated and whether the client is paid and how much he is paid if the contract is terminated prematurely. In most cases, we want a long-term contract that is not terminable at will.

In rare cases, the agent wants the ability to end the relationship. Either way termination without cause will probably be enforced by the courts. A post-termination non-competition provision that keeps you from selling competing products for one or two years will probably effectively put you out of business.

Other provisions in a contract that should be looked at carefully are requirements that you indemnify the manufacturer for your actions or inactions and also the manufacturer’s obligation to indemnify you. We had a case where our client, a manufacturer’s representative, was sued for its principal’s alleged patent infringement. The rep agreement had no indemnification provision for this and the manufacturer left the rep hanging to defend its own lawsuit.

Another item that should be looked at carefully is quota. An excessive quota creates a pretext for the manufacturer to terminate you. The quota provision should have a requirement that the quotas be fair and reasonable. There might also be some fail-safe provision so that if you have a substantial market share, you cannot be expected to increase sales dramatically from year to prior year.

Sales rep contracts drawn by lawyers who represent the manufacturer are, all too often, one-sided. The manufacturer has no obligations, and the agent has too many obligations. If the relationship is important to you, it is crucial that you look carefully at and negotiate a contract with your principal. It will put you on solid ground, allow you to make a profit from a win-win relationship, and give you the security to know that you have the respect of the manufacturer for standing up for your own rights.

MANA welcomes your comments on this article. Write to us at [email protected].