A Sales Agency Agreement (SAA), also sometimes called a “selling agency agreement,” is a contract between a company (the “Company”) and a sales agency or sales agent (the “Agent”) the Company hires to perform sales-related services. The agreement defines the rights and obligations of both parties with respect to the performance of those services.

The aim of this help center article is to shed light on some of the areas of concern in negotiating SAAs, taking in turns the perspective of the Agent and the Company and then addressing mutual considerations.

From the Agent’s perspective one would want to be thoughtful of the following:

This provision explains any sales quotas or targets that the Agent is expected to meet, as well as how and when those targets will be established (if not already explicitly stated in the SAA). However many sales agency contracts do not include sales targets, so it is a clause the inclusion of which is largely at the discretion of the parties. Where this clause is present, however, the Agent should be on the lookout for language granting the principal the sole discretion to establish such targets, because this discretion has the potential to be abused. The targets should be reasonable goals that the Agent can achieve as opposed to unattainable figures that merely serve as an excuse should the Company wish to terminate the SAA for convenience or in the hopes it will not have to compensate the Agent for services already performed. Furthermore, if the SAA provides for termination in the event the sales targets are not met, the Agent should check to see whether (a) the contract states that such termination shall not affect the rights accrued to the Agent up to and including the date of termination and (b) the obligation to pay the Agent survives the termination of the contract. The Agent will want to ensure that it is paid for services rendered, even if the Company hasn’t yet shipped the product or processed the paperwork necessary to recognize sales made by the Agent by the termination date. In the United Kingdom, European Union, and some U.S. jurisdictions, laws or regulations specifically protect Agents from this type of situation, but in others it may be wise to include such language in the SAA if it is missing.

There are multiple options for structuring an SAA with respect to exclusivity, but generally one of the three following arrangements is used. The first, most restrictive option is to prohibit the Company from seeking or generating direct sales itself and from appointing other agents or distributors to work within the territory allocated to the Agent. The second option is to prohibit the Company from appointing other agents or distributors within the Agent’s territory, but allow the Company to make direct sales to certain customers or categories of customer in the Agent’s territory without involving the Agent. The third option is to allow the Company the freedom to both appoint other agents or distributors within the territory allocated to the Agent and make direct sales to customers within the territory itself. While the terms “exclusive”, “sole,” and “non-exclusive” are used widely in SAAs to respectively refer to options one, two, and three, there is actually no universally accepted definition for them. It is therefore very important to clearly set forth the extent of the rights granted to the Agent within the territory specified in the SAA and what, if anything, the Company is permitted to do with respect to sales in that territory.

In the world of sales, there are different ways in which to compensate an Agent. One way is to pay the Agent a “commission,” which is a one-time payment of a certain percentage of the sale price for each transaction. The Agent may instead or also receive residuals, which are recurring payments an Agent receives over time for a sale or deal the Agent secured in the past that typically lasts for as long as the customer account remains active. Residuals are most typically seen in the SaaS, network marketing, property management, and insurance industries, where a new customer contract brings in monthly revenue for a company, and can be a great way to incentivize Agents to bring in clients who will stay with the Company for the long term. The recurring income stream can be very attractive to Agents, while the Company benefits from a stable customer base from which to grow, and the Agent may be able to leverage that stability to upsell those customers on additional products or services. The down-sides of including residuals in a compensation structure are that they may be more complicated to forecast and calculate.

The SAA should explain how commissions and residuals are calculated, when they are to be paid, and what documentation is required to be maintained and/or submitted to receive them. For example, is a sale complete when the business gets paid from the customer, when the Company invoices its customer, when goods are delivered to the customer, or when the customer signs the sales order or contract? Is the residual to be paid monthly or quarterly? Another element of the calculation to be defined in the SAA is the rate of the commission and/or residual, which may be a flat rate applicable across all sales or a variable rate across different products or depending on the volume of sales achieved during the year. Sometimes, rates are tiered such that they are designed to go down over time. For example, the Agent may be paid 50% in the first month, followed by 3% for each subsequent month. Clarification in the SAA as to what “price” the commission or residual will be calculated against is also important in order to avoid disputes as to whether it excludes applicable taxes, shipping costs, and/or any discounts or rebates. Finally, depending on how “price” is defined, it is worth considering whether the Agent should include a good faith clause stating that if the Agent must offer a discount in order to make a sale (e.g., such as a volume-based discount) and the discount will negatively impact the Agent’s commission, the parties will negotiate any decrease in commission in good faith.

This article usually specifies that the Company will provide the Agent with sales materials, pamphlets, manuals, and marketing information, solely for the purpose of performing the SAA, and that such promotional materials will be returned to the Company or destroyed upon SAA termination. If the Agent is required to use these materials to perform the contract, it may want to condition its performance upon its prior review and approval of such materials. A party involved in making a marketing claim, regardless of the primary source of the product’s advertisement, may be open to liability, including spokespeople, advertising agencies, producers, and companies that review and approve distributor advertising, etc. In Porter & Dietsch, Inc. v. F.T.C., 605 F.2d 294 (1979), for example, Pay’n Save (a retailer) was held liable for false claims about a diet pill even though it had no involvement in generating the advertisement itself. Pay’n Save argued that it merely disseminated marketing materials provided by the pill’s manufacturer in its own name, and had no knowledge of its falsity. The court determined, however, that Section 12(a) of the Federal Trade Commission (FTC) Act “does not make mental state an element of the violation and creates no exemption from liability for parties not involved in the creation of the false advertising or for unwitting disseminators of false advertising.” Id. at 309. Such a condition should be drafted to (a) give the Agent a reasonable period to review the Company's promotional materials in advance of the expected performance; and (b) enable the Agent to reject use of the promotional materials without being in breach of the SAA if it determines, in its sole discretion, that they may include false, deceptive, unfair, misleading, or unsubstantiated claims.

False advertising consumer claims are particularly suited to class-action litigation, the overall cost of which can be massive, involving multiple layers of insurance policies, even though the actual damages for each individual class member may be negligible. In large part, this is because advertising reaches a broad audience by nature, making establishment of a class more likely. Additionally, false advertising claims can be attractive to plaintiff’s attorneys because they involve minimal investment to pursue and class-actions can be particularly lucrative. Legal practitioners in this area have also noted that these types of claims are on the rise. While the SAA may include a solid indemnification clause and some courts have allowed the equitable doctrines of indemnity or contribution to be applied for false-advertising claims brought under state law (though such rights have been held not to exist with respect to the federal Lanham Act), if the Company isn’t properly insured it might run out of assets before the claims are resolved or the Agent is reimbursed. Given the foregoing, an Agent should consider whether to require that the Company carry insurance providing coverage for these types of suits. Notably, “advertising injury” coverage in commercial general liability (CGL) policies is generally defined to include only defamation, invasion of privacy not involving data breaches/cyber liability, misappropriation of advertising ideas, and certain types of IP infringement, so is likely not going to cover false-advertising claims. Also keep an eye out for “unfair trade practices” exclusions in Directors and Officers (D&O) or management liability policies, which insurers tend to rely on in denying coverage for these types of suits though some courts have construed those exclusions not to apply to consumer protection and false advertising claims.

From the Company’s perspective one would want to be thoughtful of the following:

It is important to specify how and under what circumstances the contractual relationship can be terminated by the parties. This article may be divided into two parts, one that discusses the rights of the parties to terminate “for cause” and another part that addresses termination for a party’s convenience. From the Company’s perspective it is important to be able to immediately terminate the contract if the Agent breaches the contract and that breach is not curable. For example, breach of any confidentiality provisions in the contract would not be something that could be “cured”. Where a breach would be curable, for example a failure to timely produce sales activity data, it is standard to give the breaching party a reasonable amount of time from notice of the breach (usually 30 days) to cure the breach before termination of the contract.

If possible, the Company should also include the unilateral right to terminate the SAA for its convenience and without penalty. This could save the Company a significant amount of money in the event it chooses to change its overall sales and marketing strategy, decides to shelve the product line that is the subject of the sales efforts the Agent was hired to perform, or the Company needs to halt marketing and sales expenditures for some other reason. Along those lines, it may also be important to address what effect, if any, termination will have on the company’s obligation to pay the Agent should it fail to meet sales targets prior to termination. (See Section 3A, below.)

Sales agents are often in positions where they must develop intricate knowledge of the products that they sell and/or may receive feedback from potential customers that generate ideas as to potential product improvements. It is therefore important to ensure that the SAA addresses this intellectual property issue appropriately such that all product improvements (even those invented by the Agent) will be exclusively owned by the Company.

A non-disparagement provision is perhaps one the most significant ways in which the Company can protect itself if the relationship of the parties falters during or after the term of the SAA. This is because the Agent is in the business of publicizing information and persuading others, so it is no doubt skilled in doing so and could cause serious reputational damage to the Company if things turn sour. Unfortunately, lawsuits are a poor substitute for such a provision. First, it is much more costly to attempt to stop disparaging statements through the courts (by which time some reputational damage has already occurred) than to negotiate a non-disparagement clause into a contract upfront, which may enable the Company to avoid negative publicity from the get-go. Secondly, defamation is both difficult to prove and conceptually narrower than non-disparagement as the damaging statement must actually be false. Finally, over 30 states now have Anti-SLAPP legislation which adds additional procedural burdens for the plaintiff in a defamation suit. For example, California has an anti-SLAAP law that allows a defendant to file a motion to strike the complaint, which the court will hear within 30 days unless the docket is overbooked, and requires the plaintiff to pay the defendant’s attorneys’ fees and costs if the motion to strike is granted by the court. Moreover, an ethical sales agency will not bad-mouth its clients or former clients (even the difficult ones) so should have no trouble agreeing to add such a provision to the agreement. If the Agent objects, this is likely a red flag.

As Agents generally serve multiple clients, it is important to ensure that the Agent does not have any conflicts of interest, for example existing agreements to promote products of the company’s competitors or ownership interests in other entities within the same market. Split allegiances can significantly undermine the ability of the Agent to effectively represent the Company. There may also be confidentiality, tortious interference, and anti-trust implications. Contractually ensuring that the Agent’s interests are aligned with that of the Company can help to avoid these sticky issues and remove a potential impediment to the Agent’s effectiveness in promoting and selling the products of the Company. One way in which to do this is by requiring the Agent to represent and warrant in the SAA that it has no such conflicts and that by entering into the SAA with the Company, it is not breaching any of its existing contracts. Another way is via an exclusivity clause that prevents the Agent from working for the Company’s competitors during the Term, and sometimes, for a set period thereafter. It is important to note, however, that non-compete clauses with respect to SAAs may not always be enforceable under state and federal anti-trust laws. For example, they are generally unenforceable in California, except in limited circumstances not applicable to an SAA. Ensuring that counsel for the parties have first reviewed applicable law and, if appropriate, have drafted a non-compete clause that is reasonable in scope and duration such that it is appropriately tailored to the Company’s legitimate business interests, may be the best way to ensure that the clause will be enforceable.

The marketing, promotion, and sale of products and services can involve significant legal risk, particularly if such products and/or services are in a highly regulated market, marketed online, or being marketed to a vulnerable audience. Under federal law, claims in advertisements must be truthful, cannot be deceptive or unfair, and must be evidence-based. However, additional rules may also apply. For example, if one uses endorsements in marketing, they need to meet the standards of the FTC Act and the FTC's Guides Concerning Use of Endorsements and Testimonials in Advertising. If one were to market prescription drugs, the Food and Drug Administration rules about disclosing the drugs’ risks and benefits, and to what extent depending on the type of advertisement, would also apply as would a number of fraud and abuse laws such as the Anti-Kickback Statute (AKS) and the Sunshine Act. Some industries have also established codes of conduct that address marketing and sales activities for that industry. As a last example, direct marketing to children online or of kid-related products to their parents should take into account the Children’s Online Privacy Protection Act (COPPA). And whatever the Company’s product, state consumer protection laws should also be considered.

A reputable Agent should have a deep understanding of the laws and regulations that apply to sales and marketing, particularly in regard to the products and services that it regularly sells and/or promotes. Including language in the contract obligating the Agent to both (a) comply with applicable laws (and any applicable industry codes of ethics) in the performance of the contract and (b) indemnify the company for any damages resulting from the Agent’s failure to do so is probably a good idea. Moreover, any limitation of liability clause in the SAA should arguably explicitly exclude liability arising from the agency’s violation of law, as opposed to merely relying on a “gross negligence or willful misconduct” exclusion to the limitation of liability, because the dissemination of false advertising prohibited under Section 12 of the FTC Act uses a strict liability standard.

It can be important for both parties to consider the following issues:

At least 31 U.S. states and the Commonwealth of Puerto Rico have specific legislation applicable to SAAs. These laws are primarily aimed at ensuring the Agent is paid its commissions by the Company in a timely manner by imposing additional liability on the Company for failing to do so. However some states also require the parties to observe certain formalities to create an agency relationship, such as the state’s Statute of Frauds, and require that specific information be included in the contract. Finally, some states also have substantive requirements, such as a minimum notice period for termination or the obligation to pay commissions on shipments in process at the expiration or termination of the contract. Prior to executing any SAA, both parties would therefore benefit from carefully reviewing any applicable state laws pertaining to commercial agency agreements.

This article sets forth any limitations or characteristics of the Agent’s authority. For example, the Agent’s authority will naturally include the Agent’s obligations set forth in the SAA, but will likely also include other acts for which the Agent isn’t explicitly responsible but that are impliedly part of performing its duties, such as promoting the Company’s products and services, negotiating prices, executing sales contracts or orders, and providing customer service for customers with whom it has closed sales deals. As such, the Company should explicitly limit any acts that it does not want the Agent to have the authority to perform and similarly limit, as appropriate to the Company’s needs, the Agent’s authority with respect to other aspects of the Agent’s performance, such as the geographic territory in which the Agent can operate on behalf of the Company, the customer segment to whom the Agent can market and sell, and/or the specific product and/or service lines that the Agent is authorized to promote and sell. Many companies have certain territories that are within a narrowly defined target market. The SAA may state that each sale needs to be prepared within a specific geographic area and/or may restrict the Agent to selling only to a certain segment of customers, such as those not designated as potential “national” accounts. The Agent may also be limited to selling certain products or services full-stop or during a specific period of time, for example until a newer model of a product is released. Ensuring that the scope of the Agent’s authority is well-defined and crystal clear in the SAA is to the substantial benefit of both parties. It helps the Agent to understand what it can and cannot do in furtherance of its sales objectives and helps the Company to limit its liability if the Agent exceeds its scope of authority.

This provision, which usually survives the termination or expiration of the agreement and can bind the parties for many years, is perhaps one of the most important clauses to include in an SAA and its violation may be cited as grounds for denying an Agent its residuals under the SAA. A non-solicitation provision can prohibit a number of different actions on the part of either party, such as the hiring of the other party’s employees or agents. If the Company has any in-house sales team members to which the Agent has exposure, for example, it can be important to include a non-solicitation clause in the agreement so that the Agent, if a sales agency, does not poach members of the Company’s team. Similarly, a sales agency may wish to protect itself from losing its best salespeople to in-house openings at the Company.

Additionally, a non-solicitation clause may prohibit the Agent’s solicitation of the Company’s customers on behalf of itself or another party (e.g., if the customer might later be interested in the same services provided by a different company) or the Agent’s solicitation of the Company’s upstream business relationships. For instance, Independent Sales Organizations (which resell payment processing services on behalf of banks) get a commission on directing merchants to such services, so when they enter into an SAA with an Agent there is the risk that the Agent will go around them, and refer potential customers directly to the banks so they can capture that commission themselves. Similarly, Agents sometimes include a prohibition against the Company contracting directly with any sub-agents or vendors that the Agent brings to the Company so that it cannot “go around” the Agent, thereby cutting it out of the picture. That said, it is strongly recommended that counsel refer to applicable laws prior to drafting such clauses, as in some jurisdictions non-solicitation clauses may fall within the scope of prohibited non-compete clauses.

Including language that allows the Agent to use the Company’s trademarks, service marks, and copyright-protected material as specified in the SAA, for the limited purpose of promoting and selling the goods or services pursuant to, and during the term of, the SAA is a key part of any SAA. This language assures the Agent it will not be infringing on the Company’s rights if it uses this intellectual property of the Company to effectuate sales and promotion per the agreement and clarifies that the Agent's license to the Company’s marks and copyrighted material is limited in duration and scope, reducing the risk that they will be misused by the Agent.

In order to avoid the legal, tax, and insurance complications that arise from an Agent becoming classified as an employee of the Company or deemed a joint venturer or partner of the Company, it is important to include an article stating that the Agent is an independent contractor and not an employee or partner of the Company. Notably, however, such a provision will often not be sufficient by itself to avoid classification of the Agent as an employee if the parties otherwise act as though the Agent is an employee in the performance of its duties. For example, in California the relevant tests to determine whether one is an employee or an independent contractor, depending on statutory exemptions, are the ABC and the Borello common law test, each of which involves the evaluation of multiple factors--not just the existence of this type of provision in a contract--to reach a determination as to nature of the parties’ relationship. When working with an independent contractor, it is therefore wise to review applicable state laws to ensure both that the SAA takes them into account and that the parties don’t unintentionally behave during the term of the relationship in a manner that will undermine their wish for the Agent to be legally recognized as an independent contractor by government authorities.