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 (2nd 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 (1st 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 (1st 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 (1st 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.
[1] Johnson, supra, distinguishes Nicor Energy v. Dillon, 2004 U.S. Dist. Lexis 86 (N.D. Ill. 2004) on the basis that Nicor Energy was a mixed product case to which ISRA applied because the services provided in that case were incidental to the sale of natural gas and electricity to end users.
[2] In Johnson, supra, the Act was held inapplicable to an independent sales representative’s delinquent commissions claim which involved the dale of repair services to homeowners where some tangible products were also sold to the homeowners incidental to the repair service contracts.
[3] The determination as to whether a principal’s conduct passes the threshold for a punitive damage award is determined by the Court as there is no right to a jury trial under ISRA. Install Co, Inc., supra, 336 Ill. App. 3d at 785.