The Perilsof Tortious Interference

Posted: 05/2002

The Perils of Tortious Interference
How to Avoid Contract Cliffhangers

By Tara Seals 

LIKE THE DAMSEL IN DISTRESS WAITING for someone to pull her from the path of an oncoming train, an agency can find itself trapped by the dastardly doings of carrier contracts. That standard agreement may look innocent enough, but when something goes wrong agents may find themselves at the mercy of a merciless adversary, and unsure of what's going to happen next.

An agent agreement will establish the agent as a representative of an underlying provider for the sale of that provider's product at a price established by the underlying provider and subject to credit terms established by the underlying provider, in return for a defined commission.

Seems simple enough. But in reality, this assignment of roles may be fraught with imbalance.

Agents need to ensure their revenue streams in every vendor relationship, and that means building in detailed protection and definitions for liability and commissions. Nothing should be left ambiguous.

"I also look at every clause and I try to look for mutuality," says David Hirsch, a partner at law firm Shiling, Bloch and Hirsch. "If it's an equal burden on either side, the side that has control of an issue has most of the burden."

Villainy of Customer Ownership

The carrier may own the customer on paper, but the de facto owners are agents. Agents have the relationships, and customers sign with providers on agent recommendations. But carriers go out of their way to restrict agents' power of influence on client decisions, even going so far as poaching customers.

"Agents need a non circumvent clause," says Neil S. Ende, a partner at Technology Law Group LLC.

This provision prevents vendors from rejecting customers brought by agents, only to go after them on the direct side. "They'll use your list as a marketing list," warns Ende. "They should agree that if they reject the customer they can't go sell that customer some other way."

Another route to protection is confidentiality, with a clause establishing agents' customer names as private. "They can't go around you because the info itself is confidential," says Ende.

Another issue to watch out for is moving traffic. Agents should set clear parameters for justified customer migration. "If a customer wants to leave, most of the contracts I've seen have a provision where the agent cannot take that customer to another carrier," says Shiling.

Or, agreements often have a provision stating the agent should make "best efforts to sell." "That essentially means an agent must do everything short of bankruptcy to keep the customers with the carrier, no matter what's going on," says Charlie Hunter, a partner at Hunter Telecommunications Law Group P.C.

Moving customers in the event of poor service may be considered "tortious interference," or, knowingly interfering with the business affairs of another entity in order to cause damage.

While carriers take customer ownership for themselves, when it comes to liability for non-payment they are all too willing to assign the agent responsibility.

"It's not appropriate because the provider has the absolute right to determine when and if and how it will deal with an end-user," says Ende. "It decides credit worthiness, when a customer is a customer and, at its own discretion, decides when a customer is refused, to require deposits and establish billing procedures.

"Many contracts assign agents liability anyway," he adds.

If agents do agree to take some responsibility for credit and non payment issues, they should require the carrier to attempt to collect first, and should cap the amount at the commission level. "So at worst you get zero, you don't end up owing them," says Ende. "An agent can quickly get underwater, so control the percentage and amount."

Other liability areas to watch are slamming and PIC dispute charges, which frequently are passed down to the agent.

Trackless Wastes Bankruptcy

It's a topic of burning interest to agents in today's volatile financial atmosphere, but when it comes to bankruptcy, "it's the ultimate nightmare for everyone," says Hunter. "No one wins."

There is little to no guarantee of getting paid on owed commission payments or getting compensated for damages. Agents are not considered creditors or employees, and therefore have no sort of safety net. At best, a contract could include protection for keeping the customers.

Because an agent has no ownership rights to the customer base, even in bankruptcy he or she may not be able to move traffic from an out-of-service carrier, and that could torpedo an agent's business.

"[Bankruptcy] comes along and wipes everyone out," says Hirsch. "Bankruptcy law has a lot of technicalities, but I try to at least structure it so if we have to fight it out in the bankruptcy court, there's a clause that says we're not being paid so at least we can take the customer."

Also, agents should be able to move customers if carriers don't meet service and quality parameters.

"You need to negotiate two categories of things: terms that address the quality of service, timeliness of provisioning and the rates, and/or something that says you have the ability to port those customers if they don't deliver."

Hirsch also cautions agents to watch out for verbal agreements. "It doesn't matter what someone tells you when you're talking to them on the phone or having a beer, if it's not in writing it doesn't exist," he says.

Getting it down on paper is important in case the contact leaves, or if there's a disruptive event. For instance, if a carrier sells a division, the buyer has no obligation to honor inherited agent contracts. However, an agent could protect himself by building in a clause that for instance makes the original carrier responsible for buying out the agent.

Commissions on the Brink!

The whole reason to be an agent is to make commission. In a contract, that commission naturally should be protected as much as possible. But many terms and conditions leave an agent wide open to pernicious carrier behavior.

"It's remarkable to me how many times you see agreements where the payment are so incredibly loose that they have no guarantee of payment, and no right to know the basis of the payment," says Ende. "If it's not in the contract, you have no basis to insist upon it without suing."

The first rule is to determine the terms and conditions of payment very clearly. Good questions to ask include: Is commission based on billed or collected revenue? Does "billed" mean the actual number that appears on the statement? If "collected," what effort does an agent have to make to collect the revenue? Is "collected" offset by the costs of collection or of running the business? How is "net revenue" defined? "You have to make sure they don't write off employee costs against it and other things that diminish the pot that your commissions come out of," says Ende. "You also need a higher percentage of collected than billed."

Ende also suggests creating a frequent audit right "with some teeth," so agents can determine exactly how much the customer is paying the carrier. "You take their word that they collected X dollars and they're paying you 10 percent of X," he explains. "We like to at a minimum get an audit right to prove they paid what they should have, and that may be enough to disincent them to cheat."

Agents also could request real time copies of bills or payment records.

Secondly, agents should determine what happens if they don't meet any volume commitments that are in place.

"Critically important is that the volume tier is absolutely tied to quality, availability, provisioning and rates," says Ende. "You can't meet a tier if they don't install the service, and they could knowingly not do it if they want to steal your customer base.

"My view of volume commitments is, just say no -- having a minimum is a death trap," he adds.

Termination for cause -- not meeting volume commitments, fraud, slamming and the like -- often means termination of commissions in standard carrier contracts.

"What happens a lot of the time is the carrier will concoct cause," says Ende. "Regardless of termination you should still get commissions forever and audit rights continue."

Agents also should receive commissions as long as someone is a customer of that carrier, even if the agent contract expires.

"Get a provision in there," says Hirsch. "A lot of contracts say that upon the expiration of the original term, if it's not renewed, all residuals cease."

At the least, if a carrier does stop paying commission, the contract should state the customer automatically reverts to the agent to do with as they wish.

Even knowing what to look for, agent negotiations can be difficult to initiate. The ability to negotiate on a standard contract hinges on the amount of economic power an agent has, says Hirsch. Having a good relationship already in place helps too.

Creating a group of agents for economic leverage and creating a standard contract for themselves is not a new idea, but it may be one whose time has come.

"Most of the time, 99 percent of these [agents] just get run over," says Ende. "If you have a real lawyer and they want your business, you can get a lot of what you want, but the carriers pick these smaller guys off one by one."