Statutes and Common Law Protecting Sales Reps from “Bad Faith” Terminations
What is Bad Faith termination?
Bad Faith termination is a legal doctrine enabling a manufacturer’s sales rep to be
compensated with more commissions than their contract requires, IF they are
terminated for the primary purpose of the principal avoiding the payment of
commissions, which requires a strong factual showing (including circumstantial
evidence).
Terminations possibly undertaken in Bad Faith must be analyzed individually to be sure
that retaining the sales rep’s commissions was the primary purpose of the termination.
States with Bad Faith termination provisions built into their laws.
Arizona has a Bad Faith statute which requires commissions to be paid on post-
termination sales if the rep proves that the termination was “primarily for the purpose of
avoiding the payment of commissions.” That applies, even though the contract had a 30
day termination provision, and the principal followed the termination provision
methodically.
Indiana has a Bad Faith statute providing that if a principal terminates a rep’s contract
before a specific commission or commissions are paid that the principal will still be liable
to the rep for the commission(s) IF:
1) the sales rep establishes that the termination was intentionally designed to
avoid the payment of commission(s);
2) the termination occurs after the sales rep has obtained a written order for the
principal’s product based on the rep’s efforts, and;
3) the product that is the subject of the order is shipped to and paid for by a
customer.
Maryland has Bad Faith provisions similar to those of Arizona. If a rep can prove that
their termination was “for the purpose of avoiding the payment of commissions,” they
can successfully sue for Bad Faith even though they have a contract terminable on 30
day notice.
Massachusetts does not have a statute prohibiting Bad Faith terminations. It does
have substantial case law though that closely scrutinizes terminations when commissions (or bonuses and other compensation) that would otherwise become due in
the future are cut off by an opportunistically timed termination.
Minnesota has a law tantamount to a Bad Faith provision, requiring that any
termination of a Sales Rep Agreement must be for good cause, after written notice from
the principal and a chance by the sales rep to rectify any potential breaches it may have
committed.
That is a rare legal requirement, since most States look at Sales Rep Agreements as “at
will” contracts. Meaning, either party can terminate on short notice, for any or no reason.
New York has substantial case law that prohibits terminations proven to be for the
primary purpose of the principal denying a sales rep earned commissions. If that is the
finding a judge can disregard the termination as if the contract was ongoing.
New Jersey is similar to New York, with very strong case law prohibiting terminations
that result in a sales rep (or distributor) having their reasonable expectations of
receiving commissions erased by an early termination. Most notably when the sales
rep/distributor has invested in substantial infrastructure or personnel to handle the
representation.
North Carolina has a Bad Faith provision which requires commissions to be paid on
post-termination sales if a termination is deemed wrongful, requiring another factual
showing that can often be made to.
Why do manufacturers pull Bad Faith terminations?
Bad Faith terminations often arise when a sales rep has laid the pipeline for long-term
distribution of its principal’s products, resulting in a corresponding long-term payment of
commissions; coupled with a contract that can be terminated on 30 day notice.
Getting the sales rep off the books often becomes a strong motivation for manufacturers
looking to (unlawfully) increase their profit margin.
Designed in parts/products can become problematic.
A Bad Faith termination often results when a sales rep has made great efforts and time
investment to cultivate and procure designed in sales to OEMs. Designed in parts
normally have a long distribution cycle, and after the rep has made the initial
introduction and procured long-term sales, they unfortunately sometimes become
expendable.
Blanket orders can also result in early terminations.
When blanket orders have been obtained, and the manufacture cuts off commissions in
the midstream of the distribution through a 30-day termination provision, the rep can
almost always make a valid claim for the commissions on orders resulting from the
blanket order that was placed prior to their termination.
Conclusion.
Many States either have case law or statutes that protect sales reps from wrongful
terminations meant to avoid the payment of commissions. Much more so than even the
jurisdictions covered in this article.
It is important to know one’s rights before simply accepting a termination based on an
equitable conduct by a manufacturer.
SRATM
The Sales Rep Attorneys
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