Anatomy of an Agent Agreement

Agents depend upon a limited number of contractual relationships, whether with one or more underlying carriers or master agents, for their financial viability. Yet, all too often, agents fail to understand their core contracts and neglect to invest adequate resources and upfront time in contract negotiation and formation. Major carriers, with which agents often contract, typically employ a team of specialized attorneys who have spent significant time, often years, working with the carrier’s template agreement and have carefully crafted every provision and line of that document to solidly favor the carrier. Successful master agents often come to the table with a similar advantage. It is therefore critical that agents look to “level the playing field” and approach forming their core agreements only with expert telecommunications counsel. Every agent should have qualified telecommunications counsel, involved in the drafting and negotiating process for all such core agreements. as part of the “team.”

The balance of this article surveys some of the key considerations and pitfalls associated with the typical agent agreement. Keep two points in mind. First, the issues identified below only scratch the surface of what is involved. Typical agreements entail many additional issues and often present unique, “one-of-a-kind” considerations that must be addressed in a customized manner. Second, depending on the situation, sometimes “form” is often more important than “substance.” Simply understanding and being able to identify an issue is not enough. Devising a carefully crafted clause or set of clauses (with an understanding of applicable legal principles, industry practice and carrier tendencies) to address the specific concerns and circumstances of a given agent also is required.

Commission Issues.

One of the most important concerns is remuneration. Typically, agent agreements require the agent to sell a certain volume of service per month in exchange for a flat-rate commission. However, truly lucrative commission rates commonly require a significant sales volume commitment, or minimum commitment, on the part of the agent. If a minimum commitment is not met, template agreements sometimes can impose a monetary penalty on the agent or allow the underlying carrier unilaterally to terminate the contract.

A carrier account team often will attempt to sign an agent up for as much as possible; often more than the agent can deliver. Therefore, before accepting an agreement, agents should thoroughly review their business plans and realistically evaluate how much volume it reasonably would be able to sell in any given month. Overestimation of the amount of volume that could be sold can have significant adverse financial consequences for an agent.

It also is critical that an agreement spell out the commission structure and its functioning detail. Among other things, the agreement should clearly identify how and when commission payments are made; the applicable commission rate or percentage; the basis upon which commissions are calculated (e.g. billed amounts versus collected revenue); liability for bad debt (i.e. uncollectible billings) and audit rights. Circumstances allowing modification of commission rates (such as an increase or decrease in end-user rates) also should be clearly addressed.

An important goal for every agent is an “evergreen” clause, which provides for continuing, ongoing commissions after an agreement terminates. Evergreen provisions often are difficult to obtain and can be structured in a variety of ways; some are open-ended and virtually indefinite while others are more limited in duration. Nonetheless, the case is strong for an agent seeking some sort of evergreen payment since the agent originated the customer. Typically, whether an evergreen clause will be included in a deal is a function of the agent’s “bargaining power,” the carrier’s or master agent’s prevailing attitude with respect to such payments and the creativity of the agent’s attorney in devising an acceptable evergreen arrangement.

Termination.

Most carrier agreements impose a potentially heavy financial penalty if the agreement is terminated by the agent prior to the end of the contract term. Often, agents fail to understand the financial burden that might arise from such provisions. As a result, the agent may discover too late (i.e., after the deal is signed) that it is financially chained to an unprofitable deal because terminating the contract early would prove even more costly. Agents should conduct a thorough examination of any contract language involving termination penalties, lest they find themselves on the wrong end of an aggressive collection action.

Many other considerations also come into play here. One is lack of mutuality. A carrier template agreement often will make it terminable at will by the carrier without any financial penalty, but not by the agent. Of course, this lack of equality or mutuality should not be accepted. An agent also should insist on being provided with “notice and opportunity to cure” any alleged breach before a carrier can either penalize the agent and/or terminate the agreement.

Another way to approach termination is through an agreement’s “renewal” provision. To maintain flexibility, an agent may wish to seek a shorter agreement term with the right to renew, for example, under rolling one-year terms. In this manner, an agent can avoid being locked into a long-term deal that may become financially unworkable. The agreement should clearly delineate both the “effective date” and “termination date” of the agreement.

Arbitration.

An agent should decide as a matter of general strategy whether it favors dispute resolution through recourse to traditional litigation or alternative dispute resolution means (such as mediation or arbitration). Agent agreements should, and typically do, contain dispute resolution provisions which spell out the recourse that is available to a party.

“Mediation” is the involvement by an independent third party in negotiations to settle a dispute. Mediators assist parties in reaching a settlement but do not have the power to decide an issue. “Arbitration” is the referral of a dispute to a third party empowered to make a decision that normally is binding on the parties. Arbitration is similar to traditional courtroom determinations in that it results in a resolution imposed by an outside party rather than one chosen by the parties themselves, but it differs from traditional litigation in that there is greater flexibility in choosing the deciding third party and the procedures that will be followed. In today’s environment, courts are increasingly encouraging parties to submit cases to arbitration or mediation.

Agents, particularly smaller ones, are well-served by mediation and arbitration. These alternative dispute-resolution techniques can go a long way toward reaching a settlement of issues so that the underlying relationship can be preserved. More importantly, mediation and arbitration can greatly reduce legal fees thereby eliminating the inherent advantage that many larger carriers possess by virtue of their “deep pockets” in a dispute context. Agents should consider appropriately customized mediation or arbitration provisions in their agreements.

Agent Responsibilities.

Several important portions of the agreement pertain to an agent’s responsibilities. These responsibilities need to be clearly expressed. For example, the applicable service territory that applies under the agreement needs to be defined, as do the specific products which the agent will be marketing and for which the agent will receive commission payments.

Sometimes commission payments vary by the specific product sold and it is important that an agent understand the commission levels that apply to different products. The “new customer sign-up form” also should be approved by the agent and included as a schedule to the agreement.

Addenda.

Since the “devil is in the details,” careful attention must be paid to the commission schedule and other addenda that are deemed to part of the agreement. This means these documents and schedules are as binding upon the agent as the agreement itself. It is not uncommon for many of the key provisions of the commission structure to be spelled out in further detail in the commission schedule. Thus, no less attention should be devoted to these addenda and schedules than the rest of the agreement.

Miscellaneous.

Many other provisions and issues can come into play in an agent agreement. Often, which issues arise depends on whether the agreement is between an agent and master agent or between an agent and a carrier. Some other key points are as follows:

Exclusivity. Carrier/agent contracts commonly include boilerplate “exclusivity clauses” that require the agent to market services only on behalf of that particular carrier. Such clauses severely limit agents’ ability to conduct business and needlessly tie their fortunes to that of a single carrier. Not surprisingly, such provisions usually do not require the carrier to be exclusive to the agent. Agents should make it a point to strenuously oppose the inclusion of exclusivity provisions that would limit their flexibility to sell for other carriers.

Toll-free Numbers. Agents also should give consideration to the identity of a customer’s “Resp Org” or responsible organization under the FCC’s toll-free numbers rule. The Resp Org is the entity chosen by a toll-free subscriber to manage and administer the appropriate records in the toll-free Service Management System for that subscriber. While a customer’s Resp Org typically is its carrier, the FCC has held toll-free service customers should be able to choose the Resp Org for their toll-free service and should be able to designate any entity (including themselves) as Resp Org, subject to certain conditions.

Agents may wish to consider themselves serving as a Resp Org or having the customer designate an entity other than the carrier as Resp Org in order to diminish the carrier’s control over that particular customer.

Mutuality. Many provisions in carrier agreements are designed to favor the carrier and do not extend comparable rights to the agent. For example, as discussed above under “termination,” carrier templates typically state that an agreement is terminable at will without penalty by the carrier, but not by the agent. Carrier template agreements typically are riddled with such inequalities.

Another common example occurs under the “assignment provision” whereby a carrier template will state the carrier can freely assign the agreement to a third party while limiting the agent’s assignment rights to first require the consent of the carrier. Similarly, the “force majeure” provision in carrier templates often allows carriers to be excused from performance if unavoidable conditions exist, but do not extend this same right to the agent. All such inequalities should be identified and then aggressively pursued through the negotiation process.

The core agreements agents must enter into, whether it be with a carrier or another agent, will have an enormous impact on the ultimate financial success of their businesses. For this reason, agents should make it a priority to give close and careful consideration to the drafting and negotiation of these critical agreements.

Gregory E. Kunkle, Esq., and Thomas K. Crowe, Esq., are Washington, D.C.- based attorneys specializing in communications legal/regulatory matters. They can be reached at +1 202 263 3640 or via e-mail at [email protected].