To prepare this article, I conducted an unscientific poll asking a smattering of sales representatives this question: What is the difference between an exclusive and a non-exclusive sales representative agreement? Each answered that in an exclusive sales representative agreement, the contract defines a territory, and the sales rep expects to receive commissions on all sales in that territory. In a non-exclusive contract, the manufacturer or principal may be allowed to sell direct in the territory, or even to appoint other sales professionals, and the sales representative is not paid commissions on every sale in the territory.

Experienced sales reps instinctively understand the rationale for receiving commissions on every sale in a defined territory — even (and some might argue, especially) sales that they did not directly solicit. The experienced rep understands that sales professionals covering a territory spend their time identifying and contacting potential customers, meeting with potential customers, and quoting sales and projects for potential customers. Some of those contacts, meetings, and quotes will result in a specific sale for which the sales representative is paid a commission. More often, a sales representative will spend time soliciting customers and sales, only to have that prospect never buy a dollar of product. The rep is paid nothing for all that time because commissioned sales representatives are not compensated for their time, only for sales.

Sometimes a sale will occur in an exclusive territory that the sales rep did not directly solicit. Maybe the customer, or one of its employees, had met with the rep years earlier in connection with a completely different product. Maybe they heard about the rep’s product from another company or from marketing. Maybe all the work the rep did enhanced the principal’s name and brand recognition. Or maybe it is just lucky, in much the way that it is unlucky when a rep spends months working on a major sale that never comes to fruition.

Commission for Sales

Whether a rep has the good fortune of a sale in an exclusive territory that required little or no work, or a sale occurs that took years of engineering and quoting, the rep still expects to receive a commission on that sale. At the end of each month, the sales rep expects to receive a report of all sales in the territory and to be paid corresponding commissions on all sales. The only exception is for excluded or house accounts, which are identified at the outset of the sales representative-principal relationship.

But what if everything reps think about exclusivity is not quite right?

Disputes about exclusivity typically rear their head when a principal unexpectedly deems a sale un-commissionable and when a rep knows or suspects that they are not being paid on all sales in the territory. When a sales representative is disputing a termination, they may raise the fact that not all the sales in the assigned territory were reported, or not all commissions were paid. In the rare situations that a sales representative sues a principal for wrongful termination or unpaid commissions, the lawsuit may reveal territory sales that the rep knew nothing about and on which commissions were not paid.

This can lead to a face-off. The rep has one understanding of exclusivity that entitles it to commissions on every sale in the territory, while the principal believes that the sales representative should be paid commissions only on sales that the rep directly solicited.

When courts have addressed this situation, they have looked very closely at the language of the sales representative contract. Some courts make a distinction that every sales representative should understand when entering into agreements with principals.

Even an agreement that names the rep the “exclusive sales representative” may not afford the exclusivity that the rep expects. Courts have recognized two types of “exclusivity.”

“Right to Sell”

One type of exclusivity is embodied in what courts call “exclusive right to sell” agreements. Under this type of agreement, only the sales representative is permitted to represent and “sell” the principal’s products in the defined territory and the sales representative is entitled to commissions even if they did not directly solicit or procure the sale. This is the type of arrangement that most representatives believe they have when they see the word “exclusive” in a contract.

The other type of exclusivity is embodied in what the courts call “exclusive agency” agreements. In this type of agreement, the representative is the only agent permitted to market product in the territory, but the arrangement does not exclude the possibility of the principal selling without the involvement of a sales representative. Under an exclusive agency agreement, the sales representative may be entitled to commissions only on sales generated by the commissioned sales representative.

Clear Language

The best way to avoid this type of conflict is to ensure that the language of sales representative agreements is clear about what exclusivity means and what sales are commissionable. This means including some — or all — of the following language:

• The sales representative has the exclusive right to represent the principal’s products in the defined territory.
• The sales representative’s rights are to the exclusion of any other sales representative and the principal itself.
• The sales representative is entitled to commissions on every sale in the defined territory.

What may not be enough to ensure that the sales representative is legally entitled to receive commissions on every sale in a defined territory is language referring to the representative simply as the “exclusive sales representative.” Courts have interpreted this to mean that the principal may still solicit sales directly and not pay the sales representative on such sales. Or said another way, unless the sales rep can establish that it solicited a particular sale, they may not be entitled to a commission.

Even exclusive contracts often include language that the sales representative is entitled to commissions on sales that they solicited. This language should never be included in a contract where the rep expects to be paid on every sale in a territory. Relatedly, the contract should define exactly what sales or accounts are not commissionable, such as any house accounts or sales of a particular type of product on which commissions are not paid. The principal should not have the discretion to add to that list or modify the territory without the rep’s agreement.

To ensure that they are paid adequately for their work in a territory over time, sales representatives should seek upfront clarification about the nature of exclusive contracts. A contract that clearly and thoroughly defines the terms of “exclusivity” can prevent costly disagreements down the road.

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