Sticky Contract Issues Lead Jury To Wrap $8 Million Verdict Around Business-Producing Rep, Including For Future Commissions

It’s an old, even classic dilemma for independent sales reps, but it continues to play out across the country. Fueled by his own sweat equity over long hours and on his own nickel, an industrious rep scores a big customer contract for a principal. Rather than treating the rep to a steak dinner and a pledge to honor its contract by commissioning the rep on this new-found business, a notice of termination is issued. The principal then brushes off the rep: “We’ll pay you everything we owe you as of today, and best of luck in your future endeavors. What’s that? The new contract won’t be signed until tomorrow? You don’t say!”

This familiar scenario recently unfolded in New York involving some major food industry players. The rep firm BGI’s relationship with McDonald’s dated to the 1970s, when its owner, Lewis Barton, had a company that supplied its restaurants with ketchup packets. By the 1990s, the relationship had progressed to the point where Barton had a handshake deal entitling him to present new ideas for products or food preparation processes to McDonald’s, which did not generally accept unsolicited ideas.

Success Is a Sticky Business

As the McDonald’s sandwich line expanded, Barton identified an inefficiency in the process of serving each sandwich in a unique, preprinted wrapper. He developed the concept of printing “sticky labels” in the restaurants bearing the sandwich name and any special-order instructions, which could be applied to a generic wrapper. McDonald’s charged Barton to work on this concept with its supplier, NCR Corp., with whom a sales rep agreement was entered into in 2003.

Barton used his contacts to set up a meeting in 2003 for NCR and BGI to formally present the “sticky labels” concept to McDonald’s. Barton then shepherded the labels through extensive product testing, including troubleshooting, and prepared the necessary McDonald’s paperwork. This led to McDonald’s approval of the project, and its purchase of small quantities of “sticky labels” from NCR during the testing phase in 2004-05, on which NCR paid BGI commissions. Barton helped generate demand for the product by demonstrating the labels to franchisees at McDonald’s 2006 convention.

By 2007, however, McDonald’s was reportedly objecting to the cost of the sticky labels, and Barton began having difficulty getting updates from NCR about the project. Termination followed in early 2008, and large-scale sales to McDonald’s soon began.

Putting a New Label on an Old Idea Leads to Court

After terminating BGI, NCR sold McDonald’s a label product known as Receipt on Label or “RoL.” As of 2010, about half of McDonald’s restaurants used the RoL product. BGI sued to recover the commissions on the sale of these RoLs in federal court in New York, and the case proceeded to trial in December 2010. Major trial issues involved:

  1. whether the “sticky labels” Barton developed were the same product as RoL, and
  2. whether BGI had procured this McDonald’s business.

The stakes were significant. BGI sought over half a million dollars in commissions up to the time of trial, plus an additional $1.3 million to $6.3 million in future RoL sales to domestic McDonald’s restaurants.

In characteristic fashion, expert witnesses battled at trial over BGI’s damages claim, including whether the whole approach was too speculative, and whether assumptions about manufacturing costs, price increases, and future growth were reasonable. The trial judge instructed the jury that, if it found NCR breached the contract, it could only award damages for losses BGI “actually has suffered or which it is reasonably likely to suffer in the future.”

After five days of trial, the jury received the case following (a non-McDonald’s) lunch, and delivered its verdict that afternoon: NCR breached the contract, and BGI suffered more than $8 million in lost past and future commissions on RoL sales to McDonald’s.

Ambiguity in a Contract Can Really Stick It to One Party

Seeking to overturn that verdict, NCR’s first main argument was that its RoL products fell outside the BGI contract requiring payment of commissions on “sticky labels.” NCR contended that the contract’s “sticky labels” reference encompassed only a generic wrapper bearing the sandwich name on a printed label. Because McDonald’s had decided not to print sandwich names on the labels and the RoLs contained only special-order instructions, NCR argued they were not covered.

The court rejected this “extremely strict reading” of the parties’ contract. Because certain contract terms were ambiguous, they had to be construed together with other evidence. Relying on such other evidence showing the contract was intended to cover other applications for the labels, the court found the jury’s conclusion that “sticky labels” were not limited to generic wrappers with printed sandwich names on the labels was reasonable. Other evidence supporting this finding included NCR’s payment of commissions to BGI during the testing phase, and the use by McDonald’s of the RoLs in a manner consistent with the “sticky label” concept.

BGI Wrapped Up the Business for NCR

NCR’s second argument challenged whether BGI procured the McDonald’s RoL sales. The jury was instructed it could only find for BGI if it was a “procuring cause” of the RoL business, meaning BGI had to be a “direct and proximate link to the sale or…the efficient cause of the sale.”

This did not require BGI “to participate in all stages of the negotiation or to be present when an agreement finally is made,” but it must have done more than simply make introductions.

NCR argued that since its contract with BGI was terminated by the time McDonald’s purchased RoL in commercial quantities, BGI did not directly cause these sales. This rationale was flawed, however, because any manufacturer could terminate an independent rep before a sale is consummated if doing so was enough to avoid the commission obligation. The law enabled BGI to earn its commission if it “generated a chain of circumstances which proximately led to the sale.”

Even if the sale is consummated without the rep, the commission can still be due if the rep was the procuring cause of that sale. The “procuring cause rule” specifically protects terminated sales reps.

Based on the trial evidence, including BGI’s participation in the heavy McDonald’s testing process, and its demonstration of the labels to franchisees, which led to McDonald’s eventual approval, the jury’s conclusion that BGI procured the business was upheld as eminently reasonable.

The RoL: For How Long is McDonald’s Lovin’ It?

Perhaps the most significant part of this case involved the damages award. Of the jury’s total $8,018,667 award, some $7.5 million was awarded as future commissions. Not surprisingly, NCR attacked this award as speculative, arguing BGI could not prove how long McDonald’s would continue purchasing its RoLs. This is a common defense position in commission recovery actions based on the argument that a customer can discontinue purchasing product at any time.

Under New York law, as in virtually all states, damages must be “reasonably certain and directly traceable to the breach,” and not merely speculative or possible. Rather than offer a precise basis for its calculation of damages, this court only required BGI, as the plaintiff, to “demonstrate a stable foundation for a reasonable estimate as to damages.”

The foundation was laid when BGI’s expert economist testified that a reasonable basis existed for believing that NCR could sell RoLs to McDonald’s through the year 2025. He relied on the fact NCR held a patent for RoL through 2026, which gave it the right to prevent competitors from producing a substantially similar product during this time. The expert witness also pointed to the several years NCR devoted to developing RoL, believing substantial sales would result, and referenced an NCR projection from 2007 that nearly 2.25 million units of RoL would be sold to McDonald’s restaurants just in the first five years of sales, generating over $21 million in revenue.

The trial court considered this “more than enough evidence” to support the jury award of commissions for the next 15 years. And the federal court of appeals affirmed the trial court’s rationale, deeming it “thorough and well-reasoned.”

Aftermath

Few reported commission recovery decisions have validated recovery of future commissions for as long as BGI received in its action against NCR. This significant 2011trial court decision, together with the appellate court’s April 2012 affirmance, suggests that, absent contrary contract terms, reps may get their just due when their pre-termination promotional efforts procured the business that will continue enriching their former principals on a post-termination basis.

To view this publication as published on ERA.org, click here.

 

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