Top Questions About Procuring Cause and Unpaid Commissions
Top Questions About Procuring Cause and Unpaid Commissions
- Unpaid Commissions. Unpaid commissions are clearly one of the top problems for independent sales reps. It is easier to not pay some independent sales person working in an office outside the Company, versus not paying an employee that passes you in the hallway. Unpaid commissions are the number one reason independent sales reps contact our law firm.
- Breaches of Contract. Most sales reps know when their contract has been breached, when they don’t receive their commissions. However, few sales reps know anything about a pretty ancient legal doctrine that can sometimes support their claim for unpaid commissions after termination.
- The Procuring Cause (PC) Doctrine. The PC Doctrine is a cornerstone of legal practice that has been valid for decades, even centuries. Many high level Court opinions still rely on it today.
- Meaning of PC. The PC Doctrine holds that if a sales rep or agent signs a “revocable offer of representation,” meaning their Broker or Representation contract can be terminated at the will of the Principal, they are still entitled to their commissions on post-termination sales, IF the contract does not limit the right to post-termination commissions, and IF they prove they were the cause of the sales.
Case study 1. A Broker’s Agreement has a revocable offer of representation, simply meaning a termination clause. That clause reads:
“This Agreement shall have an initial term of one year, after which, this Agreement may be terminated on 30 day notice by either party, with or without cause.”
Nothing further was stated as to termination. Since there were no provisions limiting the Broker’s right to commissions on post-termination sales, she was allowed to make a PC claim. The court thus allowed her to prove that she was the cause of certain sales to customers she first solicited for the Company, even though the sales were more than one year after termination.
Case study 2. A Sales Representation Agreement has a revocable offer of representation, a standard 30 day termination clause, that reads:
“This Agreement may be terminated by either party on 30 days’ written notice. If so terminated, Representative shall be entitled to commissions only on orders which are placed within 30 days of the effective termination date.”
Since this contract addressed the right to commissions on post-termination sales, limiting that right to commissions only on orders received within 30 days of termination, a PC claim would be invalid because the parties agreed to limit the right to post-termination commissions; and a Court will honor that.
Case study 3. An independent sales rep reaches an oral agreement with a manufacturer to sell their products on a straight commission basis. The parties discussed: what needed to be done to earn a commission; an assigned territory; and the commission structure. They did not, however, discuss termination provisions and rights to commission after termination.
The sales rep magically got their Principal’s foot in the door with Home Depot, as an approved vendor. This manufacturer had tried for decades to do so, but was never successful. Within 3 months of receiving substantial commission checks at 7% of gross sales, the Principal terminated the contract. No reason stated.
Since this was an oral contract with no limitations on the right to commissions for post-termination sales, the sales rep would be able to make a valid claim for PC damages for as long as the product continued to ship to Home Depot.
- Using the PC doctrine as leverage. It is critically important to understand the leverage offered by the PC doctrine when commission disputes occur. This kind of leverage, when available, gives attorneys a powerful cudgel with which to hammer the offending company into a fair settlement.
- The following FAQs are tailored to address the most pressing concerns for independent sales reps, on issues of PC:
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FAQs
- The Procuring Cause (PC) doctrine is a legal principle that if a sales rep signs a “revocable offer of representation” (a contract terminable at will), they are still entitled to their commissions on post-termination sales IF the contract does not limit post-termination commissions, and IF they prove they were the cause of the sales.
- The PC Doctrine offers great leverage for recovering commissions, due to the fact that a Judge will have to rule what length of time is reasonable for the sales rep to receive their commissions on post-termination sales, and that can be a long time.
- Sales reps can still claim commissions if they were terminated before a deal closes, as long as they are the procuring cause of those deals, even if the company pushed the sale across the finish line.
- A scenario where this frequently occurs is where a sales rep gets a “design when” so their manufacturer’s part will be used in the production process of their customer (an OEM). These type of sales usually result in long-term distribution; so companies sometimes look at that situation and terminate the sales rep early, wary of paying large commissions for many years.
The evidence required to prove the procuring cause of a sale includes background emails, drafts of contracts, signed contracts, documentation of sales and commissions paid, and meeting notes. If there is proof that the sales rep “has their fingerprints on the sale,” they will be considered the PC.
- Yes, Principals often claim that someone else was responsible for a sale to deprive sales reps of their earned commissions. They will argue the sale was made by the regional sales manager, a direct company salesperson, or even another sales rep.
- That’s why it is so important to document marketing/sales efforts and transactions.
- To protect commissions, a sales rep should include certain provisions in their contract, from long minimum duration provisions, to specific provisions protecting commissions on post-termination sales, to liquidated damage provisions requiring the Principal to pay a specific amount to terminate a contract early.
- It is most advantageous to consult with an attorney knowledgeable in this area of law pertaining to sales reps, before negotiating and signing a contract with a manufacturer.
- Most states recognize the PC Doctrine, in one manner or another.
- The industrial states usually have the best case law on PC, including states like California and New York.
Arbitration is better than Court for a manufacturer and worse for a sales rep because:
Arbitrators have to be paid by the parties, whereas judges are free, after payment of court filing fees (which are negligible).
Arbitrators have limited subpoena powers, and sales reps benefit more than manufacturers from subpoenaing documents from and requiring appearances by third party witnesses.
Arbitration rules usually do not recognize the right to depositions, except for depositions of the parties themselves. This compromises a plaintiff’s case.
Arbitrations are usually not appealable. So one errant ruling can wreck a case.
Arbitrations are private, with no public record. Guilty defendants can therefore hide their bad conduct.
Arbitrators often issue “King Solomon rulings.” Meaning plaintiffs will sometimes only recover a portion of their damages, and not everything they’re entitled to.
- An attorney can help recover unpaid commissions using the PC doctrine as leverage because under a PC claim Courts have to award commissions on post-termination sales for as long as is “reasonable.” That open-ended proposition usually leads a defendant to settle the case early.
- Attorneys knowledgeable of the law regarding sales reps are also experts in gathering essential evidence, negotiating early settlements, and litigating cases using the PC Doctrine.
- The length of time in which a sales rep must file a claim for reduced or unpaid commissions, based on PC, varies from State to State. Generally, however, breach of a written contract has a four-year statute of limitations; while breach of an oral contract has a one or two year statute of limitations.
- A statute of limitations analysis can be sophisticated. Sales reps should act promptly to protect their commission rights. Attorneys are trained to recognize statute of limitations issues, and filing deadlines.
Conclusion
- It is important to be proactive in protecting commission rights. Get protective commission and termination provisions from the beginning. Or analyze your contract to see if a claim for PC might be possible as serious leverage.
- Sales reps should consult with an attorney early when a commission dispute begins to unfold to ensure they are properly stating their legal rights and viable claims for damages.
- We have recovered settlements and won judgments based upon a wide variety of legal claims available to sales reps, including PC claims.
Contact us for a free consultation if you have been wrongfully denied commissions. We have a 98% success rate in these disputes.
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