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Contract – Manufacturer Representatives – Independent Contractor – Poached Client

Daniel Group, Inc. v. American Sales & Marketing, Inc. (Lawyers Weekly No. 020-005=17, 30 pp.) (Gregory McGuire, J.) 2016 NCBC 97

Holding: An oral contract that allowed the defendant-independent contractors to compete with plaintiff was not breached when defendants lured a large part of the business of one of plaintiff’s clients away from plaintiff.

Defendants’ motion to dismiss is granted in part and denied in part.

Facts

As a manufacturer representative, plaintiff assists manufacturers in marketing and selling their products to retail stores within contractually-defined territories. Defendant American Sales & Marketing, Inc., is in the same business, and defendant Licata is American Sales’ sold shareholder and sole board member.

Plaintiff acted as a sales representative for M Corp.’s “cellular innovations products” to certain retailers in six southern states. The sales agreement was terminable at will by either party.

Plaintiff and defendants entered into an oral agreement under which defendants acted as sales representatives for certain of plaintiff’s clients, including M Corp. The agreement allegedly specified that defendants’ sole source of income from work relating to plaintiff’s clients would be a 50-50 split of commissions paid to plaintiff by those manufacturing clients that plaintiff assigned to defendant.

Defendants were highly successful in selling M Corp.’s products for plaintiff. On Aug. 12, 2015, Licata sent an email directly to M Corp. requesting that M Corp. pay directly to defendants a non-commission-based bonus.

Upon discovery of this request, plaintiff sent to Licata a written sales representative agreement, which defendants never executed.

In November 2015, M Corp. removed Family Dollar, Dollar General and Variety Wholesales from plaintiff’s territory and gave them to defendants.

Breach of Contract

Plaintiff alleges that (1) under the parties’ oral contract, defendants’ sole source of income from any work relating to or from plaintiff’s manufacturing clients was to be a split of one half of all commissions paid to plaintiff by its manufacturing clients and (2) defendants breached this agreement by attempting to solicit additional monies from M Corp. without plaintiff’s permission. Plaintiff has stated a claim for breach of the oral contract.

Breach of Fiduciary Duty

Plaintiff alleges that defendants breached a fiduciary duty to plaintiff by (1) intentionally undermining plaintiff’s relationship with M Corp., (2) concealing its efforts to solicit M Corp. to enter into a direct relationship with defendants and (3) causing M Corp. to terminate, in part, its contract with plaintiff.

However, the complaint alleges that defendants were independent contractors. The proposed written agreement itself said, “Nothing contained in this Agreement is intended to … create between [plaintiff] and Representative a relationship of … principal/agent….” Furthermore, defendants’ responsibility for three customers of one of plaintiff’s clients is simply not sufficient to support a claim that defendants occupied a position of power and influence over plaintiff that created a fiduciary relationship between parties.

The complaint does not successfully allege that defendants owed a fiduciary duty to plaintiff.

Good Faith & Fair Dealing

Plaintiff alleges that defendants breached an implied covenant by: (a) soliciting additional funds from M Corp. in August of 2015; (b) “willfully misleading” plaintiff that the proposed representative contract would be signed; and (c) soliciting and pressuring M Corp. to terminate its agreement with plaintiff regarding promoting M Corp.’s products with Family Dollar, Dollar General, and Variety Wholesalers.

Since defendants were not parties to the sales agreement between plaintiff and M Corp., it is impossible for defendants to have breached that agreement’s covenant of good faith and fair dealing.

As to the proposed representative contract, the email correspondence upon which plaintiff relies establishes that Licata said only that his attorney had not yet reviewed the proposal. These allegations do not support plaintiff’s claim that Licata intentionally misled plaintiff.

Plaintiffs’ claim that defendants breached the covenant of good faith and fair dealing by soliciting and pressuring M Corp. to contract directly with defendants appears to be a thinly-veiled attempt to have this court read an implied non-competition or non-solicitation covenant into the oral agreement. However, in North Carolina, a covenant restricting competition must be in writing. The court will not permit plaintiff to by-pass this requirement by implying a non-competition covenant into the oral agreement.

However, plaintiff has alleged that the oral agreement limited defendants’ compensation to one half of the commission paid to plaintiff by M Corp. Considered in the light most favorable to plaintiff, these allegations could support a claim that defendants’ request to M Corp. for a bonus deprived plaintiff of a benefit to which it was entitled under the oral agreement.

Fraud

Silence is fraudulent only when there is a duty to speak. Since defendants did not owe a fiduciary duty to plaintiff, and since plaintiff has not alleged that defendants took steps to actively conceal their solicitation of M Corp.’s accounts, defendant could only have had a duty to disclose if it had knowledge of a latent defect in the subject matter of the negotiations about which the other party was both ignorant and unable to discover through reasonable diligence.

At best, the complaint alleges that between September 3 and October 30, 2015, plaintiff was seeking to have defendant execute the proposed representative contract. Even if this constituted a “negotiation”, it was a commercial negotiation between two businesses and defendants were not under an obligation to disclose their solicitation of M Corp.’s business. Since there was no duty to disclose, plaintiff’s fraud claim must fail.

Tortious Interference

Competition in business constitutes justifiable interference in another’s business relations and is not actionable so long as it is carried on in furtherance of one’s own interests and by lawful means.

Plaintiff acknowledged that defendants were permitted to compete under the oral agreement, alleging that “Defendants were free to represent other manufacturers that were not clients of Plaintiff….” Plaintiff also alleges that defendants were competing with plaintiff, albeit “secretly,” while under the oral agreement.

In light of the allegations that defendants were competitors and were, in fact, competing with plaintiff in soliciting M Corp., plaintiff has not alleged a claim for tortious interference with contract.

Motion granted in part and denied in part.


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