Agents often fail to realize that the core of their business model critically depends upon the effectiveness of the contracts they have in place with underlying carriers and other agents.  If any of these core contracts are flawed or financially weak, the agent’s business model is in serious jeopardy.  For this reason, the first and highest priority for any agent or master agent should be negotiating sound agreements that are designed to be “financial winners”. Agents often 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 thoroughly understand their core contracts and neglect to invest adequate resources and upfront time into their negotiation and formation.  Major carriers, with whom 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 as part of its “team”, qualified telecommunications counsel who is involved in the drafting and negotiating process for all such core agreements.     The balance of this Legal Alert attempts to survey 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 which 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 is also 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 on services sold.  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 can sometimes impose a monetary penalty on the agent or allow the underlying carrier to unilaterally terminate the contract.          A carrier account team will often attempt to sign an agent up for as much as possible; often more than the agent can deliver.  Therefore, prior to binding itself to an agreement, an agent should conduct a thorough review of its 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 is also critical that an agreement clearly and plainly 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 revenues); liability for bad debt (i.e., uncollectibles); and audit rights.  Circumstances allowing modification of commission rates should also be clearly addressed (such as an increase or decrease in end user rates).     An important goal for every agent is an “evergreen” clause which provides for continuing, ongoing commissions after an agreement terminates.  Evergreen provisions – which can be difficult to obtain – can be structured in a variety of different ways, some open-ended and virtually indefinite, while others can be 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 adequately understand the potential financial burden that arises 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.  Often a carrier template agreement 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 should also 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 somewhat 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.  In our experience, agents of all types (but particularly smaller agents) are well served by mediation and arbitration.  These alternative dispute resolution techniques can go a long way towards 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.  We typically recommend that our agent clients 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” should also be approved by the agent, and included as schedule to the agreement.            Addenda            Since the “devil is in the details”, careful attention must be paid to the commission schedule and other addenda which are incorporated into and deemed to be a part of the agreement.  This means that these documents and schedules are as binding upon the agent as the agreement is 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 upon 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 the agent’s ability to conduct its business and needlessly tie its fortunes to that of a single carrier.  Not surprisingly, such provisions usually do not require the carrier to be exclusive to the agent.  An agent should make it a point to strenuously oppose the inclusion of exclusivity provisions that would limit its flexibility to sell for other carriers.             800 Numbers – Agents should also give consideration to the identity of a customer’s “RespOrg” or responsible organization under the FCC’s toll-free numbers rule.  The RespOrg 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 RespOrg is typically its carrier, the FCC has held that 800 service customers should be able to choose the RespOrg for their 800 service and should be able to designate any entity (including themselves) as RespOrg, subject to certain conditions.  An agent may wish to consider itself serving as a RespOrg or having the customer designate an entity other than the carrier as RespOrg in order to diminish the carrier’s control over that particular customer.          Mutuality – Many provisions in carrier agreements are designed to favor the carrier only and do not extend comparable rights to the agent.  For example, as discussed above under the Termination section, carrier templates typically state that an agreement is terminable at will without penalty by the carrier, but not by the agent.  Carrier template agreements are typically riddled with such inequalities.  Another common example occurs under the “assignment provision” whereby a carrier template will often state that the carrier can assign the agreement to a third party freely 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 that 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 prioritize giving close and careful consideration to the drafting and negotiation of these critical agreements. April 2004 Back