Do you really want to keep paying commissions to the salesperson you fired?

Seyfarth SummaryBaylor Miraca Genetics Laboratories, LLC (“BMGL”) is engaged in genetic testing. BMGL sells its tests to “channel partners,” who in return order test samples that doctors order. Brandon Berthuis became Vice President of Sales and Marketing at BMGL in early 2015. The two-page employment agreement drafted by BMGL Berthuis provided a base salary and commission payments. The text of the commission in the business agreement simply reads “[y]Our commission will be 3.5% of your net sales”—nothing more and you fail to define “net sales” or place any other condition on your commission payment obligations.

In 2015, Perthuis entered into a five-year purchase contract with BMGL’s most prominent clients. BMGL subsequently paid Perthuis for all sales that resulted from the minimum purchase contract. After the client met its minimum purchase requirements under the contract, BMGL directed Perthuis to negotiate a contract modification that would significantly increase the client’s minimum purchase requirements. In January 2017, Perthuis successfully negotiated a contract modification, making it the largest such contract in BMGL history. However, on January 23, 2017, one day before the contract modification was to be implemented, BMGL launched Pertheus.

BMGL refused to pay Perthius commissions on any sales completed after it was terminated, including sales that flowed from the amended contract. In fact, BMGL has revised its entire commission and compensation plan for its junior sales team, which explicitly states that commission fees “will be paid to employees only if they are hired at the end of the commission period.” Perthuis sued BMGL for breach of contract, demanding payment of unpaid commissions resulting from contract modification.

At the trial, the court instructed the jury on the “principle of reason to purchase.” The principle of pandering cause, articulated by the Texas Supreme Court in Goodwin vs Gunther, is a hypothetical rule that applies “only when a valid commission payment agreement does not address questions such as how the commission is realized or whether the right to commission extends to closed sales after the brokerage relationship ends.” 109 Tex .56, 58, 185 SW 295 (1916), on reh’g, 109 Tex. 56, 195 SW 848 (1917). The function of the reason to buy principle is to give credit to the seller or agent for a commission-producing sale produced through the efforts of the seller. Under this principle, the seller’s entitlement to commission lies in obtaining the sale, and not on actual participation in the execution of the sales or the continuation of the business through the eventual completion of the sale.

The jury found that Perthuis was in fact the reason behind at least some of the BMGL sales flows from the contract modification. However, on appeal, the judgment of the lower court based on the jury verdict was overturned based on the appellate court’s conclusion that the reason for purchase principle does not apply in this case and that the Berthus Employment Agreement unequivocally entitles it to sales commissions only. obtained during his service life.

The Texas Supreme Court said wrong. in Perthius v. Baylor Miraca Genetics Laboratories, LLC645 SW3d 228 (tex. 2022), the Court held that because the employment agreement between BMGL and Perthius was silent as to any exceptions to the duty to pay sales commissions purchased by Perthius, the principle of reason for purchase was applied and that “at will” declaration in an employment contract Pertheus did not replace the principle of reason to buy.

What is the take away from here? The means to thwart the application of the principle of reason to buy are simple. Employment agreements with employees who receive any part of their compensation through commission payments must be express regarding the payment of commission after resignation or termination. Had BMGL simply included conditional commission payments for continuing employment, as the court explained, the hypothetical reason for purchase principle would not have applied. It is too late to make this change after termination. Therefore, employers should consider reviewing the agreements they currently have with authorized employees based on the recent decision of the Texas Supreme Court now.

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