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What to Do About Contract Cancellations

When a carrier or master agent axes an independent agents contract, what routes are there to take in pursuit of that cash?

March 31, 2009

6 Min Read
What to Do About Contract Cancellations

By Cara Sievers

The bread and butter of the agent business is relationships the agent builds with customers. An agent spends the majority of his time cultivating and nurturing these relationships in hopes they return healthy recurring commissions and continued upsell opportunities.

In fact, the 2009 PHONE+Channel Compensation Survey found that partners’ paychecks rely heavily on monthly residual commissions. Half of respondents said their compensation consisted of a combination of upfront commissions, wholesale buy rates and residual commissions. But, more than 36 percent said they are primarily compensated through residual commissions.

So, what happens if those residuals suddenly disappear? There is a general feeling in the agent community that due in part to our nation’s poor economy, carriers might be trying to pad their bottom lines by kicking the little guys (i.e. channel partners) around.

“[Carriers] are cancelling agent contracts to partners not hitting commitments at record levels,” said Jeffery Ponts, executive vice president of master agent Datatel Solutions. “It is immoral and unethical to cancel an income stream to an agent that originated business for the carrier they would never have had. I can understand reducing commission levels, but cancelling revenue altogether is wrong.”

Rumors are circulating about multiple carriers suddenly invoking clauses in contracts in order to axe agents, whether for not meeting minimums, not generating enough new business, or just “underperforming” in general, as ambiguous as that may be. To add insult to injury, agents receiving such notification that their contracts have been cancelled — usually by the dreaded form letter — often find their residual commissions being cut by the carrier. In essence, commissions for customer accounts these agents had generated are taken from them.

Greg Taylor, attorney at Technology Law Group LLC, said following the termination of the agreement, agents often find themselves “on the short end of the residual commission stick” despite express language in the agreement. “In the worst cases, I am personally aware of carriers who terminated agent agreements and withheld residual commissions simply because they changed their business model; that is, the carrier lost interest in supporting the agent channel. Carriers typically own the end-user customer, not the agent. If the agents aren’t producing substantial revenue for the carrier, the carrier can cynically increase profitability merely by discontinuing its agent channel, keep the customers it derived as a result of the agents’ efforts, and refuse to pay residual commissions on the assumption most of the ex-agents will not be in a position to do anything about it.”

However, most carriers claim the termination is “for cause,” citing a reason such as failing to meet revenue thresholds or failing to adhere to the carrier’s agent conduct policies. Taylor said this approach provides cover for the carrier to retain the agent’s residuals after the termination. Sometimes the carrier has the right to terminate for cause, but many times, the carrier is to blame for the agent’s failure, he added.

“The first thing I would say to the agent community is if you’ve received a letter like this, don’t automatically assume that the carrier has a right to terminate your commissions because all too often, that’s not the case,” advised Taylor.

If an agent is terminated for his or her own shortfall and the effects on the residuals are not addressed in the contract, Taylor said the agent still has a fighting chance based on the fact that the carrier would not have that customer if it weren’t for the agent’s efforts. If the agreement does indeed dictate that an agent’s residuals will cease if targets are not met, the factors that contributed to the agent’s performance, or lack thereof, are up for scrutiny. These factors include:

  • Product – Have revenue commitments for individual products changed along with the market, i.e., are dialup thresholds the same as they were 10 years ago?

  • Rate – Does the carrier provide competitive rates or does the price point impair the agent’s ability to sell?

  • Quality of service – How does the carrier’s QoS stack up to that of other providers?

  • Support – Does the carrier provide adequate support both for agents and end users?

Technology Law Group Managing Partner Neil Ende explained that even if these stipulations are not written in the contract, carrier-agent agreements are governed by state common law, which generally includes an implied covenant of good faith and fair dealing. This covenant, along with other principles of law and equity, could be interpreted to prevent a carrier from enforcing a minimum where the agent’s inability to meet it is the result of an act or a failure to act by the carrier. Moreover, Ende urged agents to resist any demand that they agree to specific minimum sales obligations, but if they are forced to do so, they should insist the carrier be tied to fair and measurable commitments regarding price, provisioning and quality.

Ende said agents also should consider carefully whether they want to agree to arbitrate vs. litigate disputes. While arbitration generally is sold as faster and cheaper than litigation, that might or might not be the case, he said, noting there are far more substantive matters — including the right to discovery, a written decision and appeal — that are generally lost in arbitration.

One independent agent said he’s thankful for “the speediness of arbitration,” but cited privacy as one reason carriers choose arbitration. Jeff Means, owner and president of MEANS Enterprises Inc., said he was cut from a carrier in April 2007 and paid a significant confidential six-digit sum in September 2008. Thanks to non-disparagement clauses in the settlement agreement and the fact that arbitration doesn’t go on any public record books, he cannot reveal who the carrier was. In fact, Means said he was even prevented from writing a letter to the carrier’s chairman of the board. “The clause even protects the officers of this company from their own boss [for] what they did to me,” said Means.

Means added that he will not sign direct agreements with carriers anymore, but instead will go through larger master agents.

However, master agents also potentially could cancel agents for not meeting minimums. Ende explained that the aforementioned carrier obligations and the implied covenant of good faith and fair dealing would apply not only to the carrier-agent scenario, but also to carrier-master agent and master agent-subagent scenarios.

It’s also possible, depending on the contract and the circumstances, that if the master is refusing to pay the subagent, then that independent can go after the carrier. In fact, Technology Law Group recently defeated a motion filed by a major carrier seeking to prevent its client from suing the carrier directly for the wrongful acts of its distributor/agent. In that case, the court specifically rejected the claim that a carrier is immune from the wrongful conduct of its distributor. “This ruling is very important because when agents can’t get a master agent to pay them, they may have a case against the underlying carrier,” said Ende.

Ende believes that the potential liability that carriers face will encourage carriers, out of self interest, to discipline their agents to act in a more appropriate, lawful manner. In all events, the more agents fight for what is rightfully theirs, the more chance there is that carriers will straighten up and fly right.

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