Quirky Question # 180: Terminating Sales Reps — Traps for the Unwary
Quirky Question # 180:
We are a national company. We sell products through a network of sales representatives. Sometimes they’re great. Sometimes they aren’t. When they aren’t, we fire them and move on.
Recently, we learned that dumping underperforming sales representatives in Minnesota may not be so easy. Can you enlighten us? Is this regulated by statute?
By: Tom Vitt
You might believe ending your relationship with your non-performing sales representative would be simple and straightforward. But since he is a sales representative in Minnesota, where the procedures your company has to follow to terminate him are governed by the Minnesota Termination of Sales Representatives Act (“MTSRA” or “the Act”), Minn. Stat. § 325E.37, the termination process is far more complicated than you have assumed. The Act is perhaps the most restrictive, complex, and representative-friendly termination scheme in the country, filled with traps for the unwary principal. (“Principal” here is a catch-all that refers to manufacturers, importers, distributors, and anyone else who might retain a sales representative to take orders for goods on a wholesale basis. Your company is a “Principal” under the statute.) This article provides a brief primer on MTSRA compliance.
To Whom Does the MTSRA Apply?
Whether the MTSRA applies is a question that turns mainly on the location and business of the sales representative who seeks its protection. The Act defines a “sales representative” as “a person who contracts with a principal to solicit wholesale orders and who is compensated, in whole or in part, by commission.” Minn. Stat. § 325E.37, subd. 1(d). There are four carve-outs from this general definition: (1) employees of the principal; (2) someone who places orders for his or her own account for resale; (3) someone who holds the principal’s goods on a consignment basis; and (4) someone who distributes, sells, or otherwise offers goods to end users, not for resale. Id. Essentially, sales representatives are independent persons or corporations that a principal retains to take orders for goods on a wholesale basis.
The MTSRA is also limited in geographic scope, but again, its applicability depends upon the sales representative, not the principal. The Act applies when the sales representative’s residence or principal place of business is in Minnesota, or when the representative’s sales territory includes Minnesota. Minn. Stat. § 325E.37, subd. 6(a). The location of the principal has nothing to do with the Act’s applicability.
So long as these two factors (nature of business and connection to Minnesota) are met, the MTSRA applies to any “sales representative agreement” between a representative and a principal. The Act defines “sales representative agreement” broadly: it covers “a contract or agreement, either express or implied, whether oral or written, for a definite or indefinite period, between a sales representative and another person or persons, whereby a sales representative is granted the right to represent, sell, or offer for sale a [principal’s] goods by use of the latter’s trade name, trademark, service mark, logotype, advertising, or other commercial symbol or related characteristics, and in which there exists a community of interest between the parties in the marketing of the goods at wholesale, by lease, agreement, or otherwise.” Minn. Stat. § 325E.37, subd. 1(e).
How Can You Avoid MTSRA Problems Before They Begin?
A. Choice of Law Clauses
One way to avoid MTSRA problems is to contract out of Minnesota law in the first place. Although some similar Minnesota statutes, such as the Minnesota Franchise Act, explicitly prohibit choice-of-law provisions that would waive applicability of Minnesota law, see Minn. Stat. § 80C.21, the Minnesota Court of Appeals has explicitly held that choice-of-law clauses in sales representative agreements are valid and enforceable. See Hagstrom v. Am. Circuit Breaker Corp., 518 N.W.2d 46 (Minn. Ct. App. 1994). (Note, however, that when the principal-representative relationship concerns the sale of plumbing equipment, choice-of-law clauses are void. See Minn. Stat. § 325E.37, subd. 6(c). This explicit carve-out for plumbing sales representatives is further evidence that, in general, choice-of-law clauses are valid in sales representative agreements.) This is an especially attractive option for principals based outside of Minnesota, who might prefer to have all their contracts with sales representatives governed by their home state’s law.
B. Best Practices During the Principal-Representative Relationship
The first, and most obvious, suggestion for avoiding MTSRA problems before they begin is to ensure that your company has a written agreement with your sales representatives. Should you want to end your relationship with a representative, the terms of the written contract should prevent disputes about straightforward matters like the term of the agreement, the commission rate, how and when commissions are earned, and the like, provided the contract is clear on those points. A written contract can also provide a specific definition of what constitutes “good cause” for termination (discussed in more detail below).
For reasons discussed below, any sales representative agreements should be for a definite time period. Agreements for an indefinite term are treated differently under the statute, requiring a longer notice period for termination, which reduces a principal’s flexibility to remove an underperforming representative. And, if you want to continue working with a representative after the expiration of the current written agreement, make sure to renew it in writing. Failure to renew in writing does not prevent formation of an agreement, but ensuring a written renewal is in place can prevent disputes about the terms of the relationship.
What Is the Procedure for Ending the Sales Relationship?
A. Termination for Cause
The MTSRA differentiates between the decision not to renew a sales agreement and the “termination” of a sales agreement before the end of its term. Termination is proper only with “good cause.” Minn. Stat. § 325E.37, subd. 2(a). The Act defines “good cause” as “a material breach of one or more provisions of a written sales representative agreement . . . or in absence of a written agreement, failure by the sales representative to substantially comply with the material and reasonable requirements imposed by the [principal].” Minn. Stat. § 325E.37, subd. 1(b). Again, note the importance of a written agreement: if you set forth in writing what constitutes a material breach, a court will not have to decide whether a particular requirement is “reasonable.”
In order to terminate a representative for good cause, a principal must give 90 days’ notice, and the notice must set forth the reasons constituting good cause for termination. Minn. Stat. § 325E.37, subd. 2(a). If the representative fails to correct the stated reasons for termination within 60 days of receiving notice, then the relationship can be terminated on the date set forth in the notice. Id.
There are six grounds that merit immediate termination, without the 90-day wait: (1) bankruptcy or insolvency of the sales representative; (2) assignment of the sales representative’s income to creditors (or similar disposition of assets); (3) the sales representative’s voluntary abandonment of the business, determined by a totality of the circumstances; (4) the sales representative’s conviction (or plea of guilty or no contest) for a charge of violating any law relating to his or her business; (5) any act of the sales representative that materially impairs the good will associated with the principal’s trademark, trade name, or similar commercial symbol, and (6) failure to forward customer payments to the principal. Minn. Stat. § 325E.37, subd. 1(b). In these cases, termination is effective immediately upon the representative’s receipt of a notice setting forth the grounds for termination. Minn. Stat. § 325E.37, subd. 2(b).
If a principal lacks good cause to terminate an agreement, but still wants to end the relationship with a representative, the only option is not to renew the sales agreement upon its natural expiration. If the agreement is for a definite term, then the representative must be given notice of the intention not to renew 90 days before the agreement expires. The statute explicitly provides that “no person may fail to renew a sales representative agreement” without 90 days notice. Minn. Stat. § 325E.37, subd. 3.
You may wonder how it’s possible to give 90 days notice of the intention not to renew an agreement for an indefinite term. The MTSRA solves this problem by providing that “a sales representative agreement of indefinite duration shall be treated as if it were for a definite duration expiring 180 days after the giving of written notice of intention not to continue the agreement.” Id. Thus, if a principal has an agreement for an indefinite term, the principal needs to provide 180 days’ notice of intent not to renew an agreement. Without a definite term, in the event of a nonrenewal, the principal will have to give three months additional notice—and pay the representative three months’ more commissions—than it might otherwise.
Finally, whether you intend to terminate an agreement for cause or simply not renew it, you should be specific and straightforward in the language you use in the notice. Don’t call a nonrenewal a “termination” in the notice, or vice versa. Similarly, if you’re terminating a representative for cause, make sure to describe the grounds for termination clearly and correctly – ideally, with specific reference to the MTSRA or your written agreement. Sloppy wording in the notice can invite problems down the road: for example, calling a nonrenewal a “termination” might result in litigation over termination without good cause, when all you intended to do was let the agreement expire.
Another problem that may arise at the end of a sales representative relationship is how to handle commissions. Subdivision 4 of the MTSRA addresses this situation, providing that “the representative is entitled to be paid for all sales as to which the representative would have been entitled to commissions pursuant to the provisions of the sales representative agreement, made prior to the date of termination of the agreement or the end of the notification period, whichever is later, regardless of whether the goods have been actually shipped.” Essentially, this means that the representative continues making commissions per the terms of the agreement until the day the relationship ends. (Although subdivision 4 does not explicitly address payment of commissions upon a “non-renewal”, presumably the same rule would apply: commissions should be paid pursuant to the terms of the agreement between the parties, up to the last day the agreement is in force.) Thus, if the agreement provides that a commission is earned when the representative takes an order, then he or she is entitled to commissions for every order taken through the last day of the relationship, even if the goods won’t ship for another eight months. Conversely, if the agreement provides that a commission is earned when the customer pays the principal, the representative is entitled to commissions for every order for which the principal has been paid through the last day of the relationship. Again, having a written agreement that is clear on when commissions are due is the critical point.
As to timing of payment, the Act provides that commission payments “shall be paid in accordance with the terms of the sales representative agreement or, if not specified in the agreement, payments of commissions due the sales representative shall be paid in accordance with [Minn. Stat. §] 181.145.” Id. Section 181.45 governs the post-termination payment of commissions to salespersons who are independent contractors. Under that section, if a salesperson is terminated with at least five days’ notice, all commissions earned through the last day of employment must be paid within three days of termination, while termination on less than five days’ notice gives the employer six days to pay commissions. Minn. Stat. § 181.45, subd. 2(b)-(c). Given the lengthy notice requirements for termination under the MTSRA, in most cases, a sales representative would be entitled to payments within three days. (Note, however, that if the sales representative was actually responsible for handling customer money, a principal has ten days to audit the representative’s accounts before the representative can demand commissions. Id.) Section 181.145 also provides penalties for late payment: for every day the commission payments are late, a penalty of 1/15 the amount due will be assessed, up to a total of fifteen days (that is, the maximum penalty doubles the total amount due). Minn. Stat. § 181.145, subd. 3.
What if It All Goes Wrong?
Suppose that, despite your best efforts, you find yourself embroiled in a termination dispute with a sales representative. What procedures govern? What remedies are available? The MTSRA answers these questions as well.
If a principal wants to be proactive and seek a declaratory judgment that it has good cause for termination – for example, if the sales representative denies that he or she has voluntarily abandoned the business – then the principal’s “sole remedy . . . is to submit the matter to arbitration.” Minn. Stat. § 325E.37, subd. 5(a). If, on the other hand, the representative wants to be the plaintiff, he or she can choose whether to go to court or submit the matter to arbitration. Id. If a principal strongly prefers arbitration, however, it can require in the contract that both parties must utilize that process; the Minnesota Court of Appeals has held that a binding arbitration clause in a sales representative agreement trumps the MTSRA and waives the representative’s right to go to court. See AJ Lights, Inc. v. Synergy Design Group, 690 N.W.2d 567, 569-570 (Minn. Ct. App. 2005).
The arbitrator or court can provide several remedies: “(1) sustainment of the termination of the sales representative agreement; (2) reinstatement of the sales representative agreement, or damages; [and] (3) payment of commissions due [upon termination].” Minn. Stat. § 325E.37, subd. 5(b) (emphasis added). The “or damages” language is not superfluous: it reflects the fact that damages other than lost commissions might result from a principal’s breach of the sales representative agreement.
For example, in Wingert & Assocs., Inc. v. Paramount Apparel Int’l, Inc., 458 F.3d 740 (8th Cir. 2006), the Eighth Circuit upheld a damages award that stemmed from the principal’s actions surrounding termination of the sales representative agreement. Shortly after providing just three days’ notice of termination of an indefinite agreement, the principal hired eighteen of the representative’s twenty sales agents, leaving the representative with no staff to service its other manufacturers or seek out new accounts. In addition to 180 days of lost commissions, the representative put on competent evidence of 4.5 years’ worth of lost profits resulting from the raid of its sales staff, and the Eighth Circuit held that the plain language of the MTSRA supported the award. Id. at 742-44; cf. RIO/Bill Blass v. Bredeson Assocs., Inc., 1998 WL 27299 (Minn. Ct. App. 1998) (upholding arbitrator’s award of damages for both lost commissions due to improper termination and lost commissions caused by the principal’s unrelated breach of contract).
The Wingert case is subject to an important limitation, however; if the only damages the representative suffers are lost commissions, the damages should be capped by either the natural expiration date of the agreement or the 180-day period applying to indefinite agreements. For example, in Mellum v. Bioworld Merchandising, Inc., 2008 WL 4205267 (D. Minn. 2008), the District of Minnesota held that when the only harm the representative suffered due to improper termination was lost future commissions, he was not entitled to claim any other damages. Id. at *2-*3.
The Act also lists “reinstatement of the sales representative agreement” as a possible remedy. See Minn. Stat. § 325E.37, subd. 5(b)(2). It appears, however, that no court has ever ordered a representative reinstated. This may be because representatives rarely seek reinstatement, choosing money damages and a clean break, rather than working for several more months in an unhappy environment.
There are cases where reinstatement might make sense from the representative’s perspective. For example, suppose a principal and a representative have an agreement with a three-year term, and the principal tries to terminate the representative after just three months because it has decided to take all accounts in-house. In that case, the representative might seek reinstatement for two reasons: first, because there are thirty-three months remaining in the agreement, and second, because it might be difficult for the representative to provide non-speculative evidence about commissions so far in the future.
The Act also provides for arbitrator’s and attorneys’ fees. If “the sales representative’s resort to arbitration . . . or the [principal’s] defense in arbitration was vexatious and lacking in good faith,” the losing party can be ordered to pay “the full amount of the arbitrator’s fees and expenses.” Minn. Stat. § 325E.37, subd. 5(b)(6). The standard for attorneys’ fees is not so evenly matched. As befits such a pro-representative statute, it’s much easier for a representative to recover fees than a principal. So long as a sales representative prevails, he or she is entitled to reasonable attorneys’ fees. Minn. Stat. § 325E.37, subd. 5(b)(4). However, a principal is entitled to reasonable attorneys’ fees only if the sales representative’s complaint was “frivolous, unreasonable, or without foundation.” Minn. Stat. § 325E.37, subd. 5(b)(5).
The MTSRA is a complex statute that might make your company’s attempt to end its relationship with your sales representative a much bigger headache than it would be in other states. Its notice requirements are unforgiving, and its procedural and remedial components strongly favor sales representatives. But with careful planning and close adherence to the statute, you can minimize the problems involved in terminating its Minnesota-based sales representatives.