Chem-Trend, Inc., a Michigan Corporation v. Newport Industries, Inc., a Missouri Corporation, Joseph Cahan, an Individual Douglas J. Edington, an Individual, Jointly and Severally W.N. Shaw Company, a Missouri Corporation and David Murphy, Newport Industries, Inc., a Missouri Corporation, Counter Claimant-Appellant v. Chem-Trend, Inc., a Michigan Corporation, Counter
Docket: 00-1518
Court: Court of Appeals for the Eighth Circuit; February 5, 2002; Federal Appellate Court
Chem-Trend, Inc. appeals a judgment awarding Newport Industries, Inc. $109,182.23 in contractual commission damages, with the district court adding a $100,000 statutory penalty and $4,863.50 in attorney's fees under the Michigan Sales Representatives' Commissions Act (MSRCA). Newport cross-appeals, arguing the district court erred in its attorney's fee determination. The Eighth Circuit affirmed the district court's decision.
The case involves a business relationship where Chem-Trend, a Michigan corporation, initially permitted Newport, formed by former Chem-Trend employee Joseph Cahan, to act as a nonexclusive sales representative for Chem-Trend's products across several states. In 1996, Chem-Trend significantly reduced Newport's territory. Shortly after, Cahan established the W.N. Shaw Company to compete with Chem-Trend, hiring former Chem-Trend employees and selling products similar to Chem-Trend's to former Chem-Trend customers outside Newport's territory.
In March 1997, Chem-Trend terminated Newport's sales agreement after discovering Cahan's competition and misappropriation of trade secrets, subsequently halting commission payments due under the agreement.
Chem-Trend initiated a lawsuit against Newport and several individuals in federal court, alleging various claims, including misappropriation of trade secrets and breach of fiduciary duty. Newport counterclaimed for unpaid commissions, asserting that Chem-Trend's failure to pay triggered statutory penalties under the MSRCA. During the April 1999 jury trial, Chem-Trend presented twenty claims, with the jury ruling in its favor on two claims against Newport, specifically for breach of fiduciary duty and fraudulent concealment, while rejecting three other claims, including breach of contract. The jury awarded Chem-Trend $1,056,000 in damages, attributing 15% to Newport. However, despite Newport's breaches, the jury also awarded it $109,182.23 in unpaid commissions, and the court imposed a $100,000 statutory penalty plus attorney's fees due to Chem-Trend's failure to pay on time.
Chem-Trend contested the jury's decision on the counterclaim but did not appeal the adverse contract verdict. Newport, in turn, appealed the reduction of its requested fees. Chem-Trend argued that the commission damages should be reversed since the jury's finding of breach of fiduciary duty and fraud by Newport implied a breach of contract, rendering the verdict inconsistent. Newport countered that Chem-Trend could not challenge the commission award indirectly without appealing the contract verdict, and the court agreed. Furthermore, Chem-Trend claimed the district court misapplied the MSRCA regarding damages for a representative breaching fiduciary duty; however, the court noted that Chem-Trend had waived this argument by not objecting to jury instructions that allowed the counterclaim to be considered despite Newport's breaches. Thus, the review was limited to plain error due to Chem-Trend's failure to preserve its objections.
Plain error review is limited to cases where an error significantly impacts the fairness, integrity, or public reputation of judicial proceedings. A verdict may be reversed only if the error prejudices a party's substantial rights and leads to a miscarriage of justice. To assess whether the district court erred in jury instructions regarding Chem-Trend, it must be determined if a sales representative can recover unpaid commissions under the Michigan Sales Representative Commission Act (MSRCA) when they have defrauded their principal or breached a fiduciary duty. The MSRCA lacks clarity on this issue.
Under Michigan common law, a broker typically forfeits compensation due to misconduct or breach of duty, but not all acts of fraud or breaches are material, meaning forfeiture is not always warranted. Previous rulings indicate that a principal must prove harm from a representative’s breach to withhold commissions. Chem-Trend likely warranted an instruction that Newport forfeited commissions upon a material breach or act of fraud causing damage, but since Chem-Trend did not request this instruction, it must be determined if this omission meets the plain error standard for reversal. Despite concerns about the commission award and the substantial $100,000 statutory penalty, the court hesitates to find plain error.
The court's comments regarding Chem-Trend's entitlement to the jury instruction are based on common law rather than the MSRCA, which is ambiguous concerning its modification of common law principles on commission forfeiture. A previous ruling indicating that an employer not liable under common law is also not liable under the MSRCA has been overruled, leaving uncertainty about the MSRCA's impact on common law standards.
Under Chem-Trend's interpretation of the Michigan Sales Representative Commission Act (MSRCA), a principal could withhold commissions if they later prove a sales representative's disloyalty, but this interpretation is not universally accepted. The MSRCA may require principals to initially pay earned commissions and later sue for recovery in cases of disloyalty. This interpretation aims to relieve sales representatives of the burden of initiating litigation for earned commissions.
Chem-Trend sought jury instructions that would require a finding of material breach of fiduciary duty or fraud before forfeiting commissions. However, the instructions allowed the jury to find breach or fraud without determining materiality. Evidence suggested Newport’s actions, such as reimbursing a competitor for a meeting, could be viewed as disloyal or fraudulent, but not necessarily material. Consequently, Chem-Trend’s failure to request appropriate instructions hindered assessing the jury's award consistency with its findings on breach and fraud.
Despite Newport's breaches, it significantly increased Chem-Trend's sales, leading the jury to believe Newport earned its unpaid commissions. Additionally, the jury's verdicts compensated Chem-Trend for the defendants’ wrongdoing, suggesting that Chem-Trend would receive a windfall if allowed to retain unpaid commissions. Michigan law supports that forfeiture of commissions is permissible only when the principal suffers damage due to a disloyal servant.
The case emphasizes the importance of requesting proper jury instructions and the court's inability to evaluate the jury's verdicts due to Chem-Trend's oversight. Although there are concerns regarding Newport receiving a statutory penalty alongside unpaid commissions, this alone does not warrant a reversal. Newport's cross-appeal regarding fee reductions was dismissed, as the trial court exercised its discretion appropriately. The district court's decisions were ultimately affirmed.
The Honorable Frederick R. Buckles, U.S. Magistrate Judge for the Eastern District of Missouri, is presiding under 28 U.S.C. § 636(c)(1). The Missouri Sales Representatives Commission Act (MSRCA) mandates that all commissions due at the termination of a sales representative's contract must be paid within 45 days. Commissions due after termination must also be paid within 45 days of their due date. A principal who fails to pay is liable for actual damages and, if found to have intentionally withheld payment, may owe either double the unpaid commissions or $100,000, whichever is less. Additionally, the prevailing party in court is entitled to reasonable attorney fees and court costs. A federal court criticized the MSRCA for its poor drafting, noting a lack of clarity regarding its scope and applicability. The statute specifies that it does not alter existing legal rights of the parties involved. Chem-Trend contended that the statutory penalty was inapplicable as it did not act in bad faith; however, the court ruled that bad faith is not a prerequisite for the penalty under the MSRCA. After the jury determined that Chem-Trend 'intentionally failed to pay,' the district court was required to impose the statutory penalty.
