The Missing Link: Keeping Sales Reps From Turning Into Franchisees

10 August 2020 Publication
Authors: Nathan D. Imfeld Charles W. Niemann

Introduction

Manufacturers and suppliers do not ordinarily think to check state franchise or product distribution statutes when terminating a third-party sales representative, and for good reason: sales reps are mostly regulated separately, and far more lightly, than dealerships or franchises.  A recent decision from the United States District Court for the District of Connecticut, however, illustrates why manufacturers and suppliers cannot simply count on this state of affairs for protection.  Instead, carefully drafted sales representative agreements are important tools for protecting against the risks posed by an unhappy sales rep.  Trade Links, LLC v. BI-QEM SA de CV, No. 3:19-CV-00308, 2020 WL 1335688 (D. Conn. Mar. 23, 2020).

Issue / Case Summary

BI-QEM, a Mexico-based manufacturer of injection molded plastic products, contracted with Trade Links to serve as its exclusive sales representative in North America. Id. at *1.  To that end, the parties executed a Sales Representative Agreement (SRA), which after an initial three-year term would renew annually if Trade Links met minimum sales requirements.  Id.  Although Trade Links complied with the SRA, and always exceeded its minimum sales quota, the relationship between the parties began to sour.  Id. at *2-3.  Trade Links ultimately terminated the SRA, claiming that BI-QEM had breached the agreement by failing pay commissions, and by instructing customers to place orders directly.  Id. at *3.

Trade Links brought suit alleging, among other claims, that it was protected as a franchisee under the Connecticut Franchise Act (CFA).  Id.  BI-QEM moved to dismiss, arguing that its relationship with Trade Links did not meet the definition of “franchise” under the statute.  Id. at *4.  The court agreed, dismissing the CFA claim.

The terms of the SRA featured heavily in the court’s analysis.  The court concluded that the SRA established that Trade Links did not purchase BI-QEM’s products and resell them, did not fulfill orders itself, did not have the right to set prices, and was paid commissions on a monthly basis at pre-determined rates, among other considerations.  Id. at *10.  These contract terms foreclosed Trade Links from establishing a franchise relationship.  Id.

Key Takeaways

  • Have written agreements with sales representatives.Without a written agreement, an unhappy rep can survive a motion to dismiss and force its former business partner into expensive and protracted litigation on non-meritorious claims.
  • Ensure that the agreement spells out the important terms of the relationship, including whether the rep has the right to take title to product, accept orders, and set prices.

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