One of the Strongest Rep Decisions — Ever

“They will be surprised to learn that, under the default rule the Court adopts today, an at-will salesperson is entitled to commissions for any sale – here, perhaps hundreds of thousands of sales – a jury determines the salesperson ‘set in motion.’ And they will be stunned to learn that, under the default rule, the entitlement to commissions may extend years after their employment relationship ended.”

This somewhat indignant language comes from the dissenting opinion’s description of a major pro-rep decision handed down last year in Perthuis v. Baylor Miraca Genetics Laboratories, LLC.

It’s a hugely important decision – and comes from a most unexpected source: the Supreme Court of Texas. With this ruling, Texas reaffirms its membership among a growing number of jurisdictions recognizing that if rep contracts do not expressly limit the sales rep’s right to post-termination commission payments, then those commissions remain payable.

Textbook mistreatment

The facts leading up to the decision are egregious and classic: Brandon Perthuis’s written contract with Baylor Miraca Genetics Laboratories, LLC (BMGL), a genetic testing company, provided simply: “Your commission will be 3.5% of your net sales.” It did not define “net sales,” did not elaborate on BMGL’s commission obligation and did not say one word about what would happen upon termination.

Perthuis successfully pursued purchase contracts for the genetic tests with channel partners, in particular to Natera, Inc. BMGL would pay Perthuis on all sales to Natera, and calculated the commissions by multiplying the “net sales” by 3.5 percent. Natera quickly exceeded the minimum-purchase requirements of its contract, and BMGL naturally wanted to cut a new deal with this prized customer. BMGL charged Perthuis with negotiating a new agreement.

Over the next several months, Perthuis hammered out the second largest contract in BMGL’s history, a deal substantially increasing Natera’s minimum-purchase requirements. When Perthuis could finally deliver the good news to BMGL, its CEO requested to meet with him.

Experienced reps know what happened next: Instead of celebrating Perthuis’s huge deal for BMGL, the CEO fired him. And the very next day, the CEO executed the deal with Natera that Perthuis negotiated.

The rep fights back

Rather than offer any compensation to Perthuis, BMGL refused to pay commissions on any sales finalized after termination, including on Natera under its new deal. Perthuis sued for breach of contract, asserting he was the procuring cause of all Natera sales, and sales to certain other channel partners made between his January 2017 termination and the October 2018 trial date.

Disputing both that Perthuis procured the sales and the viability of the procuring cause doctrine, BMGL took the case all the way to trial. The Houston jury, however, ruled solidly for Perthuis, awarding the sales commissions, but less than the full amount. This still comprised a major victory for a rep whose contract said not a word about recovering post-termination commissions.

On appeal, BMGL found greater success. Although the contract said no more than “Your commission will be 3.5% of your net sales,” the Texas appellate court found it unambiguously allowed for commissions only during Perthius’s employment by BMGL, and not after termination.

Perthius then took the case up to the Texas Supreme Court, which found that a three-part test applies when a plaintiff seeks to recover commissions not by relying on contract language, but under the procuring cause rule.

Part I of the Procuring Cause Doctrine analysis

The first step in the analysis is to determine if the parties had “the kind of contractual relationship to which the procuring cause doctrine applies.” The Texas high court ruled that “the minimum prerequisite for the doctrine to apply is an agreement to pay a commission on a sale.”

Citing century-old Texas precedent, the court recognized that the procuring cause doctrine is “a rule of fairness and right.” Its purpose is “to credit a broker (or salesman, or other agent) for a commission-generating sale when a purchaser was produced through the broker’s efforts.” Per this doctrine, “the broker’s entitlement to a commission vests on his having procured the sale, not on his actual involvement in a sale’s execution or continued employment through the final consummation of the sale.”

Returning to the present day, the court ruled: “Because the employment contract here promises commissions for sales, BMGL and Perthuis’s contractual relationship is the kind to which the procuring-cause doctrine applies.”

Part II of the Procuring Cause Doctrine analysis

As a “default rule,” the procuring cause doctrine only applies to rep contracts if they contain no language displacing it. Displacing the default rule is typically done with a provision reading something like: “Upon termination, the manufacturer will only pay commissions on orders received from the sales representative’s territory for 90 days following the effective date of termination.” Absent language displacing the default procuring cause doctrine, it remains intact, and the rep is eligible to recover commissions on sales generated pre-termination.

Here, BMGL tried to convince the court that “Your commission will be 3.5% of your net sales” somehow displaced the default rule. The Texas Supremes would have none of it: “Far from displacing the procuring-cause doctrine, the employment agreement’s statement that Perthuis would receive a ‘commission’ for his ‘net sales’ is the very text that implicates the doctrine.” The court then added some very useful points for sales reps, including that independent contractors as well as direct employees are covered by the doctrine. “Distinctions in employment status – for example, whether Perthuis was an at-will employee or an independent contractor or something else – have nothing to do with the question that implicates the procuring-cause doctrine.”

Perhaps even more importantly for purposes of the doctrine, the court recognized how working for commissions is different from receiving a salary. Sales commissions “rewarded the fruits of Perthuis’s past labor.” To receive those commissions, “nothing more was necessary from him. He did not need to be involved in the details of individual sales or the invoicing and processing of batches of genetic tests. No such roles are inherently necessary for entitlement to sales commissions.”

Dusting off another Texas court decision – this one from 1943 – the court quoted: “The fact that the owner himself has negotiated the sale does not prevent the broker from being regarded in law as the procuring cause of the transaction.”

Applying this law, the court noted how BMGL had signed the deal with customer Natera one day after firing Perthuis and without further work. If Perthuis had fully performed his duties under the contract when he was fired by landing the new deal with Natera, then his termination made no difference and he was due his commissions. “BMGL had extracted from Perthuis essentially everything that it would have gotten from him vis-à-vis the new Natera deal whether he was fired or not.”

The resounding point is that termination does not diminish the rep’s right to commissions already earned. “Just as salary may be owed for days of work completed before termination, so too may commission fees be owed for sales to buyers procured from work completed before termination.”

One last point made by the Texas high court was to reject a common argument made by principals that because the rep contract did not expressly adopt the procuring cause standard, they should not be bound to it. The court held “no such ‘opt-in’ is required,” and instead “the default rule requires opting out, not the other way around.”

Nothing in the Perthuis-BMGL agreement served to displace the procuring cause doctrine.

Part III of the Procuring Cause Doctrine analysis

When the doctrine is shown to apply to a contractual relationship and is not displaced, “the plaintiff still must show that he was in fact the procuring cause of specific sales.” Under Texas law, the “general rule” provides that a commission is earned when the broker’s efforts “were the primary, proximate and procuring cause of the deal negotiated,” and “the transaction is directly attributable to the broker.” A plaintiff can meet this standard “by proving that he was the procuring cause of a single contract that, without further negotiations or modifications, produced a stream of sales. Or he could show that any changes to the contract were immaterial and his role was still the primary and direct cause of the sales.” Determining whether the rep was the procuring cause of a sale is usually a question for trial, meaning that this issue will not ordinarily get decided on a pre-trial motion. Suppliers disputing the rep’s role in generating a disputed sale like BMGL should expect to take that dispute all the way to trial and see their fate decided by a jury. The Supreme Court of Texas reversed the appellate court’s ruling that the procuring cause rule did not apply and by decisively reinvigorating the doctrine, benefitted both Perthuis and potentially many other sales reps.


Please contact Adam Glazer with any questions at (312) 648-2300 or e-mail at adam.glazer@sfbbg.com.

 

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