The Rights o
and Sales

f Employers

by Holli Hart Targan, Esq.

   The engine of the merchant acquiring business is sales. Acquirers need people out there in the trenches selling their card processing services to merchants. Once you strike up a deal with a sales agent, what are your rights after the relationship is over? Despite the most optimistic projections, eventually an ISO or acquirer's relationship with any one of its sales people will end, whether due to a disagreement or merely because of a mutual understanding that it is best to part ways.
   And how it ends - whether amicably or in litigation - may depend on the contract you entered into with the salesperson. Did you make it clear what will happen upon termination? Under what circumstances will the sales agent be entitled to ongoing residuals? Does the agent have any right to your proprietary information, including pricing and customer lists? Is the sales agent prohibited from competing with you? This article will examine these key issues as they relate to both employees and independent contractors.
   What state law says about a sales agent's rights upon termination may surprise you. In certain circumstances some states will require a company to continue to pay residuals to a salesperson after termination of the relationship if no agreement exists that indicates otherwise. The only way to control what happens after your salespeople leave is to require each one to sign an agreement that spells it all out.
   Without a contract, whether the employer or the salesperson has the upper hand in key issues (such as using confidential information, entitlement to commissions and residuals, and competing with you after termination), will depend partly on whether the sales agent is an employee or an independent contractor. Each is discussed below.


   Generally, an employee is prohibited from using confidential information received during the course of employment to the detriment of the employer. During employment and after termination, an employee is obligated not to divulge the employer's trade secrets. This rule applies even where the parties have not entered into a contract that explicitly prohibits the use or disclosure of confidential information. However, an employee can use the skills and knowledge commonly used in the trade that the employee acquired while working for the company.
   A key issue in a dispute with a sales person using confidential information is whether the information being disclosed constitutes a "trade secret". Generally, a trade secret may be any formula, pattern, device, or compilation of information which gives the employer an opportunity to obtain an advantage over competitors who don't possess that information. Whether specific information qualifies as a trade secret is determined on a case-by-case basis. Price lists, market-related data (like information on current and future projects), potential future opportunities for a firm, and customer lists have been held to be trade secrets.
   An employee is prohibited from concealing confidential customer information from his employer at the termination of employment. An employee is also obligated to not remove records containing customer data or other information that furnish a competitive advantage to the employer. In fact, an employee may be liable to the employer for profits and compensation earned after termination of employment where the employee uses knowledge and information acquired during employment to subsequently complete a project after termination.
   With regard to compensation for commissions after termination, some states follow the "procuring cause" rule. This holds that an employee is entitled to commissions on sales made after the termination of employment if the sale can be attributed to the employee's efforts before termination. If the contract provides that the employee will not be paid commissions after he has been terminated, then the procuring cause rule will not apply, and the employee is not entitled to such commissions.
   And as for residuals attributable to merchants solicited by a salesperson that accrue after the employee no longer works for the acquirer, some courts have (in other industries) applied the "procuring cause" doctrine. A salesperson could argue that, where the relationship procured (i.e., the merchant) does not require substantial continuing effort to keep the business alive, the salesperson expected that residuals would continue after termination. Thus, it is essential to set out in very specific terms the conditions under which salespeople can expect to continue to earn residuals after termination.
   You should include a clause in the contract providing that if the contract is terminated due to breach, then rights to continuing residuals will cease. Even if the contract is not terminated for cause, typically merchant acquiring industry agreements provide that residuals will continue for a limited period of time after termination and only as long as the salesperson continues to service the merchants.
   Perhaps the most important protection you need is to prohibit the employee from competing with you after termination. Again, the law of each state is slightly different, but generally courts will enforce non-compete agreements as long as: the restriction is reasonable in geographic area and length of time, the non-compete agreement protects a legitimate business interest, and consideration (or, something of value) has been given by the company in exchange for the non-compete agreement.

Independent Contractors

   An independent contractor typically becomes the sales agent of an ISO or acquirer with which he contracts. A sales agent is under a duty not to disclose to others or to use information confidentially given by the acquirer. This applies not only to information stated to be confidential, but also to information which the agent should know the acquirer would not want to have revealed to others. It applies to trade secrets, including lists of customers. Even after termination of the agency relationship, an agent generally may not take unfair advantage by using knowledge which he acquired during the relationship.
   In fact, if a sales agent informs someone of confidential matters, that would constitute a breach of duty and loyalty owed by an agent to the company. That type of misconduct may result in losing the sales agent's right to compensation.
   With regard to commissions, unless a contract states otherwise, a sales agent's right to compensation upon termination depends on the reason for termination, and whether the termination amounts to a breach of the contract. If the relationship has been terminated by the acquirer for no reason, the acquirer will owe the sales agent any compensation due. If the relationship was terminated due to the agents' breach, the agent is not entitled to compensation for sales subsequently consummated due to the agents' efforts, in the absence of some understanding otherwise.
   Whether an independent contractor has a right to continuing residuals is a matter of each states' laws. Some courts have held that a sales agent is entitled commissions that were earned as a result of the agent's efforts, and that the commissions are payable for as long as the agent's efforts continue to produce benefits. Whether the agent is entitled to continuing commissions is determined on a case-by-case basis, taking into consideration whether any effort is required to sustain the continuing revenue. If no effort must be expended to keep the business, the sales agent may have the right to the residuals. An additional twist is that courts recognize that the company may subsequently appropriate the accounts, in which case the agents' rights to continuing residuals will cease.
   A non-compete agreement with an independent contractor is just as important as a non-compete agreement with an employee. After the termination, the independent contractor may compete with the company subject to a duty not to use confidential information acquired during the course of the agency, absent an agreement to the contrary. Thus, it is important to obtain an enforceable non-compete agreement with sales agents. A sales agent is most likely to sign such an agreement at the beginning of the relationship.
   Therefore, in the here and gone of the merchant acquiring business, be sure to protect your trade secrets, your rights to sales agent commissions and residuals, and your good will by entering into protective agreements with salespeople - before the salespeople are gone.