Court Rules Marketing Contract Provisions Faulty

In reviewing a breach of contract lawsuit filed by a cosmetics company against former “independent marketing executives,” a state supreme court ruled that language in the contract amounted to an illegal penalty and further, the company was required to prove its degree of economic damages before it could collect them.
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The previous verdict in the case of Melaleuca, Inc v. Foeller was therefore vacated and remanded by the Idaho Supreme Court back to the district court for further proceedings.

The evidence here suggests a clear breach of contract that would obviously warrant financial remedy. However, every word of a business contract has the potential for meaning in the event of a civil lawsuit, which is why companies must take the utmost care during the drafting phase of the process.

According to court records, Melaleuca, which sells cosmetic and nutritional goods, entered into a marketing agreement (essentially, a business contract) with a couple living in Canada to sell their products and enroll new “marketing executives” for the company.

In exchange for the work, the couple was entitled to receive commission payments, based on the sale of products and how many individuals they enrolled. Those payments were made on a monthly basis, and were contingent upon the representatives maintaining “good standing” throughout the month.

In order to achieve this, executives had to comply with the terms of the contract, which included a non-compete clause, as well as several provisions that dealt with solicitation and competition. This part of the policy (referred to throughout the case “Policy 20”) indicated that violation of the non-compete agreement amounted to a voluntary resignation and a cancellation of the contract. Additionally, the provision indicated that if a breach occurred, all bonuses or commissions obtained during the calendar month in which the violation had occurred would be forfeited.

It was undisputed that the couple violated the agreement starting in June of 2008. They became involved with a competitor of Melaleuca, and started to enroll Melaleuca customers in the competitor’s programs while still receiving commissions from Melaleuca.

In fact, the couple reportedly continued this way for several months, terminating their relationship with Melaleuca in November 2008, with their last check from the company received in October for September’s commissions.

It was not until after this that Melaleuca learned of the violation. At that point, the company filed a complaint against the couple, seeking damages for violation of the policy. Several months after filing the initial complaint, the company requested a summary judgment for the return of the commission the couple had received from the time of the breach on (a total of about $24,000).

The couple, meanwhile, countered that the amount requested was not correct and that the policy they were accused of violating was not enforceable.

The court initially sided with the couple, but after granting a motion for reconsideration to Melaleuca, the court granted a summary judgment in favor of the company for a little under $24,000.

The couple appealed, and the issues of fact, as presented to state supreme court, were:

  • Whether the couple was required to refund the commissions paid to them after the breach because the breach excused the company from having to uphold its end of the agreement;
  • Whether the amount of damages was correct;
  • Whether the policy amounted to an illegal penalty
  • Whether the couple was entitled to an award for attorneys’ fees.

The supreme court overturned the district’s court’s findings on the following basis:

  • It was an error to award recovery of commissions paid on the basis that the breach “simply excused” the firm from paying. The court determined that any plaintiff who wishes to recover damages for breach of contract bears the burden of proof for damages. Even if the plaintiff establishes he’s been legally wronged, he can’t collect damages unless he’s been somehow economically injured, and those are facts that have to be proven beyond speculation.
  • There was not enough information in the record to determine whether the forfeiture provision amounted to an unenforceable penalty because the district court hadn’t engaged in any formal fact finding to determine whether the clause reasonably related to the damages sustained. Thus, the penalty was illegal.

With the summary judgment vacated, the case has been remanded back to the lower court.

The Brown Law Firm, LLC, has offices in Belmont and Boston. For a free and confidential consultation, call 617-489-0817 or contact us online.

Additional Resources:
Melaleuca, Inc v. Foeller, Feb. 7, 2014, Idaho Supreme Court
More Blog Entries:
Boston Technology Contracts & Cooperative Agreements Critical to Success, Feb. 7, 2014, Boston Business Lawyer Blog

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