Divided 7th Circuit reinstates manufacturing sales commission dispute

A divided panel of the 7th Circuit Court of Appeals has reinstated a sales commission dispute, though the dissenting judge would hold that the Northern District of Indiana’s grant of summary judgment was proper.

The dispute in R3 Composites Corp. v. G&S Sales Corp., 19-2290, involves R3 Composites Corporation, a manufacturer of fiberglass parts, and G&S Sales Corporation, an independent sales representative. The parties began a business relationship in 2011, operating under a nondisclosure agreement that included a commission provision in Paragraph 12.2, holding that “(i)f G&S obtains jobs for R3, the parties will attempt to develop an agreement whereby G&S is paid a commission with a guideline being a 5% commission with the precise commission rate to be negotiated on a job-by-job basis.” Even if the NDA was terminated, the commission provision would remain in effect.

In 2013, G&S cofounder Mark Glidden took a plant manager job with R3 while continuing his work for G&S. After that move, commission disputes began between the parties, with G&S alleging Glidden, in his role as R3 plant manager, would decide “how much commission he wanted to pay G&S each month, then instructed R3’s CFO to doctor the underlying sales figures to produce the desired result.”

R3 eventually terminated the NDA in 2015 and stopped paying commissions to G&S in September 2016. G&S alleged that Glidden’s actions resulted in insufficient commission payments through as late as August 2016.

R3 then sued G&S in October 2016, seeking declaratory judgment that the NDA was enforceable and that all commission had been paid, and that it would not be liable for any additional payment even if the NDA was unenforceable. G&S responded with counterclaims for breach, damages and fees under the Indiana Sales Commission Act, as well as a declaration that R3 was liable for continuing commissions.

The case was initially before Indiana Northern District Chief Judge Theresa L. Springmann, who partially ruled in R3’s favor with a determination that the NDA was illusory. But the case was later moved to Judge Holly Brady, who granted R3’s motion to amend or modify Springmann’s decision because “G&S had not expressly pleaded the existence of implied and/or oral commission contracts, which R3 argued was the only basis for any claim by G&S after the NDA was deemed illusory.”

The 7th Circuit reversed Brady on Monday, focusing on the portion of Paragraph 12.2 that allowed for “job-by-job” commission determinations.

“The grant of summary judgment to R3 was based on an abuse of discretion in not allowing G&S to rely on the later job-by-job commission agreements under the umbrella of Paragraph 12.2 of the NDA,” Judge David Hamilton wrote for the majority, joined by Chief Judge Diane Wood. “That is a perfectly viable theory under contract law, and G&S did not need to amend its complaint to pursue that theory. … We agree in essence with Chief Judge Springmann’s original decision (a) that Paragraph 12.2 of the NDA was of course not enforceable standing alone to establish any commission rates, but (b) that the rest of the case is rife with genuine issues of material fact.”

Specifically, Hamilton said, the allegations and responses in G&S’s court filings were sufficient to put R3 on notice that the job-by-job agreements were part of the case under the umbrella theory. Further, “(i)f that were not enough, and it is, R3’s won allegations reflected that approach to the NDA and the job-by-job agreements,” the judge said.

“Much of the dispute hinges not on the particulars of the NDA or the later job-by-job agreements between R3 and G&S, but rather on whether Glidden — the purported managing partner of G&S and simultaneous manager of R3 — had the actual or apparent authority to bind either party or both to modification as to any particular customers,” Hamilton continued. “… It is for the jury to decide under Indiana law the extent of Glidden’s authority and the proper interpretation of any commission agreements that were negotiated pursuant to the NDA. Accordingly, summary judgment in R3’s favor across the board was erroneous.”

The appellate panel also reversed Brady’s denial of G&S’s motion for leave to amend its countercomplaint “to allege ‘the existence and details of an implied and/or oral contract between the parties, and to include alternative theories of recovery in its Counter-Complaint based on contract implied in law and contract implied in fact.’”

“In denying leave to amend, the district court should not have relied on G&S’s supposed lack of diligence,” Hamilton wrote for the majority. “Its request was prompted only because the issues for summary judgment were erroneously narrowed in the first place.”

The majority thus remanded for further proceedings.

In a dissenting opinion, however, Judge Diane Sykes wrote that the majority’s concept of “this contract claim … bears little resemblance to the claim G&S Sales Corporation actually raised and litigated below.” She would hold that Brady properly rejected G&S’s “major pivot” after Springmann’s ruling to “amend its complaint to add claims premised on the existence of an enforceable oral contract or, alternatively, an implied-in-fact contract … .”