Beware Trap for Unwary Wholesalers and Distributors Employing Commission Sales Professionals: the Independent Wholesale Representatives Contractual Relations Act.

July 12, 2010

Hidden in the Civil Code are a series of statutes, Sections 1738.10, et seq., known as the “Independent Wholesale Representatives Contractual Relations Act.” These statutes are a potential liability trap for unwary wholesale distributors and manufacturers who employ commission sales staff.

This law governs the contractual relationships between all independent wholesale sales representatives (commission sales staff) and wholesale manufacturers and distributors in California. Civil Code, Section 1738.13 contains a laundry list of technical requirements which every written contract between commission sales staff and distributors must include. Additionally, that statute requires the distributor or manufacturer to include a written statement identifying the method of calculating the commission with each commission check paid to the salesperson.

Under Section 1738.15, a wholesale distributor or manufacturer “who willfully fails to enter into a written contract as required by [Section 1738.13] or willfully fails to pay commissions as provided by the written contract . . .” may be liable in a civil action for treble damages, including attorney’s fees. Section 1738.15 does not explicitly make every violation of Section 1738.13 actionable, just the two grounds identified. Still, look for sales professionals, especially those who have been terminated, to argue that all violations of Section 1738.13 may serve as the basis of a civil action under Section 1738.15. Additionally, there is no express statutory definition of “willfull” conduct under Section 1738.15, and no court has provided one yet. This is a growing area of litigation, so it is likely the courts will further define the scope of the liability risk for wholesale manufacturers and distributors under this law.

Until the courts sort out the many questions about this statutory scheme, there are things wholesale manufacturers and distributors can do to minimize their liability risk. First, read Civil Code, Sections 1738.10-1738.15. Second, seek the advice of an experienced attorney to assist with structuring written commission contracts to comply with Section 1738.13. Third, provide a clear and understandable written statement itemizing the basis of calculating commissions with each check to the sales professional. Finally, review the records of commissions earned and paid at regular intervals to make sure that the sales professional is paid all commissions to which he or she is entitled under the written contract. Hopefully, these steps will avoid or minimize any risk of liability under this obscure, yet powerful, law.