In 1916, the Texas Supreme Court articulated the procuring-cause doctrine, which is a default rule that applies when a valid agreement to pay a commission on sales of property or product does not address whether commissions are owed on sales closed after the brokerage relationship ends. See Goodwin v. Gunter, 185 S.W. 295, 296 (Tex. 1916). On May 20, 2022, the Texas Supreme Court revisited the procuring-cause doctrine in Perthuis v. Baylor Miraca Genetics Laboratories, LLC, —S.W.3d—, (Tex. May 20, 2022) [21-0036] (“Perthuis v. BMGL”).
Brief Statement of Facts. Baylor Miraca Genetics Laboratories, LLC (“BMGL”) develops and analyzes genetic tests and sells its tests to third parties. Perthuis v. BMGL at 2. BMGL employed Brandon Perthuis (“Perthuis”) as Vice President of Sales and Marketing in early 2015. Perthuis signed a two-page at-will employment term sheet, which provided, in relevant part: “Your commission will be 3.5% of your net sales.” The term sheet did not define “net sales” or place any other parameters on the commission obligation. In 2017, Perthuis spent months negotiating a substantial sales account. The day before the contract on the account was signed, BMGL terminated Perthuis’s employment and thereafter refused to pay Perthuis commissions on any sales finalized after his termination. Perthuis sued BMGL, claiming that he was the procuring cause of all sales on the account that were finalized in the period from his termination through the date of trial in October 2018. See Perthuis v. BMGL at 2-4.
Procedural Posture. The case was tried to a jury, and the jury found for Perthuis but did not award him the full amounts that he sought. The trial court declined to award any attorneys’ fees to Perthuis. Perthuis v. BMGL at 5. BMGL appealed, and Perthuis cross-appealed. The court of appeals reversed and rendered judgment for BMGL, finding that the employment term sheet entitled Perthuis to commissions only for sales made during his employment. The case then proceeded to the Texas Supreme Court for review. Finding for Perthuis based on the procuring-cause doctrine, the Supreme Court remanded the case to the court of appeals to evaluate the jury’s award from the trial court.
Key Holdings. “When a seller agrees to pay sales commissions to a broker (or other agent), the parties are free to condition the obligation to pay commissions however they like. But if their contract says nothing more than that commissions will be paid for sales, Texas contract law applies a default rule called the ‘procuring-cause doctrine.’ Under that rule, the broker is entitled to a commission when ‘a purchaser [was] produced through [the broker’s] efforts, ready, able and willing to buy the property upon the contracted terms . . . .’” Perthuis v. BMGL at 1-2 (quoting Goodwin, 185 S.W. at 296. In Perthuis,, the agreement was silent about any exceptions to the duty to pay commissions for sales that Perthuis procured. The procuring-cause doctrine therefore applies.
The Procuring-Cause Doctrine
“The doctrine provides nothing more than a default, which applies only when a valid agreement to pay a commission does not address questions like how a commission is realized or whether the right to a commission extends to sales closed after the brokerage relationship ends.” Perthuis v. BMGL at 6. When faced with this doctrine the courts apply a three-question framework:
(1) Did the parties have the kind of contractual relationship to which the procuring-cause doctrine applies?
(2) If question (1) is answered in the affirmative, did the parties displace the doctrine by the terms of their contractual agreement?
(3) If the procuring-cause doctrine applies to the parties’ dispute and was not displaced, to what extent does the doctrine impose liability for the specific commission payments that the broker or selling party demands?
(1) What kinds of contractual relationships does the procuring-cause doctrine apply?
The minimum prerequisite for the doctrine to apply is an agreement to pay a commission on a sale. Perthuis v. BMGL at 7. The doctrine extends “far beyond the real-estate industry” and may apply to credit a broker, salesperson, or other agent for a commission-generating sale when “‘a purchaser [was] produced through [the broker’s] efforts, ready, able and willing to buy the property upon the contract terms . . . .’” Id. (quoting Goodwin, 185 S.W. at 296). Under the procuring-cause doctrine, “the broker’s entitlement to a commission vests on his [or her] having procured the sale, not on his [or her] actual involvement in a sale’s execution or continued employment through the final consummation of the sale.” Id. Eliminating a broker’s role in the business immediately before finalizing a sale does not mean that the broker could not have taken the necessary final step to earn a commission on that sale.
The procuring-cause doctrine is not a judicially created “term” for commission contracts. It does not add anything to a contract or take anything away. It does not restrict parties’ ability to modify their contractual relationships and it does not change the law governing whether parties have entered into such a relationship in the first place. Parties certainly may condition the obligation to pay a commission on something other than procuring the sale—they need only say so. The doctrine provides nothing more than a default rule to enforce parties’ existing agreements as set forth in their contract. Functionally, it precludes post hoc efforts to rewrite contracts by adding exceptions under the guise of ambiguity.
Id. at 9 (internal citations omitted).
Thus, parties to a commissions-based agreement may freely provide their own rules for paying or withholding commissions. “If they do, the procuring-cause doctrine becomes irrelevant.” Id. at 11. But, where there are no additional terms applicable to payment of commissions, the procuring-cause doctrine serves to fill that gap and to contribute to the stability of contract law principles by providing a default rule to understand what it means to promise to pay commissions for procuring a sale. Id.
(2) Did the parties take any steps to displace the doctrine?
Parties dissatisfied with the common-law rules applicable to a commission-based arrangement remain free to provide, by contract, for additional or different rules, and a departing from the procuring-cause doctrine requires no “magic language.” Perthuis v. BMGL at 12. The sales agreement, term sheet or employment contract could, among other things: (i) deny the payment of commissions from procured sales absent continued employment; (ii) authorize commissions only on sales that close during the employment or business relationship; (iii) condition commissions on the money from the sale being received within a particular time frame; or (iv) provide a time limit after termination beyond which commissions from procured sales will not be paid. Id. at 13.
“Contractual silence, however, leaves the procuring-cause doctrine intact as to those contracts to which the doctrine applies.” Id. And, an “at-will” employment or independent contractor arrangement for which compensation includes commissionable sales does not displace the procuring-cause doctrine. Sales commissions function differently than standard compensation arrangements for at-will employees—they reward the fruits of the laborer’s past labor. Accordingly, an employer or hiring entity’s termination of the engagement does not inherently affect the employee or contractor’s entitlement to commissions, absent the parties’ direction to deviate from the default procuring-cause rule. Id. at 14-15.
(3) When the procuring-cause doctrine applies, the party claiming a commission must show that he or she was in fact the procuring cause of specific sales.
A person who properly invokes the procuring-cause doctrine to recover sales commissions must prove that the specific sale was the direct and proximate result of the person’s efforts or services. Id. at 22. This burden may be met by proving the person set in motion “a chain of events . . . which, without a break in their continuity, cause the buyer and seller to reach agreement on the sale” as a primary and direct result of the [person’s] efforts. Id. (quoting Am. Jur. Proof of Facts 3d 399 § 13 (1998)). This requires that the person claiming the commission was both the “proximate” and “but for” cause of those sales. Many factors are considered in this determination, including the specific or general nature of the buyer’s relationship to the salesperson and employing entity and whether and to what extent a particular sales arrangement may have been modified after the person claiming a commission was no longer engaged or employed by the selling entity.
For example, a binding, multi-year contract that an employee or agent may broker and that generates repeated sales with no material adjustments may require commissions throughout the full term, because all those sales could be attributed to the same labor contributed by the individual. Id. at 24. “But significant maintenance may be required for other contractual relationships to endure. If the efforts of others were indispensable to salvaging or preserving a foundering contractual relationship, or if the contract itself must be reworked, a jury could conclude that the entitlement to commissions no longer existed.” Id. But, a person who lacks continuing employment could not—under concepts or theories of speculation—recover commissions under the procuring-cause doctrine if that person would not be entitled to them if still employed. Thus, claims of procuring-cause status will usually present a fact question that a jury or fact-finder must determine.
Insights. The procuring-cause doctrine is “‘but a rule of fairness and right.’” Perthuis v. BMGL at 8 (quoting Goodwin, 185 S.W. at 296). Under long-standing and firm contract principles, parties may freely provide their own rules for paying or withholding commissions during and after employment or engagement. And, if they do, the procuring-cause doctrine becomes irrelevant, and the Texas Supreme Court provides an array of low-hanging fruit examples of how parties could specify the binding terms for payment of commissions post-employment or post-engagement. In short, BMGL likely could have avoided years of litigation and substantial liability to Perthuis by including a simple sentence in the at-will term sheet, such as: Upon termination of employment for whatever reason, no commission shall be payable to the employee for sales made or for payments received from sales or accounts procured by or through the efforts of the employee during employment.
Freeman Law aggressively represents clients in tax litigation at both the state and federal levels. When the stakes are high, clients rely on our experience, knowledge, and talent to help them navigate all levels of the tax dispute lifecycle—from audits and examinations to the courtroom and all levels of appeals. Schedule a consultation or call (214) 984-3000 to discuss your tax needs.