Seyfarth Synopsis: We previously wrote about the procuring-cause doctrine here. As a refresher, the procuring-cause doctrine provides that a salesperson or other agent who contracts for a commission becomes entitled to payment of the commission when through his efforts he produces a buyer who is ready, able, and willing to buy that which is being sold. The procuring-cause doctrine is a rule of fairness, to ensure that an employer or principal contractually committed to pay commissions to a salesperson cannot avoid paying the commission by simply terminating the salesperson before the sale is consummated. The procuring-cause doctrine is the default rule when the contract between the parties is silent as to how commissions are earned and paid but can be supplanted by the contract's express terms.
In 2022, the Texas Supreme Court invoked the procuring-cause doctrine in Perthius v. Baylor Miraca Genetics Laboratories, LLC, 645 S.W.3d 228 (Tex. 2022), and held that because an employment agreement between a genetics testing company and its marketing executive was silent as to exceptions to the duty to pay sales commissions procured by the executive, the procuring-cause doctrine applied and the contract term identifying the executive as an "at-will" employee was insufficient to displace the doctrine post-termination. In Perthius, the commissions provision at issue simply stated that "[y]our commission will be 3.5% of your net sales," yet failed to further define "net sales," or place any other condition on the commission payment obligations. Accordingly, the company had to pay commissions to the employee despite the termination of employment.
The procuring-cause doctrine has since been revisited by the Texas First Court of Appeals (Houston) in Five Star Electric Motors, Inc. v. Patlovany, No. 01-22-00417-CV, decided in March 2024. In Patlovany, an account manager employed by a manufacturer's sale agent filed suit against his former employer after the company refused to pay him commissions for sales he made before he resigned. The commission structure between the manager and his employer, like in Perthius, specified that his compensation would be the greater of his "base salary at $160,000 or 35% of the net profit received on your accounts and project sales," and little else. The dispute arose when the principal manufacturer changed its usual method of payment of commissions for sales, which often took three months to a year to complete, to a two-payment structure with one half of the commission paid upfront and the remaining half paid on completion. The employment agreement was silent as to what effect the end of the manager's employment would have on commissions procured beforehand but when the sales proceeds had not yet been received.
At trial, the manager testified that prior to the change in payment structure, he was regularly paid his prorated salary and 35% in commissions earned for the previous month as a credit to him, irrespective of whether the sales proceeds had been received. Under the new payment arrangement, however, he no longer received the 35% credit each month for the previous month's sales. The Court noted that it was not that the manager would no longer receive the 35% commission, but that he would no longer receive the payment as promptly. The manager objected to the delayed payment and resigned after the parties could not reach a resolution, upon which time his employer ceased paying any of the unpaid commissions which it claimed had been forfeited.
The employer took the position that the parties' agreement provided for the payment of commissions based on "the net profit received" on his "accounts and project sales" and as the company had not received any net profit from the sales during the manager's employment, the manager was not entitled to the commissions. The trial court disagreed and rendered judgment for the manager, awarding him $749,906.03 for the unpaid commissions as actual damages.
The First Court of Appeals considered the manager's entitlement to the unpaid commissions as the sole dispositive issue. Citing to Perthuis, the Court restated that the procuring-cause doctrine is the default rule in sales commissions contracts and that, under the doctrine, the right to the commission vests on the procurement of the sale, not on the sales person's "actual involvement in a sale's execution or continued employment through the final consummation of the sale." The Court found that there were no express terms in the agreement to displace the procuring-cause doctrine, as there were no terms that specified that termination or resignation might affect the manager's entitlement to the commissions or otherwise limit his right to commissions. Therefore, the Court held that the manager was entitled to recover all the commissions he sought under the agreement and affirmed the trial court's judgment.
The Court noted, as did the Texas Supreme Court in Perthius, that it was easy to displace the procuring-cause doctrine should the parties so wish. It did not require "magic language," only that the parties to a commissions-bearing contract use terms that are inconsistent with the default rule, in whole or in part.
What is the take-away here? As we said in our prior blog post on this issue, the means to thwart the application of the procuring cause doctrine is simple. Employment agreements with employees receiving any part of their compensation through commission payments should be explicit with respect to the payment of commission post-resignation or termination. If the employment agreement includes a term conditioning commission payments on continued employment, the default procuring-cause doctrine does not apply. And, because it is too late to make that change post-termination, employers should consider reviewing the agreements they currently have in place with commissioned employees now if they did not do so in response to our prior blog post on this issue.
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