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Sales Commissions Denied Where Employee “Procured” Business, but Did Not “Develop” It

The United States District Court for the Northern District of Tennessee decided against a former employee in a breach of contract case for failure to pay sales commissions on the grounds that he was required to do more than just connect the new customer with his employer (“Employer”). It should be noted, at the outset, that this case turned largely on the specific language of the former employee’s employment contract, and should not be taken as establishing a general rule that independent sales representatives and employees cannot collect commissions for just initiating the contact with the new customer. In some cases, they can.

Even though the case, Jackson v. Maine Pointe, LLC, 2018 WL 1371488, was decided largely on its unique facts, valuable lessons for commissioned sales representatives and employees can be derived from an understanding of what happened in the case.  Perhaps the most important lesson is how important it is for employees and representatives to pay attention to the terms of their written commission agreements and, where possible, to bargain for terms that leave no doubt about when they are entitled to be paid commissions.

Here are the key facts of the case:

  • Jackson was an at-will employee of a company which specialized in operations consulting
  • Jackson’s position was Vice-President of Food and Beverage
  • Jackson’s offer letter provided that Employer would pay him commissions of 7% for “sales of $0 to $6,000,000” and 8% for “sales of $6,000,001 and above” for “New Name Client Work Developed by you”
  • The specific language about commissions, which became critical, provided: “You will be eligible to earn sales commissions on collected engagement revenue (not analysis, nor reimbursed T&E Revenue … All commissions are paid monthly as project revenue is collected . . . “
  • While employed, Jackson identified Colony Brands as a potential customer for Employer
  • Jackson agreed to pay a referral fee of 1.5% to another employee of Employer who had a relationship with Colony Brands for helping Jackson connect with Colony Brands
  • Just days prior to his termination from employment with Employer, Jackson sent an email to, and left a voicemail with, a contact at Colony Brands
  • After Jackson was terminated, another employee of Employer resent Jackson’s email to the contact at Colony Brands, a Mr. Hughes
  • Mr. Hughes responded to the email and even referenced Mr. Jackson’s name in his response
  • Thereafter, other employees of Employer met with Mr. Hughes, and Colony Brands ultimately paid $6.3 million to Employer
  • The employees who met with Colony Brands and brought the contract with it to fruition were paid commissions and the employee to whom Jackson had promised a 1.5% commission as a referral fee was paid that amount
  • Jackson received no commission whatsoever

 

Jackson filed a breach of contract lawsuit against Employer. He argued that he was entitled to the agreed commission from the Colony Brands’ business because he had procured the business.  His former Employer argued that, under the terms of the written employment/commission agreement, to be entitled to a commission, Jackson had to do more than just “procure” the business — he had to “develop” it.

According to Employer, the sales development phase was split into two parts: (1) Obtaining an analysis from a prospective client; and (2) obtaining the execution of an engagement proposal from the client which resulted in revenue being generated. Employer’s position, to put it a different way, was that, to be entitled to a commission, Jackson had to do more than make an introduction: He had to close the sale.

The court ruled for Employer and against Jackson. Jackson had offered his testimony that, in over 30 years in the marketing industry as a commissioned representative, it was always the practice that representatives received commissions just for “bringing in clients, unless otherwise expressly stated by their contracts.” The court found this unpersuasive in light of the language in Jackson’s contract which stated that commissions were only due for “engagement revenue (not analysis, or reimbursed T&E revenue).”

In my opinion, Jackson deserved to be paid a commission in some amount because his efforts were the starting point that ended up with Employer receiving over $6 million in revenue. However, unfortunately, what Jackson deserved and to what he was entitled under his specific contract are two entirely different matters, as this case amply illustrates.

In our practice, we have seen many sales people who deserved commissions not receive them because of contractual language which, when considered carefully, allowed the other party a way out of paying commissions. Sales representatives must remember that their leverage for obtaining appropriate contractual language which supports their being paid commissions which they deserve is greatest on the front end, before they have brought in the business.  For that reason, it is worth the time and effort to have a lawyer advise them on what language they need to protect themselves.

Lastly, when a dispute arises about commissions, sales people should consult promptly with an attorney experienced with handling commissions cases. Sometimes, contract language can be interpreted in more than one way.  (I believe that the court in Jackson’s case could have interpreted the contract language in Jackson’s contract differently and more favorably to Jackson). Moreover, even when the contract language at issue might not be a winner, other arguments might.  For example, there may be a way to recover commissions based on a breach of the duty of good faith and fair dealing, which is implied in every contract governed by Tennessee law.