Distribution Agreements in the USA

Distribution Agreements in the USA

The distribution contract is an agreement between two parties, a party usually called a supplier, and the other distributor. The distribution contracts are regulated in each state by the UCC (Uniform Commercial Code), a law that each state, based on a common model for all the United States, has issued to regulate the legal aspects of trade, and which provides that the company producer, for example an Italian company (the supplier), sells its products to another party (the distributor), which in turn will promote and sell the products, not in the name and on behalf of the producer, but in name and on its own. There are multiple reasons that make the choice lean towards a type of contract like this. The distribution contract is, in fact, an optimal choice for companies that, wanting to maximize penetration on the US market and operating in a specific market sector, want to keep sales costs very low or even eliminate them, while at the same time guaranteeing the collaboration of an expert counterpart in the specific market sector. In addition to these advantages of a purely practical type, there are many economic / commercial advantages. A distribution contract provides in fact, in general, for the distributor to move several obligations related to the conduct of the business in question. For example, the distributor will have to plan their own advertising or product promotion campaigns, such as participations in Expo or specialized fairs; the distributor will always take care of any type of license or permit requested, both at the federal level (for example the FDA regulation - Food and Drugs Administration), and at the state level.

MAIN ASPECTS OF THE DISTRIBUTION CONTRACT

  1. Exclusivity. An important element of the distribution contract is the exclusivity of the business relationship. Since the nature of the contract is the result of negotiation between the two parties, this element, if deemed necessary by the manufacturer, must be included in the contractual clauses. The element of exclusivity can, in some cases, also be inferred from the behavior of the parties; the American Commercial Code (UCC), requires that the parties behave in a fair manner and produce the maximum commitment in the implementation of the contractual relationship. From this general provision it can therefore be inferred that exclusivity is an intrinsic element of this type of contract.
  2. Distribution channels. Another fundamental element of the contract is the choice and mention in the contractual clauses of which distribution channels will be maintained directly by the supplier. An example of this choice is Internet sales: the supplier who wants to reserve the right to sell the goods covered by the contract via the Internet, must make sure that the contract allows it, so as not to infringe the distributor's rights. Another example is the direct sale to selected customers who are in the exclusive territory of the distributor; also in this case, an express clause of the contract is necessary to limit the field of action of the distributor.
  3. Products.As in any contract, the definition of the asset subject of the same is of great importance in the distribution contracts. A supplier that is able to produce a series of different products would do well to select different distributors for each product line that is not part of a common production. This is because the choice of an expert distributor in the specific sector and with a network of contacts and knowledge already rooted in the market, can guarantee the success of sales more than a general distributor could do who is responsible for promoting and selling different product lines.
  4. Duration and renewal. The distribution contract will have the duration that the parties have freely agreed between them; if the contract is of limited duration, it is necessary to pay attention to the clauses concerning the tacit renewal and any changes in the purchase price by the distributor. With regard to permanent contracts, the great contractual freedom that distinguishes the United States, however, guarantees each party the right to terminate the contractual and commercial relationship in full freedom, respecting those characteristics of fair behavior indicated by the UCC. Still on the subject of contract termination, it should be added that it is still common practice to indicate a series of situations that guarantee the parties the right to terminate even without just cause, since in some legislations, this termination is not always permitted. To guarantee the efforts that each party undertakes to make in the realization of the commercial project, there are some situations in which the distributor is protected against a supplier who, after a short time from the establishment of the contract, declares to terminate the relationship, leaving to the distributor the burden of bearing the costs incurred.
  5. The effects of termination. The terms of the distribution contract must, in general, also contain provisions that govern the status of the parties and, above all, the status of the goods covered by the contract. The agreement must accurately report the duties of the parties in the event of termination of the contract. If, for example, the distributor has bought an important quantity of goods, the contract must be clear on what behavior the distributor will be obliged to keep in the event of termination of the contract. For example, if the same can sell the remaining goods at the cost price or if he should instead return to the supplier any remaining stock at the time of termination of the contract.
  6. Minimum sales and acquired objectives. Another aspect that we believe is necessary to underline is the faculty that the supplier should always reserve the right to refuse orders that it considers not in line with the market objectives. Furthermore, the supplier should always be able to refuse to fulfill other orders if there is the doubt that the distributor, instead of promoting and selling the products, limits himself to accumulating a large quantity without carrying out the insertion in the product market and the development of the market.
  7. Guarantees. One of the elements covered by the UCC is that of guarantees relating to products sold on the United States market. These provisions cannot be derogated and are the object of particular scrutiny by the consumer and by the protection associations of the same. The supplier must guarantee that the product sold possesses the functionality characteristics of that specific category of products (for example, who supplies a computer, guarantees that the machine has the characteristics that the consumer expects to receive when he buys that computer). In addition to this general warranty, there is an even more specific guarantee, the so-called implied warranty for specific use, according to which each product placed on the market has the characteristics related to the specific purpose for which that product was purchased. These guarantees, being implicit, are already part of the guarantee portfolio with which the product is placed on the market; it is therefore suggested to include specific clauses in the distribution contract that clearly outline the limitation and scope of other product warranties.
  8. Intellectual Property. In many cases, the products covered by the distribution contract are products with trademarks and / or patents. The supplier that wants to distribute its products in Florida, or throughout the United States, must be adequately protected against the risk of counterfeiting. Registering your trademark and / or patent in the United States guarantees the supplier the certainty of being able to enforce the Federal legislation, which protects intellectual property with extreme rigor. This protection will be effective both against any third party wishing to appropriate the trademark or the patent, and towards the distributor himself, who will not be able to register the trademark and / or the patent in his name and thus exploit the intellectual efforts of the supplier. Assuming that the trademark and / or patent have been duly registered in the USA, it is important that the contract establishes the methods, usually through licensing contracts, through which the distributor can use the trademark and / or patent. In turn, the distributor will pay particular attention to including in the agreements a clause that relieves it from liability in the event, due to carelessness or bad faith of the supplier, of counterfeit branded products or using trademarks registered by other manufacturers; this clause makes the supplier directly responsible for violations of the legislation protecting intellectual property.
  9. Non-competition. Non-competition is a clause that every supplier should include in distribution contracts; the inclusion guarantees a more stable relationship with the distributor and protects from commercial practices that could jeopardize the success of a specific market category entering the US market. Although, as mentioned, the contract is the result of the negotiation of the parties, there are state legislations that regulate such occurrences; it is therefore advisable to contact a lawyer of the State chosen for the distribution of the product and to be guaranteed in this way to be in compliance with local legislation.
  10. Confidentiality. As written above in the paragraph concerning intellectual property, it is necessary that the contract clearly outlines the obligations of the parties, and especially the distributor, regarding the confidentiality of information received during the business relationship. The supplier must safeguard himself from the possibility that all information of a corporate nature, of market strategy and of any other aspect linked to the uniqueness of the products or services offered, may be disclosed to parties outside the contract. If the supplier has further development plans with respect to the market covered by the distributor, he must oblige the same to maintain extreme confidentiality on the products and technologies offered. It is also necessary that this confidentiality obligation has a longer duration than the duration of the contract. The distributor will thus be obliged to maintain the confidentiality of the information received for a period which, even if left to the negotiation between the parties, is usually never less than one or two years.
  11. Jurisdiction. As a last aspect to take into consideration is the choice of the competent jurisdiction to decide on any disputes between the parties. The parties are free to agree on a specific competent venue for the judicial resolution of disputes that may arise from the contractual relationship. It is important to pay particular attention not only to the law according to which the contract will be interpreted and analyzed, but above all the place and the court that will be called to decide in cases of judicial dispute. It is good that the Italian supplier knows that a contractual clause of this type is recognized by the American courts and if not carefully analyzed it could tomorrow entail legal costs of great magnitude and not easy administration if the Italian company does not have a local correspondent who heals its interests on American soil.