Some manufacturers will initially consider a sales rep’s commission claim with sympathy, others with reasonableness, and perhaps most with nervous skepticism. Then there is The McGraw Hill Companies, Inc. (now known as McGraw Hill Financial, Inc.), a leading publisher of elementary school textbooks.
McGraw’s former educational division emptied the litigation arsenal in response to a claim brought by longtime independent sales rep, Shawn Kelly & Associates, for unpaid commissions (filed by the author). It took the rep’s gritty determination to stand up for himself against a better funded, give-no-quarter defendant, for whom Kelly had netted millions in sales, to achieve vindication at the end of the litigation road.
Or as the presiding judge who ultimately awarded Kelly commissions, interest and attorneys’ fees more precisely noted, after two years of battle McGraw “has come to the end of its road (or roads), and each terminates in a dead end.”
The Facts
Prior to 2008, Kelly proved quite effective in promoting the sale of McGraw’s “Everyday Mathematics” series to elementary schools in California. Once the textbooks were purchased, these school districts would continually re-order from McGraw the highly profitable supporting materials, like workbooks and math games.
Before signing Kelly to its most recent 2008Sales Rep Agreement, McGraw negotiated with him about the commissions to be paid on this residual business. Kelly offered to forego the commissions on the re-orders in exchange for a 15% commission on new sales. McGraw’s counter-offer, which was accepted by Kelly, called for payment of 8% on the first $4 million in California sales, and 12.5% on “all sales over $4M (retroactive to dollar one).”
No distinction was made in McGraw’s counter between new and residual business, and when the new, two-year agreement was signed, it drew no such distinction either. Certain other exclusions to commissions were listed, but residual business was not among them.
Kelly then did his job, and even McGraw was forced to admit he did it well. Sales easily exceeded the $4 million plateau in Everyday Math products, entitling Kelly to a 12.5% commission on every sales dollar.
Up until 2009, Kelly was always paid commissions on re-orders. Then, without warning, McGraw changed its approach and stopped commissioning Kelly on the residual business. Although almost $1.4 million in re-orders to California schools was achieved in 2009, McGraw paid zero in commissions. To top this off, despite the impressive sales Kelly achieved, and in a tough economy to boot, McGraw chose not to renew his contract.
Kelly also asserted a separate claim based on McGraw’s agreement in the parties’ previous rep contract to reimburse Kelly for $50,000 in expenses he incurred at its express direction. Only about $20,000 of these expenses was reimbursed, despite Kelly’s repeated demands, leaving $30,000 in dispute.
Kelly’s pre-suit negotiations with McGraw went nowhere, and he was forced to initiate litigation. Filing suit in Chicago, where McGraw was based at the time the contract was signed, Kelly sought to recover his unpaid commissions and the unreimbursed expenses. Among his other theories was to recover as the “procuring cause” of McGraw’s reorder sales beyond 2009.
The Court’s Rulings
1) The Procuring Cause Doctrine
As an initial matter, McGraw moved to dismiss the procuring cause theory, the judicial doctrine recognizing in many states a sales rep’s right to receive post-termination commissions on sales procured before termination, unless the rep contract provides otherwise. The federal court curiously granted the motion, finding the language in the parties’ Sales Representative Agreement that read “[Kelly] will be considered to have made a sale of a Product, if [McGraw] ships directly and issues a bill for the Product, during the term of this Agreement” foreclosed such a recovery.
Choosing to narrowly interpret the procuring cause doctrine, the court determined that Kelly’s post-termination claims were proscribed by the “during the term of this Agreement” contract language, and dismissed his claims for commissions on the continuing sales he procured. McGraw’s early success wouldn’t last, however.
Following extensive discovery practice, both parties filed summary judgment motions, urging the court that the facts were sufficiently undisputed to allow the case to be resolved without need for a trial. The court agreed, and plunged into the motions.
2) The Unpaid Commissions
The court found this same contract language, requiring McGraw to pay commissions on the defined products whenever it “ships directly and issues a bill for the Product during the term of the Agreement,” unambiguously entitled Kelly to receive commissions on the 2009 re-orders.
The court noted the contract excluded commissions for other sales, namely to international schools and to designated house accounts (neither of which applied here), and remarked that “commissions on re-orders are conspicuously absent from those exclusions.”
Interpreting the contract so as to require commissions on re-orders was further supported by Kelly’s pre-contract offer to give these up in exchange for a 15% across the board commission rate. The court continued: “It runs totally counter to common sense to say, as McGraw does, that a written counterproposal that knocked down Kelly’s requested commission rate by over 15% (12.5% rather than 15%) up to as much as 45% (8% rather than 15%) simply ‘forgot’ to include any mention of a purported oral understanding that the much lower commission rates were coupled with the exclusion of re-orders from even a nickel’s worth of commissions.”
“Hence,” the court concluded, “the plain meaning of the Agreement must stand – Kelly is entitled to commissions on re-orders.” Continuing its liberal use of hyphens, the court then asked and answered its own question: “What does – or can – McGraw offer up to counter that inexorable conclusion? It urges this Court to reform – to rewrite – the parties’ unambiguous written contract to reflect their purported intention that Kelly was not to receive commission on 2009 re-orders.” In other words, McGraw did not dispute that withholding the commissions violated its own contract, but asked the court to amend its contract to line up better with its defense arguments.
As might be expected, the standard to “reform” a contract is quite high, and McGraw fell “woefully short of meeting that standard.” Essentially, either a mutual mistake or a mistake by one party and fraud by the other must be shown. McGraw made no argument of fraud, and rather than offer evidence that both parties agreed no commissions were due on re-orders, all it attempted was showing “a unilateral mistake on McGraw’s part. And it has long since been established under Illinois law that a unilateral mistake is not grounds for the reformation of a contract.”
Granting Kelly’s summary judgment motion while denying McGraw’s, the court awarded nearly $175,000 in commissions on re-orders.
3) The Unreimbursed Expenses and Prejudgment Interest
The court separately noted how McGraw ultimately paid the requested $30,000 in reimbursements “– without interest and nearly two years after Kelly filed this action to recover that sum among other things.” Even if the original failure to pay was a mistake, as McGraw contended, its failure to “wire the remaining $30,000 into Kelly’s account (and without interest at that) until long after it had to know about the error” could not be excused.
“Once again,” the court wrote, “the most favorable label that would appear to be attached to McGraw’s conduct is that it was shabby indeed.” Accordingly, the court ordered McGraw to pay interest on both the reimbursement expenses and the re-orders, adding over $33,000 to Kelly’s award.
4) Attorneys’ Fees
By succeeding in obtaining the commission award, Kelly automatically became eligible under the Illinois Sales Representative Act to recover his attorneys’ fees from McGraw. In contrast to Kelly, who was “meticulous in identifying the fees applicable to those unpaid commissions in this multicount, multiclaim case,” McGraw “has put forth a series of untenable arguments reminiscent of the Russian defense of Stalingrad in World War II, reluctantly retreating one figurative street at a time as its successive arguments have been exposed as meritless.”
McGraw’s initial attempt “to slice and dice the individual [billing] entries to generate a minimalist figure does it no credit.” It subsequent efforts “to wield a meat cleaver to hack away at Kelly’s claim are even more troubling, for it proffers arguments that do serious damage to its overall credibility.” The court awarded Kelly the full amount of fees sought, and tacked on the requested expenses, boosting Kelly’s recovery by another $230,000. At the same time, the court rejected the “arbitrariness” of McGraw’s alternative approach as “unsupportable in any reasonable and rational terms.”
Takeaway
McGraw’s failure to honor its contract with a longtime, highly successful independent sales representative proved indefensible in the end, and the efforts of McGraw’s legal team to devise rationalizations for the conduct bordered on vindictive. As a result, McGraw faced unusually scathing criticism from the seasoned federal judge, who also awarded the rep all legal fees sought in compensation for his recovery efforts. Equally hard-hitting court decisions may well await other principals who withhold commissions, a sales rep’s lifeblood, for equally petty or arbitrary reasons.
