Enterprises in a wide range of markets and industries have long used commercial agents to solicit business, collect payments, and take care of local matters.
Such agents are hired for their local or market expertise and to deal with issues that exporting or importing enterprises cannot easily handle from their headquarters. Economically and legally, they perform an auxiliary function to the principal’s main economic activity, acting as an independent economic operator but for the risk and account of the principal. This relationship enables the principal to separate its local activities from its other activities. Thus, shipping, insurance, and other service and production companies can efficiently internationalize their operations.
Potential FCPA/Antitrust Problem Posed by Agents
The use of agents may result in unfortunate surprises, demonstrated in various anti-corruption/FCPA and antitrust cases. Regarding anti-corruption/FCPA, the principal is deemed liable for the actions and (to some extent) omissions of its agents induced or allowed by the principal. Therefore, any principal must actively monitor the activities of its agent to avoid being implicated in any FCPA issues caused by the agent. In antitrust, it is well-established in case law that any infringement by an agent is automatically attributed to the principal, at least under European competition law.
Monitoring one’s agent may not always be simple. Agents, because of their expertise in certain markets or industries, often work for multiple principals and need to divide their loyalty (and resources) among various parties. As they are independently owned companies, (often) only have a part-time commitment to the principal in a certain market, and need to manage their position in that market, it is difficult for any given principal to control its agent’s activities.
Agency Relationship Risk
Because it is difficult to control an agent’s activities, working with agents may carry significant risk, and monitoring them may not be sufficient to mitigate against such risk. Termination of the agency relationship is not always simple, however, as was earlier this month demonstrated by a very expensive separation agreement between a Dutch principal and an agent that did not want to be controlled in a particular manner. The high level of compensation reflects not only the mandatory termination indemnity (due to having agents in many jurisdictions) but also the need to regulate market behavior by the agent post-termination, as businesses prefer their trusted agents not be engaged by competitors. Because the law in many jurisdictions protects agents, it is generally not an option to agree beforehand to a longer post-termination non-compete obligation than, for example, the one-year term permitted in most European law systems.
The decision to enter into a commercial agency agreement requires a solid risk analysis, including past and anticipated future market behavior by the agent unrelated to the representation of the principal. As such, the agreement may provide for the principal to maintain full control over the activities to be performed by the agent for the principal or in relation to the principal’s business (avoiding collusion through “hub-and-spoke” information exchange, where the agent also represents other active or potential competitors).
Termination of an agency agreement (for lack of control or otherwise) can be disruptive. Employing multiple agents in the same market may be a good strategy to minimize such risk.
What may also help is making sure sales managers are aware of the risks inherent in agency relationships, i.e., that they could potentially allow or condone actions by the agent that carry liability for the principal. As such, principals may wish to consider providing their sales managers with proper incentives to promote compliant behavior.