Drafting error in specifying payout “each calendar month” costs company $1.5M

A manufacturer terminated a sales-representative company, as permitted by their contract, for failing to meet quota. The rep received commissions ranging between 15% and 22% of sales.

The manufacturer thought that the contract provided for the terminated sales-rep company to get a total send-off payment of 7.5% of sales for the previous 12 months, paid out monthly over six months, as compensation for a one-year, post-termination noncompetition covenant.

But here’s what the contract language actually said:

In the event this Agreement is terminated or not renewed by Exactech, then during each calendar month of the first six (6) months after such termination, Exactech will pay [Midwest] an amount equal to seven and one half percent (7.5%) of the total sales in the Territory during the trailing twelve (12) months ending on such termination date (the “Restricted Period Compensation”).

Midwest Medical Solutions, LLC v. Exactech U.S., Inc., No. 21-1621 (8th Cir. Dec. 29, 2021) (reversing summary judgment; emphasis added, alterations by the court).

The district court granted summary judgment for the manufacturer that the sales-rep company was entitled to a total payment of about $300,000, paid out over six months.

But the appeals court reversed, holding that the sales-rep company was entitled to a $300,000 payment each month for the entire six-month period:

And though the plain language may result in a large sum paid to Midwest by Exactech as [compensation for the noncompetition covenant], there is no evidence—other than the parties’ self-serving arguments—as to why this amount is or is not an absurd result.

As such, we are bound to give [the contract language] its plain and ordinary meaning. To conclude otherwise would be to substitute our views of the contract or our inferences … for the parties’ intent as indicated by the clear and unambiguous language …, terms that the parties negotiated and to which they ultimately agreed.

Id., slip op. at 6-7 (citations omitted, extra paragraphing added).

Whichever lawyer drafted (or reviewed and approved) the above language for the manufacturer has probably had at least one unpleasant conversation with the manufacturer’s business people — and possibly with the lawyer’s malpractice carrier ….

But who knows: The manufacturer might have knowingly agreed to just such a large payment, only to change its mind (or experience a convenient lapse of memory) when it actually had to write the check — it certainly wouldn’t be the first time that ever happened ….

Incidentally, that’s why it pays for lawyers to specifically bring up potential issues like this — in writing — with clients before contracts get signed, for example in an email or with a note in a Word comment bubble. That way, if a client does have a change of heart (or of memory) after the fact, the lawyer can remind the client, Hey, this was something I pointed out before you signed the deal ….