Monday, August 10, 2015

What to Put in Your Reseller Agreement

Do not grant any exclusivity without some minimum sales quotas or an easy way to terminate the contract. For some reason, I often encounter this common big problem that is easy to prevent. Resellers often want exclusivity b/c they don’t want to end up without any rights to sell your stuff after they have invested significant amounts into promoting your brand. They don’t want other nearby resellers to piggyback on their efforts in getting your product established in the local market. Companies feel that, if they grant exclusivity, that very fact will spur reseller into action. That’s usually only true up to a point where the reseller exhausts its marketing budget and patience. What normally happens after that is that reseller fails to create sufficient buzz around your brand, gives up, hardly sells anything and there’s nothing you can do about it unless you have mandatory sales quotas. In that unfortunately typical situation, you can’t appoint other resellers into the exclusive Territory unless you pay the slacking reseller to get out of the exclusive contract. A simple solution to this is to outline sales quotas as a condition for maintaining exclusivity. The reseller must sell at least $X of product or service within a certain period of time. Otherwise, the company may revoke reseller's exclusivity and appoint other resellers within the Territory.

Frequency of Price Changes.  If the contract is silent about the frequency of price changes, the manufacturer can arbitrary change prices for products that have not yet been ordered by reseller. This rigid approach may be detrimental to both parties. A good reseller is the one that invests time and money into promoting your brand. Such reseller will then, in fairness, want some assurances that you can’t just price them out of the market they’ve created for you in the reseller’s own territory. To give a good reseller some assurances against that, you should disallow aggressive price increases by: a)  putting a % cap on increases and b) undertaking an obligation to provide an X days’ notice prior to any price increase. Obviously, price increases should not apply retroactively; only future purchases should be subject to price increase. Note that this should normally apply only to “good resellers” who actually invest their own resources to promote your products or services.

Minimum Advertised Price (MAP) policy is especially important if your product is sold online. MAP helps ensure that your resellers compete on quality of service, not just price. MAPs are legal under U.S. antitrust statutes. Normally, a MAP policy will prohibit reseller from “advertising” lower prices. Resellers can, however, reach out to individual consumers quoting lower prices and offer discount coupons.

Will reseller be allowed to sell competing products? Non-compete/exclusivity clauses are invalid in California as a matter of law but most of the other states allow them.

Will reseller be allowed to modify, improve or bundle your products or services? If you allow that, make sure the contract clearly states that reseller, and not you, will be liable for damages arising out of any modifications.

Reseller should not be allowed to make any guarantees that are not expressly approved by you. Or else the reseller will be liable to perform those guarantees.

Will reseller be allowed to use your trademarks? Do they have to ask for your prior approval?
If reseller has the right to make its own marketing materials featuring your product, there should be a provision allowing you to review and approve those materials prior to the materials being used.

Term and Termination. Should the contract automatically renew if the reseller keeps selling the product and everything else goes well? Can reseller be terminated for no cause or only for material breaches?

Don’t forget confidentiality. Reseller will learn your product specifications, trade secrets, business model, etc. That information must not be used for others’ benefit.

Audit: Reseller’s obligation to make its books available to manufacturer for inspection.

Relationship of the parties: independent contractors, nobody is responsible for the other party's taxes, benefits and responsibilities.

Reseller’s obligations: Advertising efforts? Customer Service? Insurance, permits, licenses, compliance with local laws, accounting, regular reporting.

Manufacturer’s obligations: Sales leads, samples, advertising, training, support, honoring warranty and returns obligations.

Terms of payment, discounts, late fee.

Shipping, allocation of risk of loss upon shipment, drop shipping directly to reseller’s clients, export/import regulatory compliance.

(LIMITED) WARRANTY or DISCLAIMER OF WARRANTIES. A provision fair to both parties would be for company to guarantee that its product/service conforms to industry standards but state that there are no warranties that the reseller will make any profit. Your liability should be limited to either replacing/repairing the product or issuing a refund.

IP: Is reseller allowed to use Supplier’s name, trademarks?

Force Majeure is often overlooked as just another standard, boiler plate clause. However, take a minute to think about how likely are calamities and political instability to occur in your target market?

Indemnification: party must be reimbursed for damages resulting from the other party’s mistakes. It is especially important if reseller is authorized to install your product or make any representations or warranties to customers.

A personal guarantee of performance is an advantageous provision to negotiate. That means that, even if reseller is a company, an individual (usually the owner) will be liable in case anything goes wrong. If reseller is an individual, then the personal guarantee is automatically included b/c solos are liable for what they sign themselves. A personal guarantee is a good thing to negotiate in any contract, however, it is highly unlikely that any business savvy person will agree to sign a contract in their personal name.

Governing Law: very important in case parties are in different states or countries. You don’t want to have to go to China (or hire a lawyer there) and litigate an insignificant dispute in Chinese.

Documents-Only Arbitration allows you to resolve disputes remotely, without having to actually go to the hearing. Arbitrator resolves disputes based on mail/email submitted documents. Hearing can be conducted over the telephone, Skype, etc. This saves all parties time and money.