State Law Gives Sales Representatives Leverage in Commission Disputes
With the economy in recession, more companies are considering outsourcing their sales functions to independent sales professionals. In addition to eliminating salary expenses, many other employment costs (e.g., health insurance, retirement contributions, etc.) may be reduced or eliminated. This type of relationship also may benefit the sales representative. For instance, the independent sales representative may benefit from the reputation and goodwill a company has established in the marketplace and may, if the relationship is not exclusive, be able to diversify his or her business.
Businesses operating in Pennsylvania, however, should be aware of a state law that can levy stiff penalties on unwitting businesses involved in commission disputes with independent sales representatives. Contracts with independent sales representatives should be carefully crafted with this law in mind.
When disputes arise between independent sales representatives and the companies they represent, the advantages and disadvantages of the relationship become lightning rods for conflict. Like a marriage gone bad, each side focuses on the benefits it gave and the burdens it carried. Although each relationship is unique, these disputes often follow a familiar pattern. First, the parties trade charges and countercharges about which side is failing to uphold its end of the bargain. Then the parties investigate their positions regarding the dispute and attempt to determine whether the relationship is worth salvaging. While positions are being investigated, commissions earned by independent sales representatives may continue to accrue and are often held by the hiring company as a set-off against actual or potential damages. Like all businesses, sales organizations depend upon cash flow. Cut it off and the business will die. Control of the sales representative’s cash flow (or a significant portion of it) provides the hiring company with a huge advantage in a dispute. In addition to threatening the viability of the sales organization, the choke-hold on its cash flow may diminish the sales organization’s ability to pursue its legal claims against the hiring company.
The Pennsylvania Commissioned Sales Representative Act
In an attempt to remedy this situation, the Pennsylvania Legislature enacted the Pennsylvania Commissioned Sales Representative Act in 1988.1 The purpose of the Act is to assure that sales representatives will "be paid what was owed them, and the legislation was intended to provide an opportunity for them to have due process or an ability to go after the dollars they were owed ... [when] a manufacturer simply failed or refused to pay them." In its original form, the Act applied only to businesses using sales representatives that did "not have a permanent or fixed place of business in this Commonwealth." Because the law only affected out-of-state businesses, courts held that it violated the Commerce Clause of the U.S. Constitution.2 This constitutional defect was cured by 1998 amendments making the Act also apply to Pennsylvania businesses.
Who Does the Law Effect?
Businesses are potentially subject to the Act if they:
(1) Engage in manufacturing, producing, importing or distributing a product for sale to customers who purchase such products for resale,
(2) Use sales representatives to solicit orders for such products, and
(3) Compensate sales representatives, in whole or in part, by commission.
Although the second and third points are self-explanatory, the first requires some analysis. For a sale to be considered a "resale," the buyer of the product cannot be the ultimate user. Instead, the buyer must be a reseller of the item purchased from the sales representative.
The Act defines a "sales representative" as a person or entity who contracts with a principal "to solicit wholesale orders from retailers rather than consumers and who is compensated, in whole or in part, by commission." In United Products Corporation v. Admiral Tool & Manuf. Co., 122 F. Supp. 2d 560 (E.D. Pa. 2000), the court defined a retailer as one who sells a tangible good or product (as opposed to services) to ultimate consumers. The definition adopted by the court, however, may not be appropriate in all situations. As an example, consider a lumber warehouse. It sells lumber to consumers (such as a homeowner doing work around his house on a weekend) and those who further process the lumber and then resell it (such as a contractor building a house). The definition adopted by the court in United Products Corporation might cover the first situation, but not the second. This outcome determinative test appears to be inconsistent with the purpose of the Act, which is to provide to independent sales representatives all commissions they are entitled to receive. A less restrictive term, such as "resellers," would clarify the Act and provide sales representatives with the protection intended by the Act.
Finally, the Act does not apply to sales representatives who purchase for their own accounts or to employees of a principal. Pennsylvania’s Wage Payment Act may apply to commissions earned by an employee. (Pa.Cons.Stat. Ann. §§ 260.1 – 260.12 (Purdon 1992 & Supp. 2001)). In many ways, the Commissioned Sales Representative Act is analogous to the Wage Payment Act, but instead of applying to employees, it applies to a certain class of independent sales representatives.
Put It in Writing
Principals and sales representatives are required by the Act to memorialize their agreements in writing. The Act states that "a written contract shall be entered into" and identifies required elements of each contract. First, the contract must state the "form of payment and the method by which it is to be computed and made." Second, the contract must provide a "specified period for the performance of services." Third, the contract must describe the "manner and extent to which job-incurred expenses are to be reimbursed." Fourth, the contract must identify a specified geographical area or accounts that will be called upon by the representative.
Payments Upon Termination
The Act defines "termination" as the "end of services performed by the sales representative for the principal" and includes any action that concludes the relationship between the parties. All commissions due at the time of termination must be paid within 14 days after termination. With respect to goods delivered after termination of the agreement between the principal and the sales representative, the Act requires that commissions be paid within 14 days after the date such commissions become payable. If this date cannot be determined from the written agreement between the parties (or if, despite the requirements of the Act, the parties have failed to enter into a written contract), the past practices of the parties or custom and usage prevalent in Pennsylvania in the industry in question will apply.
In discussing this section, a member of the Pennsylvania House of Representatives stated that the "problem has occurred around orders which are placed but goods not delivered until after a contract has been terminated, and it is there where sales representatives, frankly, have been ripped off. They have been responsible for placing an order, they have earned a commission, but it has been denied them in far too many cases because goods were actually delivered after a contract was terminated."
Penalties for Violations
In an attempt to level the playing field, the Legislature enacted significant penalties for violations of the Act. A principal who "willfully" fails to pay commissions upon termination "shall be liable to the sales representative" for all commissions due the sales representative plus damages up to double the commissions due. For example, if a sales representative is owed $100,000, the Act authorizes up to $200,000 in punitive damages. If successful, the sales representative also is entitled to recover the costs of any lawsuit and reasonable attorneys’ fees.
The Act is unclear, however, on whether these penalties flow automatically or whether an element of bad faith by the principal must be established. For instance, the Act is unclear about whether a principal may rely upon a good faith belief that commissions are owed. Although this issue has not been judicially determined, as discussed above, the purpose of the Act is to protect independent sales representatives. It would appear that these penalties should be imposed regardless of the principal’s good faith or lack of it. Given these penalties, what appears to be a minor dispute over commissions can quickly become high-stakes litigation.
The principal, or company who has hired the independent sales representative, also is provided remedies under the Act. If a lawsuit is brought on frivolous grounds, the Act permits a principal to recover attorneys’ fees and court costs. Unlike the sales representative who can recover fees and costs as a matter of course, a principal has a much more difficult burden and must establish that the sales representative’s lawsuit was frivolous.
Conclusion
The provisions of the Pennsylvania Commissioned Sales Representative Act "may not be waived." As a result, the Act must be considered when drafting contracts between independent sales representatives and the companies they represent. Particular attention should be paid to the payment terms of a contract and to building in sufficient time for both sides to investigate commission disputes. Otherwise, a business using independent sales representatives may unwittingly place itself in a position of facing significant damage claims, including the doubling of the amount owed, attorneys’ fees and costs.
ENDNOTES
1 Pennsylvania Commissioned Sales Representative Act, 43 Pa. Cons. Stat. Ann. § 1471-1478 (Purdon 1988, amended 1998).
2 Palmer-Lucas, Inc. v. Martin’s Herend Imports, Inc., 827 F. Supp. 345 (W.D. Pa. 1993); Harris v. Hartz & Co., Inc., No. 95-5589, 1996 U.S. Dist. LEXIS 8032 (E.D. Pa. 1996).
Copyright 2002 Pepper Hamilton LLP. All rights reserved.
