Understanding the Distribution Agreement: A Checklist for Best Practices

Gibney Anthony & Flaherty, LLP
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Gibney Anthony & Flaherty, LLP

In the early stages of doing business in the US, it may be too soon for a company to form its own U.S. sales organization. There are several ways to enter the US market without a full sales force. One option is for companies to use a distributor to introduce their product to the US market. When hiring a distributor, a solid distribution agreement is key. This checklist provides some best practices when structuring your agreement.

What is a Distribution Agreement?

A distribution agreement governs the relationship between a manufacturer and distributor. The arrangement calls for the manu­facturer to sell finished products to the distributor and establishes all pricing and delivery terms. When preparing an agreement, it is important to understand how the relationship works and to incorporate key considerations for flexibility as your business grows.

Distributor Responsibilities

Billing and collection are usually the distributor’s responsibility, as well as ensuring compliance with local legal and regulatory requirements. Certain products are also subject to import/export controls and other regulatory constraints at the state and federal levels.

Exclusivity

The distributor may ask to be your exclusive U.S. repre­sentative. If the term of the distribution agreement is relatively short, exclusivity is often granted. The duration of the distribution agreement can be a matter of difficult negotiation. You may want to change your method of distribution in the future, perhaps by creating your own sales force. When the distribution agreement is initially entered into, it may be difficult to predict the volume of sales so flexibility is beneficial.

Distribution Agreement Checklist

  • Specify the duration of the relationship including methods of ending the relation­ship and fair compensation on termination
  • Reserve your right to repurchase the distributor’s inventory of products at cost, in order to facilitate a change in distributors
  • Include a statement that the distributor is an indepen­dent contractor with no authority to bind you as manufacturer
  • Require the distributor to take reasonable steps to avoid product diver­sion outside the U.S. or into inappropriate retail channels
  • Insurance provisions protecting the distributor from liabil­ity for defects in the products and you from liability caused by the distributor’s negligence
  • Request monitoring third-party use of your  trademark and any infringements
  • While the distributor may develop the initial marketing plan, you may want con­trol of the marketing effort – your agreement should allow significant input into the distributor’s marketing efforts and on receiving regular sales reports

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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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