The poison pill for an independent sales agent that relies on building up and establishing a territory is a 30-day at will termination provision. Is the agent left with any leverage, legally speaking, when the principal complies with such a short termination notice provision? The answer, surprisingly, may be yes!

The Covenant of Good Faith and Fair Dealing is a legal doctrine that stands for the principle that one may not act in a way that deprives another of the expected benefits of their contract. It means that just because a party has an option available to them under a written contract (including an option to terminate on 30-day’s notice), they may not exercise that option in a way that is knowingly harmful to the other party. Nor may they harm the other party’s reasonable expectations under the contract at the time it was formed.

So, this doctrine may present a problem for manufacturers attempting to terminate a sales agent that has worked for many months or years to cultivate and establish a territory, that at the time of termination is producing “pipeline sales.” The typical solicitation to cultivation to sales cycle seems to be no less than six months; and in more technical industries, with engineered, designed in parts, the cycle can sometimes be two years, or more.

If the parties both understand that there is a lengthy cultivation period for sale of the products, and a lengthy cultivation period then ensues, then it could be said that the reasonable expectation of the sales agent is that it would not be terminated (without compensation) under a 30-day at will provision, once it invested substantial time and resources to develop the principal’s sales.

If a principal pulls an “opportunistic termination,” seeking solely a windfall on the sales commissions it would save, post-termination commissions could be awarded for a breach of the good faith covenant. If, however, there is business legitimacy to the termination, and not just a desire to avoid paying commissions, then breach of the covenant is probably not available, as a damage theory. Likewise, if the agent does not have substantial time and expenses invested in developing sales at the time of termination.

*The following is a short survey of some of the key case law on this topic:

Gordon v. Matthew-Bender.., 562 F.Supp.1286, at p. 1297 (1983). Gordon was employed by Matthew-Bender, as a lawbook sales rep. The employment agreement contained no explicit duration clause. Gordon was classified as an employee, although he was paid on a straight commission basis, thus making that case more synonymous with a sales agent’s commission dispute.

After many years of performing under the contract, Gordon was informed that his territory would be reduced. He was later told that he would be terminated if he failed to achieve, in his new territory, the same sales levels which had been set for his prior territory. Thus, strangely enough, although Gordon’s territory had been greatly diminished, his sales quotas remained the same. He did not meet the quotas and was fired. Due to the termination, Matthew-Bender avoided paying him a commission based pension that would have vested a mere seven months after his firing.

In a ruling on the case, the US District Court, Northern District of Illinois noted:

The law seems fairly clear that an employee at will may not be deprived of commissions (in large part “earned” prior to separating from the employer) by a discharge made in bad faith and intended to deprive the employee of the commissions…The existence of an at will employment does not preclude this count…”

Jordan v. Duff and Phelps, Inc., 815 F.2d 429, at p. 438 (7th Cir.1987). The U.S. Court of Appeals, validating the ruling in Gordon, stated:

no one … doubts that an avowedly opportunistic discharge is a breach of contract, although the employment is at-will.”

Wilson v. Career Education Corporation; 729 F.3d 665 (7th Cir. 2013). The same U.S. Court of Appeals decided a case, based on this principle, and held that:

“…When one party’s contractual obligation is “contingent upon a condition particularly within the power of that party” [such as the right to terminate on short notice] the controlling party’s discretion in bringing about the condition is limited by the implied covenant of good faith.”

“It bears emphasizing that CEC can breach the implied covenant of good faith even though the Plan gave CEC the unambiguous discretion to terminate the Plan and not pay unearned bonuses.”

Cleary v. American Airlines, Inc., 111 Cal.App.3d 443, at p. 445 (1980). The California Court of Appeals held:

“…There is an implied covenant of good faith and fair dealing in every contract that neither party will do anything which will injure the right of the other to receive the benefits of the agreement…On occasion, it may [thus] be incumbent upon an employer to demonstrate good faith in terminating an employee …” [citation omitted]”

Carma Developers…, v. Marathon Development California, Inc., 2 Cal.4th 342, at pp. 372-373 (1992). The Supreme Court of California, stated:

“…The covenant of good faith finds particular application in situations where one party is invested with a discretionary power affecting the rights of another. Such power must be exercised in good faith.”

Putting some flesh on the bones of this rule, wouldn’t it be reasonable for a sales agent to expect they would be paid commissions for the sales they put into place, at least after a lengthy cultivation period? That notwithstanding the fact that the principal could terminate them on 30-days’ notice? That’s where the covenant of good faith and fair dealing comes into play!

Joyal v. Hasbro Inc. d/b/a Hasbro Games, 380 F.3d 14, at p. 20-21 (1st Cir, 2004). The US Court of Appeals went even one step further, holding:

“…an employee who would be entitled to a bonus or commission based on his past performance and who is deprived of it by a discharge without “good cause” may recover the sum already “earned” even though contingent on a condition not fulfilled. The theory is that even in a contract for employment at will, there is an implied obligation of good faith and fair dealing. Recovery is only for this already accrued, albeit contingent compensation; … But Massachusetts decisions hold that even without a malign motive, a discharge without “good cause” is enough to make the defendant liable for contingently due bonuses…

Fortune v. National Cash Register Company, 373 Mass. 96 (1977). A former salesman of the defendant (NCR), brought suit to recover sales commissions allegedly due, including claimed bonus payments, under the parties’ written contract of employment.

Fortune argued that, in spite of the literal wording of the contract (a 30-day termination provision, at will) he was nonetheless entitled to a jury determination on NCR’s motives in terminating his services. The Court agreed, and stated:

“We hold that NCR’s written contract contains an implied covenant of good faith and fair dealing, and a termination not made in good faith constitutes a breach of the contract… We believe that where… commissions are to be paid for work performed … the … decision to terminate … should be made in good faith.”

So, what does this all mean? It means that although an agent can be terminated on 30 days’ notice, if that’s what the written contract provides, the principal may be liable for certain compensation to the agent, if a violation of the good faith covenant is found to have occurred, due to an “opportunistic discharge.”

Consequently, a creative breach of contract claim can be made, even though a manufacturer might have conformed to the specific notice provisions regarding 30-day, at will termination.

*This analysis should be made on a case-by-case basis, depending on the specific written contract and criteria of the jurisdiction. Not all states follow this rule.