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Texas Supreme Court to Texas Employers: Employee Sales Commission Agreement Terms Better be Clear or Commissions Could be Owed Long After Employee Terminated

The Texas Supreme Court recently established a “default rule” which, as the dissent puts it, may “threaten the expectations of Texas at-will employers and employees who have agreed to a commission structure but, for whatever reason, failed to reduce it to writing with perfect clarity.”  Perthuis v. Baylor Miraca Genetics Lab’ys, LLC, No. 21-0036, 2022 WL 1592587, at *12 (Tex. May 20, 2022).  Based on century-old opinions concerning real estate broker commission agreements, the Perthuis majority opinion held that an at-will employee who receives a commission as part of her compensation must continue to receive commissions on sales consummated long after the employee’s termination if (1) she was the “procuring-cause” of the sales, and (2) the commission agreement between the employer and employee “is silent about any exceptions” to that default rule.  Id. at *1.  Moreover, that employee can establish she was the “procuring cause” by proving that she “set in motion a chain of events … which, without a break in their continuity, cause the buyer and seller to reach agreement on the sale as the primary and direct result of the [employee]’s efforts.”  Id. at *9 (internal quotations omitted).

The agreement at issue in Perthuis provided that the plaintiff employee was due a commission of “3.5% of [the employee’s] net sales.”  Id. at *1.  The agreement did not define “net sales” or “place any other parameters on the commission obligation.”  Id.  Prior to the employee’s termination, he had negotiated a contract amendment with one of the employer’s largest customers which substantially increased the customer’s minimum purchase requirements moving forward.  Id. at *2.  The employer subsequently refused to pay any further commissions to the employee on sales to that customer finalized after the employee’s termination, and the employee sued for breach of contract.  Id.  At trial, the jury was instructed that the employee’s “net sales” included those for which he was the “procuring cause” – resulting in a jury award of over $1 million in damages and interest.   Id.  The court of appeals reversed and rendered judgment for the employer, (1) finding that nothing “in the parties’ agreement … indicates that [the employer] agreed to compensate [the employee] for sales from customers he had ‘procured’ even after” the employee’s termination, and (2) rejecting employee’s argument that the “procuring cause standard applies in determining all sales commissions.”  Baylor Miraca Genetics Lab’ys, LLC v. Perthuis, 639 S.W.3d 108, 117 (Tex. App.—Houston [1st Dist.] 2020).  The Texas Supreme Court disagreed – holding that the “procuring-cause doctrine” provides a default rule for any “agreement to pay a commission on a sale” that does not contain terms that “are inconsistent with the default rule.”   Perthuis, 2022 WL 1592587, at *6.

So what are the terms that Texas employers should add to their sales commission contracts if they wish to avoid the procuring-cause doctrine?  The Court held there is no “magic language” required – any language that is inconsistent with the doctrine suffices.  For example, the contract could deny the payment of commissions from sales that close after termination of employment or limit commissions to a specific period following termination of employment.  Id.  As the Perthuis dissent warned, in the absence of such language, Texas employers run the risk of suits brought by at-will employees for commissions “for any sale” they “set in motion” and will be “stunned to learn that, under the default rule, the entitlement to commissions may extend years after their employment relationship ended.”  Id. at *12.