Legal Briefs #9 - Wholesale Distribution Agreements

Transcript:

Ron: Hi and welcome to another edition of our MAPP Trap Podcast, Legal Briefs. Today we'll be talking about the double-edged sword of wholesale distribution. And to answer our questions we've got our Legal Briefs expert Jeremy Richardson on the line. Hi, Jeremy.

Jeremy: Hello, Ron. Nice to hear you again.

Ron: As I mentioned, wholesale distributors represent both risk and rewards. They're great for getting products to a wide number of retailers without having to adopt operational costs like warehousing, fulfillment, granular sales. etcetera. But they tend to be a less profitable deal since distributors get bigger discounts. And now that e-commerce has exploded, in many cases, it's the distributor’s customers that cause the unwanted MAP violations. Sometimes even the distributors themselves are selling at retail. But what safeguards should a brand take for avoiding MAP violators and unwanted sellers from the distributors’ network.

Jeremy: All right, that's a mouthful. So, lots to talk about with distributor agreements in particular as they relate to a minimum advertised price policy. So, I think the first place we start is why would a distributor care about the brand owner’s minimum advertised price policy? And I think to drill into that, you know, you have to understand what motivates the distributor, what are the things that the distributor wants to get out of this relationship? And, obviously it's making money by selling a volume of goods at a good margin. So, you want to get buy in from your distributor partners just like you want to get buy in from your sales team when you roll out a minimum advertised price policy or continue a MAP policy in place.

In discussing this with the distributors, I think if you present it as wanting to avoid that race to the bottom, where retailers drop advertise price, in which case the manufacturer and the distributor both lose. If it is a race to the bottom, the prices are going to drop out, the retailers aren't going to pay as high a price of wholesale, the distributors are going to lose money, the manufacturers going to lose money, volume’s going to drop off and it becomes a real problem.

I think if your distributor understands that and has a long-term view. It's going to buy into your MAP policy. So, what are some of the key terms that you want to include in a distribution agreement in order to protect your MAP policy and really your relationship with the distributor and your brand? Well, you can have restrictions on distribution channels and territory exclusions, and of course those extend to the retailers who the distributor is selling your product to.

You want to have, likely want to have, a prohibition on the retailers selling directly to end users, meaning you don't want the distributor to also be a retailer. It's going to have a tremendous margin in that situation and really be able to compete unfairly with your other retail partners. You may not have an absolute prohibition, but you may limit the distributor to a percentage of the total volume that it can sell directly to consumers. So maybe 5%, 10%, some amount if that is a key interest that the distributor has of selling directly.

Ron: A quick question on that. So, let's just say because a lot of distributors just in the real world are selling online, they have multiple stores and they are selling at retail. But we have spoken with a couple of distributors who say they'll do that and they maintain MAP, or they maintain MSRP, because they don't want to compete with their customers, right? Just as if a brand were selling it because they're getting full margin, of course, so that would subject the distributor to the MAP policy would it not? So, is that something that you would recommend? That you have a separate MAP policy with the distributor? If you sell at retail then this…

Jeremy: Well, I don't know that you need to have a separate minimum advertised price policy, one for retailers and one for your distributor. I think it's probably the same MAP policy or certainly the same MAP price list, because if your distributor is acting as a retailer as well, you want to make sure that when it acts as a retailer it is abiding by you, your brand owner, your MAP policy.

Ron: Practically speaking, again, one more question on that is, so now you're the brand and we really try to keep things as simple as possible, so you've got this distributor who's got two different models they're selling at retail and they're selling at wholesale and they violate the MAP on their retail side. Do you cut them off entirely so that now they can no longer sell wholesale? Or are you just going to be cutting them off to say, you may no longer sell our products at retail.

Jeremy: Obviously, that's a decision for the brand owner to make and part of that is going to depend upon your bargaining position. I think that if it was me, Jeremy's manufacturing company, I would probably start with telling the distributor that it cannot sell at retail, at least for a period of time, because of the MAP violation. But there may be a situation where this distributor has acted so egregiously that you just don't want to work with them anymore and you want to end the relationship. And presumably if you have other distribution partners, where you can transfer those sales to, you're in a good position to do that. But obviously the facts of each relationship would guide that decision.

Ron: Thank you.

Jeremy: So, after limitations on the distributor acting as a retailer, as well, something that's also related to that would be prohibition against drop shipping for other retailers. And that essentially means a third party who is a retailer but doesn't hold any inventory simply takes the order, sends it on to the distributor and the distributor directly fills that order, that might be something that you want to prohibit in your agreement. Maybe not, but maybe it's certainly something to think about. And that also goes right into data feeds. Do you want to have your distributor populating some retailer’s website and potentially giving the opportunity again to drop shipping? So, it's an issue to think about.

Something else that I think is an important one, but I know it is fought over traditionally is the brand owner requesting, demanding, asking that the distributor share its retail account list. So, you as the brand owner want to know which retailers are carrying your products. I mean, obviously, you can go do a Google search, but you want to know which distributor, assuming you have more than one, is supplying that particular retailer and that again is especially important if you have a violation of a MAP policy and you want to take action due to a MAP policy violation.

Ron: I can speak to that directly that we advise our clients all the time who have the wholesale distribution as a model to get those lists from their distributors. First of all, you know they circulate a do not ship list and they'll send that to the distributor. Many of the distributors don't really have time to look through their lists and figure out, Well, who's this? Who's that? We can cross reference, you know, addresses and phone numbers and so, we at MAPP Trap do that for our clients.

So, we ask them to get their distributor lists so we can do the cross referencing so they can go back to the distributors and say so we know that you're selling to Jeremy, therefore, please stop shipping and you don't have to look through your lists or anything. We're going to make it easy.

But then the distributors push back and say, no, we're not going to give you our list. That's proprietary and we don't want you selling to our customers. And if you have our list, you could sell it to someone. You could do that; you could take business and money out of our mouths. So, how do you make these distributors comfortable with sharing the vendors, customers with the vendor.

Jeremy: Well, Ron, I think you're in a pretty interesting position to facilitate that because you are a third party, you're not a distributor, you're not a brand owner, you're not a retailer. If the parties were comfortable with you acting as a confidential intermediary, the distributor could provide its client list, its list of retailers to you for your eyes only if you were willing. And I don't know if you are, but if you were willing to keep that confidential and not share that list with the brand owner, that might be one solution.

Another solution, assuming that Ron isn't in the picture or willing to do that, is for the brand owner to do something to give some comfort to the distributor that the brand owner isn't going to misuse that customer list. And one idea might be something like a Sunset Clause that you would find generally in a sales agent agreement, or maybe even in a distribution agreement, where if the distributor provides its customer list and then you brand owner or somebody affiliated with you, start selling directly to those retail accounts, then the brand owner is going to have to pay some royalty or sum of money or some penalty to the distributor for violating that trust. So that's another option. It may be something where the brand owner can make that offer knowing that it's not ever going to do that, but it will give some teeth to the brand owners promise of I won't use your customer list, distributor, to were compete against you.

Ron: Sunset Clause, interesting. I can see that going either way. I could see that potentially being a turn off to a brand to be able to offer that to a distributor, but I can see it were giving some comfort, maybe to a distributor. I'm assuming that what we're talking about is a distributor agreement, and not a policy.

Jeremy: Yeah, that is correct. We would be talking about a distribution agreement or a distributor agreement. It is a contract between the brand owner and the distributor.

Ron: So, a contract, if the brand were to have stipulations such as do not ship lists, right, or drop ship exclusion, or you may not sell at retail and, you know, not to get litigious, but again, you know, being a defender of the brand, like I am, are there are there potentially any legal remedies if the distributor doesn't honor those provisions of the, of the contract?

Jeremy: Yes, absolutely. So those could be bases for termination of the distribution agreement. There could be actual damages that could be recovered. If actual damages are too difficult to calculate, there may be an agreement to liquidated damages, which is where the parties simply say, hey, we can't really calculate this with accuracy, but we're going to say that the violation is going to be worth this much money, and in the event of a breach by one party, the other party recovers that from the breaching party.

So liquidated damages could be in there. You could also have an attorney’s fees provision where the prevailing party recovers its attorney’s fees if there's litigation. You might want to do this all-in arbitration. There are number of ways to build in those protections. Unfortunately, though, in many of those cases, the lawyers make out and both parties go home feeling very upset.

Ron: Well, at the end of the day, nobody wants this. It's very much a symbiotic relationship. Distributors and brands need to coexist. They need to cooperate and there has to be a certain level of trust in order for them both to be successful. So yeah, so upgrading and updating these distributor agreements based on, you know, e-commerce I think is a great suggestion and some of your ideas are really great. And I guess that that's it. Do you have anything to add to this, although I'm sure we could go on forever.

Jeremy: We could go on, maybe not forever, but for a lot longer. Let me throw out just a couple of other items that I think are important, I know time is short. I like to include Best Efforts provisions. So, you know that if you brand owner need to ensure that the distributor is using its best efforts to really sell your product, it is going to use good sales team staff and really do its best to monetize the relationship.

I also like to have protection of intellectual property ownership and domain name protection. Brand owner typically doesn't want the distributor to start registering a whole bunch of URLs that use the brand owner's name or similar names. You want to have your distributor cooperate with you in anti- counterfeiting efforts. We know that counterfeit goods are a serious problem, have been and continue to be, and that's really on the forefront of a lot of folk’s minds.

Compliance with applicable laws is another good one, although that, more often than not, applies to distributors who are in other countries or other locations and may know the laws and regulations, schemes, better than you do sitting in a foreign country.

And then the last thing I want to address is term and termination. It's really important before you get into one of these relationships, to know who your distributor is. Know who they are, know about them and what their expertise is and get comfortable that they're going to represent your brand well, because your brand identity is very important to you as a brand owner. So having the term is important to know how long this agreement is going to go on. But then once you've gotten into the agreement, you also want to make sure you have an escape hatch. So, termination upon the occurrence of certain unwanted events, on both sides, is also important. If one party breaches, the other party should be able to get out of that relationship before the natural expiration, which may be years down the road.

Yes, I have a lot more, but I think that's a good point to stop unless you have any follow up questions, Ron.

Ron: No, no follow-ups. I think we've covered a lot and what we'd love to do is maybe get a list of some of the must haves in a distributor agreement and we can put them up alongside the podcast so listeners can download that and review.

Jeremy: That sounds great.

Ron: Well, thanks again, Jeremy. I appreciate your time. Appreciate your insights and your expertise and I hope you have a great rest of the day.

Jeremy: Always a pleasure. Good to be with you.

Ron: All right. Bye-bye, everybody. If you'd like to submit a question or topic for a Legal Briefs podcast, e-mail them to legalbriefs@mapptrap.com. For more information about how map trap can help you with your online brand protection needs, visit www.mapptrap.com.