A recent breach of contract case decided by the Court of Appeals of Tennessee drives home two lessons. One lesson is for sales representatives who earn their living by commissions: The other is for Tennessee lawyers who handle breach of contract cases. The lesson for sales representatives is that, if they don’t obtain adequate protection for themselves in the written contract they sign before they start to work, they should not be surprised if they are not paid commissions for sales which they generated and should not be surprised if they cannot be helped by a court. The lesson for lawyers who handle sales commission cases is that the duty of good faith, which is implied in every contract in Tennessee, cannot rescue a sales representative, even one who has been treated unfairly, from a bad bargain which they made on the front end.
In Schwartz v. Diagnostix Network Alliance, LLC (Tenn. Ct. App. 2014), Mr. Schwartz, a sales representative, signed an agreement with Diagnostix Network Alliance (“Diagnostix”) pursuant to which he was to be paid commissions for each medical test which he sold. That agreement (“Commission Agreement”) provided for the payment to Schwartz of commissions, but also stated that either party could terminate it “with or without cause” and could do so “immediately” upon providing notice. Another clause in the Commission Agreement provided that Schwartz, the sales representative, had no rights to commissions once he was terminated.
For eight months after the Commission Agreement was signed, Schwartz traveled extensively and, the opinion seems to indicate, worked pretty hard and diligently to sell the medical tests offered by Diagnostix. Schwartz made pitches to one particular organization which had a big network and which could potentially result in many sales. Then, Diagnostix and that organization bypassed Schwartz by entering into an agreement for the purchase of the tests. Then, Diagnostix terminated the Commission Agreement with Schwartz. Although Diagnostix claimed that it had to terminate the agreement because the organization in question complained about Schwartz’s aggressive sales tactics, it is reasonable to assume that Diagnostix’s stated reason for terminating the agreement with Schwartz was pretextual and that it terminated him to avoid paying him commissions.