No Sale -- Sales Commissions Violate Anti-Kickback Statute; Prevent Enforcement of Nonsolicitation

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A durable medical equipment (DME) distributor, Joint Technology, Inc., entered into an agreement to pay a salesman commissions ranging from 18 to 22 percent on the volume of his sales. The court held that the salesman did not have a bona fide employment relationship.

In furtherance of the agreement, the salesman solicited referral business from various medical providers for the DME distributor. After a dispute arose, the DME supplier brought claims against the salesman for breach of exclusivity and breach of the agreement's nonsolicitation covenant. The court held that the DME distributor's claims could not be enforced as the agreement was void for illegality. The court found that the agreement provided for a commission based upon the volume of the salesman's sales -- in other words, the salesman was paid to solicit Medicare or Medicaid referrals in violation of the anti-kickback statute.

Had the salesman been treated as an employee, the court acknowledges that he could have been paid the commission. In determining whether the salesman was an employee, the court considered the "common law rules applicable in determining the employer-employee relationship, has the status of an employee." It found that the salesman was an independent contractor based upon (1) the agreement's provision stating that the salesman would "be an [a]gent of [the DME distributor] and shall not be deemed a servant or employee . . . . [the DME distributor] has no control over the operations of [a]gent or any of his employees, agents, owners [and] managers"; (2) the DME distributor's treatment of the salesman as an independent contractor for tax purposes; and (3) the salesman being paid on commission rather than an hourly or monthly rate without employee benefits.

This case reminds us that sales commission paid to independent sales representatives can violate the anti-kickback statute and that the violation also can prevent the enforcement of nonsolicitation and noncompete agreements contained within the sales arrangement. Joint Technology, Inc. v. Weaver, No. CIV-11-846-M (W.D. Ok. Jan. 23, 2013).


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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