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Distributionship or distribution agreement, which one matters?

The name does not make a difference. A distributorship is another kind of arrangement for the purchase and sale of goods. The distributor buy the goods for resale, generally from the manufacturer or other producers. The distributor may have an exclusive right or a non-exclusive right to market the goods within a specified territory. In general, an exclusive distributorship does not impose any restriction on the price at which the distributor may resell the product, will be lawful—that is, it will not constitute an illegal restraint of trade—if (i) the manufacturer of the goods does not control a substantial share of the market, (ii) competitive goods of other manufacturers are readily available in the market, (iii) the distributorship is reasonable in terms of the period and area of exclusivity, and (iv) the distributorship is not part of a scheme to control the prices at which the goods are resold. If a manufacturer markets the same goods within the same territory as its distributor, the effect of this arrangement must also be considered.

To some extent, there are similarities between the distributorship agreement and the trademark and license agreement. The economic concerns of the manufacturer and the distributor differ, though, in at least two ways from those of a licensor and licensee of a trademark. First, during the term of the license, the licensor will incur little, if any, cost for its product, the trademark. The manufacturer, on the other hand, will incur the continuing costs of production. Second, the licensee can increase or decrease production depending on demand, and compensation payable by the licensee to the licensor based on a royalty or percentage of sales protects the licensee in a falling market. Considering these concerns, careful consideration should be given to any long-term arrangement. Over time, costs and markets change, and so the desire for a long-term commitment must confront the reality that changing conditions often warrant changes in prices and quantities.

The risk of the distributor—especially in the event of a new product—is that the distributor will create a market for the product which will allow the manufacturer to attract other distributors and to negotiate better terms when the short-term agreement expires. However, if the distributor is not granted an exclusive right to market the product within a specified area, then a short-term arrangement may make more sense from its point of view. Ideally, if the product is good and if the distributor does a good job, the parties should wish to continue their relationship and should agree on renewal terms which respond to existing conditions.

If the parties desire an even less formal arrangement or wish to sample the relationship, they can employ a purchase order form. As always is the case, the objectives of the parties and the various considerations involved must be carefully analyzed and combined to produce a proper outcome.