Commercial Agency Contracts in USA

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How are agency agreements regulated in the U.S.A.?

To understand the regulation of commercial agency agreements in the U.S., it is helpful to remember the interplay between federal and state statutory and common law in the U.S. legal system. Under the U.S. Constitution, all power not specifically reserved for the federal government resides with the states. Federal law has exclusive jurisdiction only over certain types of cases (e.g., those involving federal laws, controversies between states and cases involving foreign governments), and share jurisdiction with the state courts in certain other areas (e.g., cases involving parties that reside in different states). In the vast majority of cases, however, state law has exclusive jurisdiction.

Commercial agency is regulated at the state level rather than by U.S. federal law[1]. Almost two-thirds of the U.S. states have adopted specific legislation for commercial agency relationships with non-employees. Most state statutes regulating commercial agency relate to the relationship between a principal and an agent that solicits orders for the purchase of the principal’s products, mainly in wholesale rather than retail transactions (although state law often has special rules for agency relationships with respect to real estate transactions and insurance policies).
A second, overarching theme of note to understand the regulation of commercial agency agreements in the U.S. is the primary importance of the doctrine of freedom of contract under state law jurisprudence. As the doctrine’s title suggests, as a matter of policy, courts interpreting a contract generally will seek to respect its terms. Exceptions exist where public policy requires otherwise (e.g., in the consumer or investor context, in cases of adherence contracts or where unconscionable terms are found to exist). As a result, state law generally contains few mandatory, substantive terms that are superimposed on the relationship between principal and agent in an agency arrangement. State laws on agency mainly address commissioned agency, and, where in force, are primarily aimed at ensuring that the principal timely pays the agent the commissions that are owed by imposing liability on the principal for a multiple (often two to four times) of unpaid commissions, as well as for reimbursement of the agent’s attorneys’ fees and costs incurred in collecting the unpaid amount. Other states further require that agency agreements satisfy certain formalities, including that they be in writing (under the so-called “Statute of Frauds” in force in most states) and that they contain specified information (i.e., how earned commissions will be calculated). A minority of states further impose substantive requirements, such as a minimum notice period for termination, the obligation to pay commissions on certain post-term shipments or those in process at expiration or termination of the agency agreement.

[1] As Messrs. Kuhn and Sardi are licensed to practice law in the State of New York, this article provides information on agency matters with a focus on the law of the State of New York. Information as to the laws of other states is based on general research and experience with those states only.

What are the differences from other intermediaries?

Under the law of New York and the majority of states, an “agent” is a person or entity who, by agreement with another called the “principal,” represents the principal in dealings with third persons or transacts business, manages some affair or does some service for the principal. The key elements of an agency are: (i) mutual consent of the parties; (ii) the agent’s fiduciary duties, and (iii) the principal’s control over the agent. A principal may act on a disclosed, undisclosed, or partially disclosed basis in dealing with third parties.
The purpose of an agency may be broadly defined, and ultimately a principal may appoint an agent to perform any act except those which by their nature require personal performance by the principal, violate public policy or are illegal.
A defining element of the agency under New York law and the law of the majority of states is the principal’s control over the agent. Indeed, whether the principal will be bound by the agent’s acts will depend, in large part, on whether the agent had actual or apparent authority to act on behalf of the principal.
Separate from the question whether an agent’s acts bind the principal is the question whether the agent’s actions create a permanent establishment of the principal under applicable rules of taxation and/or an employer-employee relationship under applicable employment law in the agent’s jurisdiction, thereby potentially subjecting the principal to onerous state and federal tax and employment law obligations.

Two of the many factors taken into account in determining whether such a relationship could be characterized as one of employment include whether the agent (i) provides the services according to her own methods and (ii) is subject to the control of the principal (other than with respect to the results of the agent’s work). Both analyses are specific to fact and circumstances.
The main difference between an agent and a distributor is essentially one of ownership and risk. While an agent acts on behalf of the principal, who continues to own the product or service, distributors take ownership and risk (i.e., of the product) and trade on to their own risk and behalf.
Furthermore, because a distributor is typically an unaffiliated third party acting on its own account rather than on behalf of the supplier as principal, distribution agreements are subject to greater regulation under U.S. federal and state antitrust law.
Furthermore, distribution agreements often may resemble franchise arrangements, subjecting those arrangements to extensive federal and state regulation.
Besides the differences from commercial distributors, commercial agency relations must also be distinguished from franchise agreements, which is more regulated and have many implications regarding intellectual property rights.
Contrary to the U.S. state law governing commercial agency and distribution agreements[2], franchise arrangements in the U.S. are regulated at the federal and state levels. At the federal level, franchise arrangements are regulated by the U.S. Federal Trade Commission (“FTC”) under the so-called “FTC Franchise Rule”, while at the state level franchise arrangements are typically regulated by state agencies. In New York, franchise arrangements are regulated by the New York Antitrust Bureau under New York’s General Business Law[3].
Franchise law and regulation also provides, to some degree, an exception to the general freedom of contract doctrine that underlies U.S. state law on contracts, as these relationships are subject to significantly greater regulation than commercial agency and exclusive distribution arrangements.

[2] With the exceptions relating to federal antitrust law as noted in the foregoing chapters on U.S. law above.

[3] N.Y. Gen. Bus. Law §§ 360, et seq.

How to appoint an agent in the U.S.A.

Oral agreements are enforceable under the law of the majority of states, unless the Statute of Frauds (which has been adopted by most states) applies. Under the Statute of Frauds, certain agreements are only enforceable if reduced to writing. The Statute of Frauds generally applies to contracts for the sale of goods under the Uniform Commercial Code as adopted by an individual state. In many states, including New York, similar rules have been enacted to govern agreements that do not involve strictly the sale of goods. Under New York’s Statute of Frauds[4], any agreement – including commercial agency – that cannot be performed within one year’s time or completed within a lifetime must be in writing. There is no particular format that the writing must follow to be enforceable. Any kind of writing is sufficient, including notes or memoranda, as long as they are signed by the party to be charged and other elements necessary for contract formation are satisfied under general rules of contract.
Generally, U.S. state law does not impose any registration or filing requirements with respect to agency relationships. One notable exception is for agency relationships that are “franchises” or “business opportunities” under state or federal law.
New York law does not impose formalities for the creation of an agency relationship. In fact, under New York law, absent circumstances under which New York’s general Statute of Frauds rules apply as set forth in § 5-701 of the General Obligations Law, parties may be deemed to be in an agency relationship even without signing an agreement evidencing the agreement consideration or any writing which evidences their agreement. New York law does regulate the payment of sales commissions under New York labor law[5]. New York labor law defines a sales representative as an independent contractor who solicits orders in New York for the wholesale purchase of a supplier’s product or is compensated entirely or partly by commission[6]. However, New York labor law does not otherwise regulate meaningfully the actual sales representative relationship.

[4] N.Y. Gen. Oblig. Law § 5-701 (a)(1).

[5] N.Y. Lab. Law §§ 191(1)(c), 191-a, 191-b, 191-c.

[6] Id. § 191-a(d).

Applicable law to an agency contract in the U.S.A.

It is possible to choose the application of foreign law in an agency agreement, simply by a contract disposition. New York courts typically recognize foreign governing law clauses. However, the question of whether a particular New York court will enforce a choice of governing law clause is not straightforward.
The New York Court of Appeals has held that as a general matter, the parties’ manifested intentions to have an agreement governed by the law of a particular jurisdiction are honored[7]. Likewise, the Second Circuit has held that in the absence of a violation of a fundamental state policy, New York courts generally defer to the choice of law made by the parties to a contract, while also noting that New York law authorizes a court to disregard the parties’ choice when the “most significant contacts” with the matter in dispute are in another jurisdiction[8].
In any event, while the intention of the parties is a significant factor under New York law, it is not conclusive. In New York, it is required a minimum contact with the state in order to invoke New York rules on agency agreements[9].
Therefore, it is best to select a jurisdiction’s law that not only is acceptable to the parties, but that also has a substantial relationship to the parties themselves or to the performance of their obligations.
Absent any choice, the law that governs the contract would depend on the places where the services were rendered, or the products were sold. It is a matter to be addressed and solved under the conflict of laws, which is also different in every state.
We also note, that Under § 5-1401 of New York’s General Obligations Law, parties to an agreement may choose New York law to apply to their agreement if the underlying transaction involves $250,000 or more, whether or not such contract bears a reasonable relation to the state. This applies even where New York conflict of laws rules would otherwise result in the application of the law of another jurisdiction[10].

[7] See Freedman v Chem. Constr. Corp., 43 N.Y.2d 260, 265 (1977). See also: Terwilliger v. Terwilliger, 206 F.3d 240, 245 (2d Cir. 2000) and Donenfeld v Brilliant Tech. Corp., 96 A.D.3d 616, 616 (1st Dept. 2012).

[8] See Cargill v Charles Kowsky Res., Inc., 949 F.2d 51, 55 (2d Cir.1991). See also:Zuckerman v. Metro. Museum of Art, 307 F.Supp.3d 304, 324 (S.D.N.Y. 2018) and Brink's Ltd. v. South African Airways, 93 F.3d 1022, 1030–31 (2d Cir.1996).

[9] See D&R Global Selections, S.L. v. Bodega Olegario Falcon Pineiro, 29 N.Y.3d 292, 300 (2017). See also: Burger King Corp. v. Rudzewicz, 471 U.S. 462, 464 (1985).

[10] See IRBBrasil v. Resseguros, S.A. v. Inepar Investments, S.A., 20 N.Y.3d 310, 316, 958 N.Y.S.2d 689, 692 (N.Y. 2012).

Dispute resolution clauses in agency agreements in the U.S.A.

Under the law of the majority of states (including New York), parties are free to agree to resolve disputes arising from a commercial agency agreement by amicable settlement, arbitration or litigation. Although previously disfavored for antitrust cases, agreements to arbitrate are broadly enforced under the Federal Arbitration Act 9 U.S.C. § 1, et seq[11].

Under § 5-1402 of New York’s General Obligations Law with respect to venue, if parties elect New York law to govern their agreement, the transaction involves an amount of $1 million or more and the parties agree to submit to the jurisdiction of a New York court, a New York court is required to hear the related action. Although there have been cases to the contrary, New York law further provides that a New York court may not stay or dismiss such an action on the grounds of forum non conveniens[12].

[11] See Stolt–Nielsen S.A., v. Animalfeeds Int’l Corp., 559 U.S. 662, 688 (2010).

[12] N.Y. C.P.L.R. § 327(b).

How to terminate an Agency contract in the U.S.A.

State contract law does not impose any specific notice period requirements on commercial agency agreement, except for specific statutory exceptions (i.e., under the law of certain states for arrangements that are deemed to be franchise agreements, business opportunities or dealership agreements).
It is common practice in the U.S. for commercial agency agreements to provide that the agreement may be terminated by either party, at its discretion, with a certain advance notice (usually 30 days). Such provisions are generally enforceable, except to the extent that the agent has made capital investments in order to perform, at the insistence, or at least with the knowledge, of the principal, and has not been given a reasonable opportunity to recoup those investments.
If a contract term is indefinite, a party can generally terminate the contract with advance notice (30 to 60 days in most cases) that is reasonable in light of the circumstances[13]. To determine the reasonableness of such term a party should consider factors such as: (a) the nature of the business affected; (b) the relationship of the parties (exclusive relationships may require longer notice); (c) whether the supplier required or encouraged the distributor to invest capital to perform its obligations, in which case the supplier may terminate the agreement only for a material breach or after the distributor has been given a reasonable opportunity to recoup its investment; and (d) whether the agreement is deemed a franchise, business opportunity or dealership agreement.

[13] N.Y. U.C.C. § 2-309(3).

Termination indemnity for agency agreements in the U.S.A.

State law (including New York law) typically does not require a compensation payment (often referred to outside the U.S. as an “indemnity”) when a commercial agency agreement expires or is terminated in compliance with the terms of the agreement. As noted, an exception to the foregoing, certain states require that a commissioned agent be paid commissions on orders in process at the end of the relationship.

Other peculiarities

Generally, the following are the most important duties of the agent under state common law:

  • Agent must not act outside of its express and implied authority;
  • Agent must use care, competence and diligence in acting for the principal;
  • Agent must obey the principal’s instructions as long as they are legal;
  • Agent must avoid conduct which will damage the principal’s business;
  • Agent must not act for an adverse party to a transaction with the principal;
  • Agent cannot compete with the principal in the same business in which the agent acts in such capacity for the principal without the principal’s consent;
  • Agent must provide the principal with information relevant to the marketing of the principal’s products;
  • Agent must separate, account for and remit to the principal all collections for the principal’s account and other property of the principal;
  • Agent must not receive compensation from any third party in connection with transactions or actions on which the agent is acting on behalf of the principal;
  • Agent must maintain the confidentiality of, and not misuse, the principal’s confidential information.

The agent is subject to a general duty of good faith in the performance of its responsibilities and dealings carried out on behalf of the principal under an agency agreement. Under New York law, the agent owes the principal duties of loyalty, obedience and care.

The following are the most important duties of the principal under state common law:

  • Principals must promptly pay terminated agents the commissions that they are owed; in most states, failure to pay can result in penalties, including multiple-damages. Some states apply similar penalties to failures to pay commissions in a timely fashion during the term of the relationship; in contrast, a few states require that a commission be paid on transactions in the pipeline at the time of termination;
  • Under the law of some states, an agency arrangement must be in writing, and certain formalities complied with, for the agency arrangement to be binding.

Generally under state law, principal and agent alike are required to act in good faith in performing their obligations in an agency relationship, subject to the express terms agreed to in the agency agreement. Additionally, under the law of some states, the principal is required to indemnify the agent against liabilities vis-à-vis third parties arising out of the performance of the agent’s duties, to compensate the agent reasonably for its services and to reimburse the agent for the reasonable expenses it incurred in carrying such service. New York law does not provide for any mandatory obligations by the principal in favor of the agent in this regard (New York courts having constantly held an agent’s right to indemnification from a principal is based on contract)[14].

There are no specific federal or state regulations regarding commissions or stock consignments generally in commercial agency agreements. Generally, provisions regarding commissions, including the right to the same at and after contract termination or expiration, loss of commission rights and the right to inspect the principal’s books are provided for contractually.

State law generally does not contain mandatory provisions on exclusivity. Indirectly, certain rules (such as the Statute of Frauds under New York law) may apply. Otherwise, parties to a commercial agency arrangement generally may agree contractually on the terms of exclusivity.

Non-compete clauses are fairly common in commercial agency agreements. Such provisions are generally enforceable under the law of the majority of states. However, certain non-compete provisions could be subject to challenge under federal or state antitrust laws as an unreasonable restraint of trade.

State courts will often scrutinize contractual provisions that purport to restrict competition after expiration of the term of the agency agreement. Under antitrust and common law principles, such covenants must be reasonable in duration and scope to be enforceable[15].

[14] See McDermott v. State, 50 N.Y.2d 211, 216, 428 N.Y.S. 2d 643, 646 (N.Y. 1980) (citing McFall v. Compagnie Maritime Belge (Lloyd Royal), S.A., 304 N.Y. 314, 326 (N.Y. 1952)), accord. Riviello v. Waldron, 47 N.Y.2d 297, 306, 418 N.Y.S.2d 300, 305 (N.Y. 1979), Rock v. Reed-Prentice Div. of Package Mach. Co., 39 N.Y.2d 34, 39, 382 N.Y.S.2d 720, 722 (N.Y. 1976).

[15] See Worldhomecenter.Com, Inc., v. PLC Lighting, Inc., 851 F. Supp. 2d 494, 501-02 (S.D.N.Y. 2011).

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