(This article was originally published in Bench & Bar Magazine in July 2020 as “Not So Fast – Termination of Sales Rep Agreements Under Minnesota Law.”)
Minnesota has several statutes that protect small businesses from termination of certain contracts regardless of the actual terms of the agreements in question. Imagine a very large, New York-based company working with a sales representative firm based in Minnesota. The New York company decides to end its relationship with the representative to move sales operations in house and save money on commissions. Its general counsel looks at the written agreement, which both parties signed, and concludes, based on the plain language of the contract, that it can be terminated with 30 days’ notice by either side. The company sends a notice of termination letter and gets a response back from the Minnesota sales rep: “Not so fast.” The company then goes through the five stages of denial, anger, bargaining, depression and finally acceptance that the law is not on its side.
The concept that state laws can override commercial contracts can come as a surprise, but these laws have survived constitutional challenges. One treatise characterizes them as protecting small businesses that “depend on distributor agreements with large marketplace entities.”[i] Thus, just as certain consumer protection laws can supersede consumer transactions, some laws trump contracts between large businesses and small businesses. The policy rationale behind these laws is that small ventures invest significant money, time, and effort to sell or distribute for national manufacturers and the loss of a single large account could be ruinous.[ii] And, since large manufacturers are perceived to have disproportionate bargaining power, dealers and sales reps need legal protection instead of leaving them vulnerable to arm’s length negotiations.
For these reasons, Minnesota attorneys who represent distributors, dealers, sales representatives, manufacturers, large retailers or other business clients that utilize sales intermediaries should be aware of these laws, including recent amendments.
Examples of Minnesota Statutes Protecting Small Businesses from Termination of Contract
The following are examples of Minnesota statutes that protect certain small businesses from termination of contract:
- The Minnesota Termination of Sales Representatives Act (“MTSRA“), Minn. Stat. § 325E.37.
- The Minnesota Agricultural Equipment Dealership Act, Minn. Stat. Section 325E.061, et seq. (“MAEDA”).
- The Minnesota Heavy and Utility Equipment Manufacturers and Dealers Act, Minn. Stat. Section 325E.068, et seq. (“MHUEMDA“) The MAEDA and the MHUEMDA are sometimes lumped together as the “Equipment Statutes.”[iii]
- The Motor Vehicle Sale and Distribution Act, Minn. Stat. Chapter 80E
- The Beer Dealers Act, Minn. Stat. § 325B.
This balance of this article focuses on the MTSRA (or the “Act”), but the concepts discussed herein may also be relevant to application of the other statutes listed above.
The Minnesota Termination of Sales Representative Act – What is a “Sales Rep?”
The MTSRA was passed in 1990 to provide legal protections for certain independent contractor sales representatives commonly known as “sales reps.” Minnesota is home to many sales rep businesses that assist manufacturers who want to sell their products at one of the large Minnesota-based retail companies like Target and Best Buy. Sales reps serve an important role in helping companies navigate the complicated requirements and needs of these large store operations.
The purpose of the MTSRA “is to afford some protection to sales representatives by limiting the circumstances under which their agreements may be terminated.”[iv] The MTSRA defines a “sales representative” as “a person who contracts with a principal to solicit wholesale orders and who is compensated, in whole or in part, by commission.”[v] Under the Act, “‘[p]erson means a natural person, but also includes a partnership, corporation, and all other entities.”[vi] This means that both individuals and business entities can qualify as sales representatives under the Act. The MTSRA applies to sales representatives who reside in, maintain a principal place of business in, or whose geographic territory includes Minnesota. The term “sales representative” does not include a person who:
(1) is an employee of the principal;
(2) places orders or purchases for the person’s own account for resale;
(3) holds the goods on a consignment basis for the principal’s account for resale; or
(4) distributes, sells, or offers the goods, other than samples, to end users, not for resale.[vii]
A door-to-door salesperson, therefore, is not considered a sales rep protected under the MTSRA because she would be selling to “end users.” Salespeople who are employees are also not protected by the Act, nor are sub-agents.[viii]
In 2017, the MTSRA was amended to address an ambiguity as its application to reps who sell components to manufacturers that use them to make products to then sell to the general public. The amendment clarified that “wholesale orders” means the solicitation of orders for goods by persons in the distribution chain for ultimate sale at retail, and includes material, component, or part orders for use or incorporation into a product, and later resold.[ix] As such, reps who sell components to manufactures are now covered by the Act.
Limits on Termination of Sales Representative Agreements
The MTSRA limits the ability of a manufacturer to terminate a sales representative. The Act states that:
A manufacturer, wholesaler, assembler, or importer may not terminate a sales representative agreement unless the person has good cause and:
(1) that person has given written notice setting forth the reason(s) for the termination at least 90 days in advance of termination; and
(2) the recipient of the notice fails to correct the reasons stated for termination in the notice within 60 days of receipt of the notice.[x]
“Good cause” means a material breach of one or more provisions of a written sales representative agreement or in absence of a written agreement, failure by the sales representative to substantially comply with the material and reasonable requirements imposed by the manufacturer. The Act therefore imposes a “good cause” standard in all sales rep contracts. And, if the manufacturer is unaware of the Act, it may miss the 90-day written notice requirement, thus delaying termination even if good cause exists. In extremely narrow circumstances such as bankruptcy of the sales rep or conviction of a crime the principal is entitled to terminate the sales representative agreement effective immediately.[xi]
In a situation where the sales rep is performing its duties, but the manufacturer simply wishes to end the relationship, it cannot. But is the manufacturer locked into the contact forever? What if the contract has an expiration date? What if it does not? The Act also addresses non-renewal. It states that “no person may fail to renew a sales representative agreement unless the sales representative has been given written notice of the intention not to renew at least 90 days in advance of the expiration of the agreement.”[xii] Thus, if a one-year contract expires on December 31 and the manufacturer does not provide notice of non-renewal by October 1 the contract will be deemed to have been renewed for another one year. But if the manufacturer is aware of the requirement under the Act it can terminate the relationship with 90 days’ notice.
If the sales rep agreement does not have an expiration date, or if there is no written agreement, the MTRSA also has an answer: “a sales representative agreement of indefinite duration shall be treated as if it were for a definite duration expiring 180 days after the giving of written notice of intention not to continue the agreement.” [xiii] Because most sales representative-manufacturer relationships can be terminated for any or no reason with at least 180 days’ notice, when notice of termination is improper the damages for the sales rep is logically 180 days’ worth of commissions, less the amount of notice that was provided. The 180-day provision is often the fulcrum of discussion in litigation and settlement, therefore, especially those involving expired agreements or informal arrangements. As one Minnesota practitioner put it, claims by the rep under the MTSRA for unlawful termination of a sales rep contract generally have a “street value” of 180 days’ of commissions.[xiv]
Choice-of-Law Provisions no Longer Provide a Defense.
For years, a choice-of-law provision in a sales rep agreement stating that it would be governed by the law of a state other than Minnesota was an effective, and common, means for manufacturers to avoid claims under MTRSA. [xv] In 2014, however, the Act was amended to prohibit certain terms from being enforceable in sales representative agreements. The amendment provides:
(a) No manufacturer, wholesaler, assembler, or importer shall circumvent compliance with this section by including in a sales representative agreement a term or provision, whether express or implied, that includes or purports to include:
(1) an application or choice of law of any other state; or
(2) a waiver of any provision this section.
(b) Any term or provision described in paragraph (a) is void and unenforceable.[xvi]
The new law became effective on August 1, 2014 and “applies to sales representative agreements entered into, renewed, or amended on or after that date.”[xvii] A choice of law and forum selection defense, however, may still be applicable to agreements preceding that date.
Litigation and Arbitration Under the MTSRA
A sales rep with a claim under the MTSRA has the option of proceeding in arbitration with the American Arbitration Association (AAA) or bringing the claim in district court.[xviii] Legal remedies available under the Act include reinstatement[xix], actual damages, payment of commissions, and recovery of reasonable attorney’s fees and costs to the prevailing sales representative. The fee-shifting provision of the Act means that early resolution of these cases often makes strategic sense for the manufacturer. Attorneys representing sales reps should also consider the potential applicability of Minn. Stat. § 181.145 which provides penalties for non-payment of commissions owed to an independent contractor.[xx]
Payment of six months of commissions may be a common basis for settlement discussions, but it is important to note that damages are not limited to 180 days. In Wingert & Associates, Inc. v. Paramount Apparel International, Inc., 458 F.3d 740 (8th Cir. 2006), the Eighth Circuit Court of Appeals affirmed a jury award to Wingert, the sales rep, for the manufacturer’s violation of the Act in an amount exceeding $1 million. The court in that case noted that, “[s]ubdivision 5 of the Act provides for damages in addition to commission payments for the 180-day period under subdivision 4, and it does not limit the period for which such damages may be awarded.”[xxi] The court rejected the manufacturer’s argument that the Act did not permit damages beyond the 180-day notice period, holding that such an interpretation of the plain language would make the statutory subdivisions incompatible and therefore unreasonable.
Manufacturers seeking to resist application of the MTRSA have attempted various interesting tactics, generally without success. In one situation the author was involved in, the manufacturer attempted to reduce the list of products allowed to be sold (i.e. from 1,000 to 1) as arguably contemplated by the terms of that specific agreement without technically terminating the contract. The sales rep firm argued constructive termination and the matter settled.[xxii] In some cases, manufacturers have tried to sue first for declaratory judgment in manufacturer-friendly forum in another state, but that strategy is not without its costs and risks.[xxiii] In other circumstances the manufacturer may cry “bad faith” if it believes the sales rep knew of the Act at the time of negotiating the agreement but did not mention it. Although knowledge of the law is presumed by all parties, sales reps in Minnesota should strive to craft agreements that are consistent with the law, rather than hide the ball.
Constitutional Challenges to the MTSRA
Minnesota courts have repeatedly affirmed the constitutionality of the MTSRA. Both the United States Constitution and the Minnesota Constitution contain provisions that prohibit the state from passing laws “impairing the obligation of contracts.” [xxiv] Both state and federal courts in Minnesota have found that the MTRSA does not unlawfully impair contracts. In Midwest Sports Marketing, Inc. v. Hillerich & Bradsby of Canada, Ltd., 552 N.W.2d 254 (Minn. Ct. App. 1996), the manufacturer claimed that the Act created an unconstitutional impairment of its freedom of contract by imposing the “good cause” requirement for termination.[xxv] The Minnesota Court of Appeals, however, ruled that any impairment of the parties’ right to contract was not substantial, since the Act merely increased the notice period already agreed upon by the parties in the terms of the sales representative agreement, and permitted the manufacturer to end the agreement without cause by way of the Act’s non-renewal provisions.[xxvi] The court also noted that, even if a substantial impairment was found to exist, the court could still have upheld the law if the state demonstrates that there is a significant and legitimate public purpose for the law but declined to address the issue of whether the Act is supported by a significant and legitimate public purpose.[xxvii] A federal district judge in the District of Minnesota, however, held that the retroactive application of the Act to pre-existing contracts did violate the Contracts Clause where the pre-existing contract was for an indefinite term, because the contract could not be renewed by mere continuation of a prior contractual relationship.[xxviii]
The Act has survived challenges under other provisions of the Constitution as well. In RIO/Bill Blass v. Bredeson Associates, Inc., No. C6-97-1386, 1998 Minn. App. LEXIS 82 (Minn. Ct. App. Jan. 27, 1998), the Minnesota Court of Appeals held that the Act also does not violate the Commerce Clause.[xxix] This conclusion was reiterated in Synergy Marketing, Inc. v. Home Products International, Civ. No. 00-796, 2001 WL 1628691, at *4–5 (D. Minn. Sept. 6, 2001). (holding that the the Act, “does not necessarily exert extraterritorial reach and does not unnecessarily burden interstate commerce in violation of the Commerce Clause.”[xxx]
The protections of the MTSRA are powerful. Rep firms, manufacturers, and their counsel should be aware of its application and purpose when drafting and terminating sales rep agreements. Denial is not a defense.
V. John Ella is a shareholder at Trepanier MacGillis Battina P.A. He has represented both sales rep firms and manufacturers in litigation, arbitration, and negotiation regarding the MTSRA.
[i] Consumer Fraud and Deceptive Trade Practice Regulation in Minnesota, 2nd ed., © 2009 Minnesota CLE, at p. 10-39.
[ii] When a sales rep takes on a new manufacturer, it invests significant time on the front end to build up capabilities without initially earning a financial return. It often requires many months or even years to convince a major retailer to approve a new manufacturer or category product line. Sales reps typically work nine to twelve months out with the retailer on displays, planograms, and seasonal orders. Sales reps view the Act as allowing them to recoup enough from their investment to allow them time to land another account to build up.
[iii] Tri-State Bobcat, Inc. v. FINN Corp., 338 F.Supp.3d 971 (D. Minn. 2018)
[iv] Cooperman v. R.G. Barry Corp., No. 4-91-633, 1992 WL 699500, at *8 (D. Minn. Jan. 10, 1992)
[v] Minn. Stat. § 325E.37, subd. 1(d).
[vi] Minn. Stat. § 325E.37, subd. 1(c).
[vii] Minn. Stat. § 325E.37, subd. 1(d).
[viii] Dachtera v. Whitehouse, 609 N.W.2d 248 (Minn. Ct. App. 2000)
[ix] Minn. Stat. § 325E.37, subd. 1(f) (2017)
[x] Minn. Stat. § 325E.37, subd. 2(a)
[xi] Minn. Stat. § 325E.37, subd. 2(b).
[xii] Minn. Stat. § 325E.37, subd. 3
[xiii] Minn. Stat. § 325E.37, subd. 3
[xiv] The best reading of the statute, and the best evidence, suggests that damages should be calculated from the actual sales during the 180-day period following improper termination. Sometimes, however, if a dispute is resolved before the 180 period is over, the parties may agree to look at historic commissions for the 180 days prior to termination. E.g. Synergy Marketing, Inc. v. Home Products, International, No 00-796, 2001 WL 1628691 (D. Minn. 2001), at n. 13. If sales for the products in question have a seasonal fluctuation, however, waiting for actual sales data may be necessary.
[xv] E.g. Rowlette & Associates v Calphalon Corporation, No. C8-99-1667, 2000 WL 385502 (Minn. Ct. App. 2000). A sales rep that is not based in Minnesota and whose territory does not include Minnesota is not protected by the Act even if the agreement has a Minnesota choice of law provision. N. Coast Tech. Sales, Inc. v. Pentair Tech. Prod., Inc., 12-CV-1272 PJS/LIB, 2013 WL 785941, at *2 (D. Minn. Mar. 4, 2013)
[xvi] Minn. Stat. § 325E.37, subd. 7.
[xvii] The effective date is found in the Session Law, 2014 Minn. Sess. Law Serv. Ch. 165 (S.F. 2108).
[xviii] Minn. Stat. § 325E.37, Subd. 5. Arbitration is the sole remedy for a manufacturer who alleges a violation of the Act, but arbitration is optional for the rep unless the sales rep agreement itself contains an arbitration provision. In that case arbitration is mandatory. A.J. Lights, LLC v. Synergy Design Group, Inc., 690 N.W.2d 567 (Minn. Ct. App. 2005).
[xix] In Apex Technology, Inc. v. Leviton Manufacturing, Inc., No. 17-2019 SRN/HB, 2017 WL 2731312 (D. Minn. 2017), the sales rep successfully moved for and obtained a temporary injunction pursuant to the MTSRA enjoining the manufacturer from terminating a sales rep agreement.
[xx] At least one court has held that Section 181.145 only applies to commissions actually earned through the last day of the relationship, not to damages for the 180-day period following improper termination. Synergy Marketing, Inc. v. Home Products, International at *7. Often in these situations, however, there is also dispute regarding commissions actually earned as of the date of termination, especially if there is a lag time in payment.
[xxi] Wingert at 744.
[xxii] See Rodney L. Cooperman Manufacturer’s Representatives, Inc. v. R.G. Barry Corp., Civ. No. 4-91-633, 1992 U.S. Dist. LEXIS 12411, at *24–25 (D. Minn. Jan. 10, 1992) for a discussion of constructive termination.
[xxiii] In Q Holding Company v. Repco, Inc., No. 5:17-CV-445, 2017 WL 2226730 (N. D. Ohio 2017), the manufacturer sued the sales rep in Ohio for fraudulent inducement and declaratory judgment regarding a non-compete provision of the sales rep agreement which contained an Ohio choice of law and choice of forum provision. The rep argued that MTRSA blocked the claim in the Northern District of Ohio but the court there disagreed and declined to dismiss the action.
[xxiv] U.S. Const. art. 1, § 10; Minn. Const. art. I, § 11.
[xxv] Midwest Sports Marketing at 264.
[xxvi] Id. at 265.
[xxviii] Angostura Int’l, Ltd. v. Melemed, 25 F. Supp. 2d 1008, 1010–11 (D. Minn. 1998).
[xxx] Id. at *4.