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A Trap for the Unwary: Sales Representative Agreements and Statutory Protections

October 5, 2020

Overview

Many companies utilize outside sales representatives to aid in finding customers for their products or services. Often these arrangements are governed by a contract. However, many businesses fail to appreciate that more than 30 states have enacted protective sales representative statutes that cannot be modified by contract. These statutory protections can apply even in situations where the parties have expressly chosen the law of another jurisdiction, and they carry the potential for punitive penalties and attorney’s fee awards.

Following a recession in the late 1980s and early 1990s, many states enacted statutes with the intent to insure sales representatives were paid commissions in a fair and timely fashion, similar to statutes that require employers to pay wages to regular employees. California’s statute, for example, expressly notes in the preamble that sales representatives “spend many hours developing their territory in order to properly market their products,” and thus, “should be provided unique protection from unjust termination of the territorial market areas.”

The protections granted by these statutes vary from state to state and no two statutes are identical. Some statutes limit the protection to sales of goods and not services, while some cover only sales made to wholesalers not consumers, and others apply only to sales made within their states. Despite these differences, there are several similarities between many of the statutes. The most common theme is requiring companies to timely pay sales representatives after termination or otherwise face penalties up to triple the amount of damages, plus attorney’s fees. Almost all of these statutes require that earned commissions be paid within a certain time after the relationship ends, with most states requiring commissions to be paid anywhere between 5 to 45 days after termination.

Another common theme among these statutes is outright bans on choice of law and forum selection clauses in sales representative agreements. Many of these state statutes invalidate any provision that attempts to waive the application of its statute, even if the sales representative expressly agrees to be governed by the laws of another state. States that have such prohibitions void any attempt to make the agreement subject to the laws of another state, leaving companies surprised and stuck in a jurisdiction they had no desire to litigate in.

In most states, the statutes do not go further than dictating payment after termination and voiding choice of law provisions. Minnesota, however, goes much further. Minnesota places considerable protections on how a sales representative relationship may be terminated by differentiating between the decision not to renew a sales agreement and the “termination” of a sales agreement before the end of its term. The latter is proper with “good cause,” 90 days’ notice, and the opportunity for the sales representative to remedy the issue. If, on the other hand, a company merely desires not to renew the sales representative agreement for whatever reason, the company must provide the representative with 90 to 180 days’ notice, depending on the term of the agreement. Minnesota’s statutory protections apply if the sales representative’s residence or principal place of business is in Minnesota, or when the representative’s sales territory includes Minnesota. 

This vast variety of sales representative statutes across the country create a potential trap for the unwary. Businesses are strongly encouraged to consult with their attorneys before entering into sales representative agreements, modifying such agreements, and terminating such agreements.

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