Sometimes proving the willful withholding of commissions is “f*#!ing easy”

California’s sales rep protection statute, among the nation’s strongest, mandates an award of treble damages to a rep who does not receive commissions as provided in the contract.

Some state statutes are mealy-mouthed and provide that a rep whose commissions are withheld “may receive treble damages,” or enable the rep to recover “up to three times” the unpaid commissions. Not so in California. Under its statute, a manufacturer who does not pay commissions when due “shall be liable to the sales representative in a civil action for treble the damages proved at trial.”

The Golden State’s rep statute, however, requires the aggrieved rep to show not only that the manufacturer failed to pay commissions when due, but did so willfully. And proving willfulness can sometimes be a tall order, seemingly requiring the reading of minds.

Fortunately for sales rep Med Tech/Med Care, LLC (“MTMC”), no mind-reading was required to determine whether Hemosure, Inc. acted willfully. “I’m not going to f—ing pay those guys,” bellowed Hemosure’s president, effectively removing willfulness as a disputed issue in their case.

The underlying dispute

After MTMC dutifully made Hemosure’s cash register ring, the parties entered into a new rep contract providing for the payment of a commission on all net sales to medical distributors of Hemosure products. When Hemosure then stiffed MTMC on two months of commissions worth over $64,000, MTMC complied with the contract’s terms by filing an arbitration demand with the American Arbitration Association (“AAA”) in Los Angeles, seeking damages both for breach of contract and under the California statute.

Rather than cherish the mutual benefit that results from deploying a successful sales rep, some unscrupulous principals engage in the foolish practice of seeking to keep the rep’s contractually earned commission for themselves. Unable to identify any genuine breach of the agreement committed by the rep, such a principal may turn to vague, catchall provisions in the contract and claim that no matter how objectively successful the sales efforts were, the rep failed to adequately “promote and solicit sales.”

Hemosure chose to defend its nonpayment at the arbitration on precisely such arbitrary grounds. It also sought to avoid the reach of the California rep statute by claiming that it did not apply because MTMC was not a “wholesale sales representative” and did not participate in “soliciting wholesale orders” within the statutory meaning. Alternatively, Hemosure argued treble damages were not available because MTMC did not show a willful failure to pay.

The decision

The arbitrator made short work of these arguments. Rejecting Hemosure’s “novel defense” that it can withhold commissions “because it decided after entering into a new agreement with MTMC that its performance under the parties’ prior agreement was not satisfactory is not persuasive and must fail.”

Continuing, the arbitrator recognized that “the words and actions of Hemosure’s president” were “unambiguously willful (‘I’m not going to f—ing pay those guys’),” thereby triggering the treble damages provision of the statute. Notably, the arbitrator did not specifically address the arguments concerning “wholesale sales,” but implicitly rejected them by finding the rep statute did apply to the case.

For good measure, the arbitrator added to the award 10 percent interest on the unpaid commissions plus attorney’s fees and costs for a total award of nearly $300,000.

The appeals

Unwilling to lick its wounds and go home, Hemosure fought on, challenging the award in the Superior Court of Los Angeles County. The argument it devised to challenge the arbitration award in court proved no stronger than its positions in the arbitration. Hemosure claimed the award was defective because the parties did not receive the required “reasoned award” from the arbitrator.

The Los Angeles court had little difficulty dismissing Hemosure’s arguments to escape the arbitrator’s decision. Finding that the award was indeed “reasoned,” including as to the applicability of the California rep statute, the court readily confirmed the award.

Still not done, Hemosure’s next and final stop was the Court of Appeals of California. The welcome it received on appeal in its all-consuming effort to “not f—ing pay” MTMC proved no warmer.

Noting that neither the AAA rules nor any California court decision specifies what constitutes a “reasoned award,” the appellate panel unanimously disagreed with Hemosure that more was required than the two-page decision generated by the arbitrator. The court concluded that the award must merely contain “the basic reasoning of the arbitrator on the central issues,” and need not “delve into every argument raised by the parties.”

While “the better practice would have been for the arbitrator to provide his analysis” explaining his rejection of Hemosure’s wholesale sales argument, this was not a sufficient basis to overturn him “in light of the deference we give to arbitration awards.” The parties received the reasoned award they were entitled to from the arbitrator.

MTMC was even awarded its costs on appeal.

The takeaway

As this case demonstrates, arbitrations are not always faster, more direct or less expensive dispute resolution formats. Yet, this is a story of redemption for hard-working and effective reps like MTMC who prove unwilling to succumb to the exploitative and heavy-handed practices of a non-paying principal. And ultimately, the determination of MTMC shows that reps can indeed get paid what they are due, including full reimbursement of the expenses incurred, by insisting on the enforcement of their rights.

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

 

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