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The Illinois Sales Representative Act – a Powerful Collection Tool for Sales Representatives, Who Have Been Short-Changed on Commissions

By Jeffrey C. Blumenthal. © All Rights Reserved.

A)  Reasons for Legislation Protecting Sale Representatives’ Commissions

          The success of a manufacturing or distribution business is dependent upon a productive sales force. Many businesses outsource some or all of their sales efforts to independent contractors. “Independent” sales representatives often invest their time and money promoting and selling the product lines they represent. Where payment for those services is solely by commission, the sales representative may have a personal stake in actual product sales that can mirror that of the manufacturing or distribution company’s owners. 

          Because sales representatives frequently make up-front and continuing investments of their energy and resources in developing the product lines offered for sale, they are vulnerable to disreputable principals who, depending on the parties’ contract, may be able to terminate the relationship just when sales start to take off. Accordingly, over 30 states have enacted legislation regulating the payment of commissions due sales representatives. Typically these Sale Representative Commission Acts establish deadlines for the payment of earned commissions and allow for the imposition of substantial penalties in the event that commissions are not paid when due. These penalties often include allowing for punitive damages and the payment of the attorneys’ fees and the costs of suit.

B)   The Illinois Sales Representative Act Provides a Potent Statutory Mechanism for the Collection of Earned, but Unpaid Commissions

          The Illinois Sales Representative Act (“ISRA” or the “Act”, 820 ILCS 120.01 et seq.), which became effective in 1985, is intended to protect the right of terminated independent sales representatives to receive timely payment of their commissions. The Act, has been held to “clearly express [] a ‘fundamental policy of the state’” (Reinherz v. Sun Microstamping, 2000 U.S. Dist. Lexis 17831 (N.D. Ill. 2000)); and is notable for providing an effective collection remedy in a simple statutory framework.

          ISRA is intended to apply to sales representative agreements that satisfy the “minimum contacts” test for jurisdiction in Illinois. Circuit Sys. v. Mescalero Sales, 925 F. Supp.546 (N.D. Ill. 1996). This means that the Act has a broad reach. For example, in Mescalero, supra, the Court held that the Act applied to commissions due an Arizona company for sales made outside of Illinois where the principal was an Illinois corporation and the contract between the parties provided that Illinois applied. Moreover, under Section 2 of ISRA, the protections afforded to sales representatives cannot be eliminated by contract (820 ILCS 120/2). Accordingly, in Maher & Assocs. v. Quality Cabinets, 267 Ill. App. 3d 69, 76 (2^nd Dist. 1994) appeal denied 159 Ill. 2d 569 (1985), the appellate court affirmed the trial court’s ruling that a forum selection clause in a sales representative’s contract requiring all legal actions to be brought in Texas was void as against Illinois public policy. As set forth below, ISRA has three operative sections, which have been fleshed out by case-law.

C)  Section 1 Defines the Terms Employed in the Statute

          Section 1 of the Act (820 ILCS 120/1) provides definitions in four subparagraphs. Subparagraph 1 defines “commission” as the compensation due a sales representative from his principal, “expressed as a percentage of the dollar amount of orders or sales or… the dollar amount of profits.”

Subparagraph 2 provides the means for determining when a commission is due. Under subparagraph 2, if the parties’ contract provides when the commission is due, the contract controls. However, if the express contract does not provide when a commission is due, the parties’ past practice controls. In the event that neither the contract nor the parties’ past practice can be used to ascertain when the commission is due, then “the custom and usage prevalent in this State for the parties’ particular industry” controls when the commission is due.

          Subparagraph 3 defines the “principal” who is obligated to pay the commission.  Case law has interpreted the term “principal” to apply only to “purveyors of tangible goods, not services”. Johnson v. Safeguard Construction Co., 2013 Ill. App. Lexis 922*16 (1^st Dist. 2013) appeal denied 2014 Ill LEXIS 544 (2014) citing English v. Northwest Envirocon, 278 Ill. App. 3d 406, 415 (1996) appeal denied 168 Ill. 2d 587 (1996).  Accordingly, neither an insurance company nor a telephone carrier were “principals” to whom the Act applied, because they sold services, rather than a tangible item, Kenebrew v. Connecticut Gen. Life Ins. Co., 882 F .Supp. 749 (N.D. Ill. 1995);  Wujec v. AT&T Corp., 2004 U.S. Dist. Lexis 797*4 (N.D. Ill. 2004). The Act has been held to apply to certain mixed product sales where the sale of services is incidental to the sale of the tangible product. Johnson, supra[1]. Conversely, the Act does not apply where the sale of a tangible product is incidental to the sale of services. Johnson, supra[2].

          Subparagraph 4 defines those “sales representatives” who are covered by the Act and those who are not.  Under subparagraph 4, the Act applies to a sales representative, “who contracts with a principal to solicit orders and who is compensated, in whole or in part, by commission.” The Act does not apply to a sales person “who places orders or purchases for his own account” and then resells the product to third parties or to persons who are the principal’s employees under the Illinois Wage Payment and Collection Act (820 ILCS 115/1 et. seq.). In Darovec Mktg. Group, Inc. v. Bio-Genics, Inc., 42 F. Supp. 2d 810, 815 (N.D. Ill 1999), the Court held the Act did not apply to a party that both solicited orders for a principal for a commission and also purchased for its own account for resale to third parties.

D)  Section 2 Provides When Commissions that are Due Are to be Paid

          Section 2 of the Act provides that commissions due a terminated sales representative are to be paid within 13 days of the date that the sales representative’s contract is terminated or, if the commission(s) becomes due after the sales representative’s contract is terminated, payment is to be made within 13 days of the date when the commission(s) became due. Section 2 also provides that a sales representative’s contract with the principal cannot waive any of the provisions of the Act.

E)   Section 3 Provides for the Recovery of Exemplary Damages, Attorneys’ Fees and Costs

          Section 3 of the Act provides for the imposition of punitive damages against principals who fail to make timely payment of commission as well as providing for an award of attorneys’ fees and costs. Accordingly, where a principal has failed to make timely payment of commissions, the reasonable attorneys’ fees and costs of the sales representative in pursuing the action are to be charged to the principal. Staebell v. L’amour Hoisery, Inc., 2002 U.S. Dist. LEXIS 11030*6 (N.D. Ill. 2002). However, notwithstanding that Section 3 uses mandatory language that a principal who fails to make timely payment of a sales representative’s commissions “shall be” subject to exemplary damages, the courts have grafted on additional requirements for the imposition of such damages. Staebell, supra at *4. The Courts have held that a sales representative has to show that the principal’s failure to timely pay commissions was “willful, wanton or the result of a ‘vexations refusal to pay’”, before exemplary damages will be awarded. Zavell & Associates, Inc. v. CCA Industries, Inc. 257 Ill. App. 3d 319, 322 (1^st Dist.1993) Staebell, supra at *6; Accord: Conrad v. Vacuum Instrument Corp. 2004 U.S. Dist. Lexis 27161*8 (N.D. Ill. 2004).

          In Installco, Inc. v. Whiting Corp., 336 Ill. App.3d 776,784 (1^st Dist. 2002) appeal denied 203 Ill. 2d 548(2003) the Court held that “exemplary damages should not be awarded absent a finding of ‘culpability that exceeds bad faith.’” Citing Maher & Associates, Inc. v. Quality Cabinets, 267 Ill. App. 3d 69, 80 (1994). In Installco, supra, the Court also cited Maher, 267 Ill. App. 3d at 81 for the proposition that for punitive damages to be awarded, “the defendant’s behavior in withholding the commissions beyond the statutory period [must be] ‘outrageous and the moral equivalent of criminal conduct[3].”

          While there are no reported cases where an award of punitive damages under the Illinois Sales Representative Act has been affirmed, the very possibility of such an award may have an effect on how a manufacturing or distribution business positions itself in litigation with a disgruntled, former sales representative. Possible exposure to punitive damages may cause principals to take a more measured response to commission claims and act as an inducement for settlement. Similarly, the fact that Courts have awarded attorneys’ fees and costs to sales representatives, who have prevailed under the ISRA, may also provide an inducement for principals to seek prompt settlement of commission claims rather than run the risk of paying the terminated sale’s representative’s attorneys and costs, as well as their own.

CONCLUSION

          The Illinois Sales Representative Act is a simple straight-forward statutory scheme that provides a ready to use mechanism for sales representatives to collect delinquent sales commissions. The fact that the Act provides for attorneys’ fees and costs to be awarded prevailing sales representatives should make the decision to pursue a claim easier, as the sales representative with a good claim should be able to recover those fees and costs from his principal, as well as all of the commissions due. The Courts have grafted strict limitations on the ability to obtain punitive damages. These limitations have been imposed, despite the fact that Section 3 of the Act uses mandatory language that a principal who fails to make timely payment of commissions “shall be” subject to punitive damages. However, the very possibility that punitive damages could be awarded may lead manufacturing and distributor principals to take a more conciliatory approach to litigation with their terminated sales representatives than would otherwise be the case. While the likelihood that a Court may award punitive damages is remote, the existence of the sanction is still a factor that the principal must consider, when litigation is threatened or filed.

The Illinois Accountant-Client Privilege and Suggested Responses for a CPA whose Documents or Testimony are Subpoenaed

By Jeffrey C. Blumenthal, Esq. © All rights reserved.

A)  Illinois Law on the Accountant-Client Privilege

          The statutory privilege protecting communications between certified public accountants and their clients from disclosure has been in existence since 1943.[1] However, there are only 15 reported decisions discussing the privilege[2]. A communication or document protected from disclosure by the statutory accountant-client privilege generally has these three attributes: (1) the communication or document is confidential in nature; (2) both the accountant and client have not disclosed the communication or document to a third party; and, (3) the damage that could result to the accountant-client relationship from disclosure of the communication or document must be deemed greater than the benefit to the disposition of the litigation that would result from the disclosure.

          The leading case is In re October 1985 Grand Jury No. 746, 124 Ill. 2d. 456, 530 N.E. 2d 453 (1988), the sole Illinois Supreme Court case to discuss the statutory accountant-client privilege. The October 1985 Grand Jury case relied on the four-prong test articulated by Professor Wigmore in his Treatise, Wigmore on Evidence for gauging whether a privilege should exist to determine whether the accountant-client privilege applied. Accordingly, the Court reasoned at 124 Ill. 2d at 457 that the following four elements had to exist for an accountant-client document or communication to be privileged pursuant to the  accountant-client privilege contained in Section 27 of the Public Accounting Act[3] (emphasis in original):

            “(1) The communications must originate in confidence that they 

                  will not be disclosed.

             (2) The element of confidentiality must be essential to the full

                  and satisfactory maintenance of the relation between the parties.

             (3) The relation must be one which in the opinion of the

                  Community ought to be sedulously fostered.

             (4)  The injury that would inure to the relation by the disclosure

                   of the communication must be greater than the benefit

                   thereby gained for the correct disposition of the litigation.”

          In October 1985 Grand Jury No. 746, supra, the Illinois Attorney General’s office sought disclosure of certain personal and company tax returns, which the outside accountant for the individuals and company did not produce. The accountant had also invoked the privilege when being examined before the grand jury. The court ultimately held that the tax documents and information sought were not privileged because they had been prepared with the understanding that, within the accountant’s discretion, client documents and information could be disclosed to third parties.  As the Supreme Court reasoned at 124 Ill. 2d 457: “A tax client provides information to his accountant with the understanding that there may be, at the accountant’s discretion and judgment, a disclosure to a third party, the State, or other parties, e.g., federal and other taxing authorities.” Therefore, tax documents, such as personal and business tax returns were not confidential and thus, not subject to the privilege.[4]

          Brunton v. Krueger, 2014 Ill. App. (4th) 130421, 2014 Ill. App. LEXIS 200 (4th Dist. 3/27/14) is the most recently reported Illinois appellate decision on the statutory accountant privilege. The Brunton case not only applies and expands upon the basic reasoning of In re October 1985 Grand Jury, but also correctly rejects limitations placed on the statutory privilege by federal courts. If the Brunton Court’s reasoning is accepted by the Illinois Supreme Court and/or other appellate districts, as it should be, the scope of the statutory accountant privilege will be fundamentally enlarged.

          The ultimate issue in Brunton was whether documents relating to estate planning services that an accounting firm rendered to the decedent parents of the litigants were privileged in the context of a will challenge. In reaching its conclusion that the documents sought to be discovered were not privileged the Court relied heavily on In re October 1985 Grand Jury No. 746, supra.

          The Court not only applied the four prong test set forth in October 1985 Grand Jury No. 746, supra, but also similar to that case, the Court analogized to the attorney-client privilege in determining the contours of the statutory account privilege.[5] Accordingly, the Brunton Court concluded, that similar to the attorney-client privilege, there was a testamentary exception to the accountant-client privilege. In so ruling, the Brunton Court referenced the fourth element in the test to determine whether a privilege applied, and held that the subject estate planning documents were not privileged because the benefit to be gained by deeming the documents privileged was outweighed by the damage done to the truth seeking process. The Court reasoned at ¶46 that the executor and the heirs in a will contest are not adverse to the decedent and that the decedent would want the validity of the will determined in the fullest light of the facts. Notwithstanding the ultimate holding, the Court recognized at ¶33 that, under certain circumstances, the “privilege can apply to information imparted to an accountant in estate planning activities.”

          The primary significance of the Brunton case is that the Court rejected the line of federal cases, beginning with Dorfman v. Rombs, 218 F. Supp. 905, 907 (N.D. Ill. 1963), that have held that the accountant privilege set forth in Section 27 of the Public Accounting Act belongs/inures to the accountant and not the client and that only accountants can claim the privilege. See: Stopka v. Am. Family Mut. Ins. Co., 816 F. Supp. 2d 516, 525 (N.D. Ill. 2011); In re American Reserve Corp., 1991 U.S. Dist. LEXIS 1639*5 (N.D. Ill. 1991); Western Employers Ins. Co. v. Merit Ins. Co.,  492 F. Supp., 53, 54 (N.D. Ill. 1979); Baylor v. Madling Dugan Drug Co., 57 FRD 509, 510, fn.2 (N.D. Ill. 1972); See also: United States v. Balistrieri, 403 F. 2d 472, 481 (1968) vacated on other grounds, sub nom Balistrieri v. United States, 395 U.S. 710 (1969). The Dorfman Court held, at 218 F. Supp. 907, that the statutory privilege “spoke for itself” and, since it only mentioned the CPA and not the underlying client, the privilege had to belong solely to the accountant and the client could not claim it.  Citing to the Grand Jury case, the Brunton Court correctly recognized at ¶42 that: “Section 27 does not exist for the benefit of CPAs; it exists for the benefit of the clients, to encourage them to make full disclosures to their CPAs.”[6] Accordingly in ¶43, the Court “h[e]ld that the client, not the CPA, is the holder of the privilege that section 27 creates.”

          The holding in Brunton is a “game changer” because it not only means that the underlying client can raise the accountant privilege, but also should mean that, similar to the attorney-client privilege, documents and information will remain privileged in the client’s hands as well as the accountants. In the referenced federal cases the Courts had rejected privilege claims made under Section 27 of the Public Accounting Act either because the claims had been made by the underlying client rather than the accountant (Stopka v. Am. Family Mut. Ins. Co., 816 F. Supp. at 525 (N.D. Ill. 2011); In re American Reserve Corp., 1991 U.S. Dist. LEXIS 1639*5 (N.D. Ill. 1991);Baylor v. Madling Dugan Drug Co., 57 FRD at 510, fn.2 (N.D. Ill. 1972) Dorfman v. Rombs, 218 F. Supp. 905, 907 (N.D. Ill. 1963)); or the documents were in the client’s hands and the privilege did not apply (Western Employers Ins. Co. v. Merit Ins. Co.,  492 F. Supp., 53, 54 (N.D. Ill. 1979)). Under Brunton, a number of the above federal decisions may have had a different outcome. If followed, as the other appellate districts and the Illinois Supreme Court should, Brunton’s holding should result in a significant expansion of the privilege and how it is applied.

          In Brunton, the Court also rejected the limited interpretation given to the statutory privilege in PepsiCo, Inc. v Baird, Kurtz  & Dobson, LLP, 305 F. 3d 813, 816 (8th Cir. 2002), where the Eighth Circuit held that the privilege only applied to information obtained and documents related to audits of financial statements. In rejecting this interpretation, the Brunton Court stated in ¶29 that “often, if not most of the time, certified financial statements are intended to be read by third parties, most notably investors and regulators. It would be illogical to require CPAs to maintain the confidentiality of information they obtained in their audit of a financial statement if such information was destined to be used in their publicly disseminated opinion regarding the financial statement.”

          The Brunton Court also ruled that privileged accounting documents remain so in the hands of the CPA’s support staff, just as documents protected by the attorney-client privilege remain protected in the hands of a law firm’s support staff. The court recognized that the privilege has to be extended to an accounting firm’s support staff in order for the firm to properly function.

            As an alternative basis for production of the subject documents, the Brunton held that any privilege had been waived by the Respondents in the case. The Respondents, were the decedent’s personal representative and other heirs, and they had filed briefs requesting an Order requiring disclosure of the accounting firm’s estate planning documents to the Petitioner who had sought those documents. A number of earlier decisions involving the accountant privilege contained in Section 27 of the Public Accounting Act were also predicated on waiver. In Re Grabill Corp., 109 BR 329 (N.D. Ill. 1989); See also: Zepter v. Dragisic, 237 FRD 185 (N.D. Ill. 2006).

            B) Suggested Responses for an Accountant Whose Documents or

                 Testimony is Subpoenaed or Summoned

          Section 1430.3010 of the Rules applicable to Accountant Disciplinary Proceedings under the Illinois Administrative Code (Title 68, Chapter VII, Subchapter b, Part 1430, Section 3010) adopts nearly verbatim Ethical Rule 301 on the confidentiality of client information promulgated by American Institute of Certified Professional Accountants. Section 1430.3010 (a) provides in pertinent part that “A registered public accountant shall not disclose any confidential client information without the specific consent of the client.”  Section 1430.3010 (b) further provides that: “This Section shall not be construed… (2) to affect in any way his/her obligation to comply with a validly issued and enforceable subpoena or summons or to prohibit a registered accountant’s compliance with applicable laws and government regulations;”

      Because client confidentiality has the force of both statutory and disciplinary law, accountants who fail to maintain client confidentiality can be subject to both malpractice and/or disciplinary actions. Accordingly, every accountant and accounting firm should have a protocol that is followed when client documents or communications are subpoenaed or summoned.  

          The first step in any accountant/accounting firm protocol for responding to a subpoena or summons for client documents or information should be to promptly contact the underlying client by letter advising the client of the accountant’s receipt of the subpoena or summons. In fact, a copy of the subpoena or summons the accountant receives should be an attachment to the letter. The client should be asked to advise the accountant in writing if the client has no objection to the production of the documents or information requested in the subpoena or summons.[7]

          The accountant’s letter should also advise the client that if the client objects to the accountant’s production of the requested documents or information, the client must take prompt action to quash the subpoena or summons and notify the accountant that such action will be taken. Until such time as the Brunton case’s holding that the accountant-client privilege can be raised by the client, as well as the accountant, at a minimum, the accountant’s letter should also probably provide that the accountant is prepared to raise any colorable privilege objection to the requested production, provided the client agrees in writing to reimburse the accountant for its reasonable attorneys’ fees in making that objection.

          Since currently only the Fourth Appellate District in the Brunton case has expressly held that clients may raise the accountant-client privilege contained in 225 ILCS 450/27, the law on the accountant-client privilege is unsettled. An accountant who offers to raise a colorably valid privilege objection avoids the problem of a client contending that the accountant failed to take necessary action to preserve client confidences that only the accountant could effectively raise. The issue is whether the accountant is obligated to raise the privilege for a client who objects to the production of documents or information, but has neither independently taken action to have an attorney raise the objection nor agreed to reimburse the accountant for fees incurred by the accountant’s counsel in raising the privilege or otherwise objecting to the production of documents or information. At a minimum, in the above scenario, the accountant should consult with counsel on how to appropriately respond to the subpoena or summons.

          Finally, the letter should inform the client that the accountant is legally obligated to comply with applicable laws and government regulations, including producing client documents and communications requested in validly issued and enforceable subpoenas or summons to which no objection is made and sustained. Finally, the client should be advised that if no objection is made to the production or should the Court enter an Order requiring the production of the requested information or documents, the accountant will have no alternative but to produce as sought in either the unobjected to subpoena or summons or as directed by Court Order.