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When it comes to contracts between independent manufacturers’ representatives and their principals, MANA and the rep-savvy attorneys who work closely with the association have been adamant in their shared advice that representatives should:

• Familiarize themselves with their states’ commission protection laws. (A complete list of those laws may be found on the MANA website, www.MANAonline.org.)
• Seek and follow the advice of attorneys familiar with representative law.
• Work with written contracts.
• Develop and adhere to contracts that are fair to both the representative and the principal.

Representatives that follow this advice stand a much better chance of establishing and benefiting from profitable and long-lasting relationships with their principals than those that don’t.

The article that follows describes what can happen when a relationship isn’t established on the solid foundation that MANA recommends. It also emphasizes how important it is to be knowledgeable concerning states’ commission protection laws (in this case in the State of California). At the same time, the association notes that the scenario that evolved between the representative and the principal in this article is the exception to the rule. In general, the manufacturers and representatives that comprise MANA’s membership can boast of long‑standing business relationships established on a solid legal and professional foundation.

Peter Reilly, a retired electronics industry executive, orally agreed to use his industry contacts in order to bring new business to a growing Orange County, California, electronics manufacturing company.

Asked by Agency Sales to detail the actions he had taken on behalf of the manufacturer, Reilly explained, “I was a retired vice president of Triconex, which became a part of Invensys. I knew the owners of Inquest from past work — I had hired one of them (the president of Inquest) and had considered him a good friend. Inquest had a small contract manufacturing business with good manufacturing contacts in Asia. I believed their manufacturers could make precision-metal parts that could be used to make Invensys high-end triple-redundant safety control computer systems, but Inquest was not an approved vendor of Invensys. As former vice president and former head of manufacturing and operations, I had good contacts at Invensys and I knew what was needed to get Inquest approved as a vendor. Over several months, I studied the necessary parts, logistics, costs and pricing, and developed a plan for getting Inquest approved as a vendor to Invensys through my contacts.

“After the owners and I agreed on terms for commissions for any new business that I would bring in to Inquest, I arranged introductions to my contacts, shepherded Inquest through a complex and thorough quality control system, and obtained approval for test orders to start a long-term, evergreen production agreement with Invensys. The plan was that the parts Inquest supplied to Invensys would over time expand from simple parts like metal spines and brackets to large high-value chassis assemblies for their safety control computer systems. After I got Inquest approved into the purchasing system as a vendor, through the test process, and they were online to start full production for Invensys, the owners of Inquest proceeded to terminate their agreement and cut off my commissions for the actual large-scale production sales that were the whole purpose of the agreement I had made with them.”

Reilly continued by describing his efforts at documenting the steps he had taken to develop business for the manufacturer. “My documentation was informal but adequate: Plans and specs, parts quantities, pricing and annual projections; reports from my visit and inspection of various potentially suitable factories in China; fax communications, and e‑mails with the China program manager; e-mails and meeting reports with senior management and heads of manufacturing and purchasing at Invensys; and bids to Invensys. Also, the completed and approved vendor application to Invensys documented the work done to obtain approval of Inquest as a vendor, and of course, there was documentation of the completion of the test process and the first orders with Invensys.

“My agreement terms were written out but never signed by the parties, so I had to prove in the lawsuit that the terms stated in the written agreement were actually agreed to and performed by me and the owners of Inquest, up until the time that they breached by terminating the agreement and refusing to pay the commissions owed.”

According to an article co-authored by Reilly’s attorneys Eric S. Engel and H. Kim Sim, Conkle, Kremer & Engel, Santa Monica, California, that appeared last year in the Los Angeles Daily Journal, “Reilly was paid only a small part of the commissions owed for sales made to contacts that he brought to Inquest. An Orange County jury unanimously found that Reilly had a contract and procured sales for which he should have been paid past and future commissions totaling $2.1 million. The jury also unanimously found that Inquest’s violation of the act was willful. Following the verdict, the trial court was required by the act to treble the damages and award attorney fees to Reilly. Under the act, a $2.1 million jury verdict became a $6.2 million judgment, before attorney fees were added.

“But that was not all. In a bench trial immediately following the verdict, the trial court also found that the individual owners of Inquest were subject to alter ego liability for the full amount of the $6.2 million judgment and attorney fees. As a practical result, the individual owners became liable for all of the damages available under the act — treble damages and attorney fees — even though the owners were not themselves subject to the act.”

“The California Court of Appeal affirmed the judgment in full against Inquest and the individual owners of Inquest. As the first published decision to endorse the full remedies available under the act, Reilly should stand as a cautionary note to California manufacturers and distributors, just as it is a dream result for plaintiffs’ lawyers.”

As Reilly and his attorneys look back on the case, they had some observations that should be of interest to reps and principals. Reilly notes that “I would not have gone to court if Inquest had given me any other choice. Unfortunately, despite literally years of effort, I could not get the owners of Inquest to honor their promises to me nor even to compromise in a reasonable way. Eventually, I went to the lawyers for help, but the initial attorney letters did not convince the owners to pay the commissions owed or come to a reasonable compromise. So at that point there was little or no option but to sue.”

Attorneys Engel and Sim maintain that it’s almost always best for parties to work out their differences on a reasonable basis without having to start litigation. “If the parties are having trouble doing that on their own, a lawyer can often help get to a resolution without any lawsuit being filed. When a reasonable settlement cannot be reached without a lawsuit being started, everyone should recognize that almost all cases still settle before trial. It takes an unusual set of circumstances for a case to reach trial, as the Reilly v. Inquest Technology case did.”

As a final bit of advice the attorneys maintain that it’s best for manufacturers and their reps to have a well-written agreement. “If one must select between an oral agreement and a poorly written agreement, the answer would be, ‘It depends.’ Mostly, it depends on whose perspective one takes, and just how ‘poorly written’ the agreement is. From a principal’s perspective, it should be rare that a written agreement would be so poorly written that the principal would be better off with an oral agreement. An oral agreement carries a strong risk of violating the Independent Wholesale Sales Representatives Contractual Relations Act of 1990, Civil Code §§ 1738.10 et seq., exposing the principal to treble damages and attorney fees liability. For the same reasons, from the sales rep’s perspective, an oral agreement brings the potential of such a major award, but at the substantial risk of trouble due to the potential for disputes about the terms of the oral agreement.”

They continue: “If manufacturers and reps do right by each other, it is not difficult to comply with the law. Have clear written agreements, signed by the manufacturer and the sales rep, explaining the terms of the commissions that will be paid and charges against commissions. Then do that. If you get into a disagreement, be reasonable with each other. If you can’t work it out on your own, get a lawyer to try to help work through it. Recognize that both sides face risks when they dig their heels in and refuse to compromise — sometimes the risks are big enough to bankrupt the manufacturer and its owners.”

From his perspective, Reilly volunteers his major take away from the entire experience: “I must add that over my career I’ve been in all three situations — I’ve been the customer at a large company, the manufacturer at both small and large manufacturing companies, and I have also been the independent wholesale representative in-between.

“I understand that the large company does not want any disputes between its suppliers and their representatives. I understand that the manufacturers do not want all their profits, which are often thin already, to go to representatives. Manufacturers need clear agreements with each of their representatives so there is no misunderstanding or underestimating of commission expenses. Over my career, I have experienced situations where, once the contact with the large customer is well established and the orders are coming in, manufacturers sometimes forget the hard work that went into getting that business, and they may neglect their duties to the representative that initiated or brought in that line of revenue.

“I believe in fairness on all sides and I believe that is why the Act is there — to enforce fairness and to help those independent representatives who may easily fall by the wayside in the ongoing relationship of the customer and the manufacturer.”