California Distribution Agreements

AdobeStock_531838016-300x200It’s becoming increasingly common for manufacturers to turn to distributors to sell their products to reduce the overhead costs of processing orders, logistics, and more. The manufacturer sells the product to the distributor, which then resells the product at a profit. The distributor ostensibly has the infrastructure to process these sales and a keen understanding of the market in which they operate. Instead of taking on the overhead of distribution themselves, they can hire experts who operate within this market on a daily basis and have the infrastructure to meet demand. From the distributor’s point of view, they get access to the product without the overhead of manufacturing. Distributors and manufacturers can thus operate on a symbiotic basis, each making the other more profitable by staying in their lane of expertise.

Problems arise, however, on the distributor side. Distributors may spend years cultivating a relationship with a manufacturer only to find that the manufacturer now wants to handle distribution in-house. In Europe, you cannot fire a distributor without a severance package. In California, distributors have no such protection.

In this article, a Silicon Valley business litigation attorney will discuss how distributors can protect themselves with strong distribution agreements that protect their interest in a market.

What contractual protections do I need to seek as a distributor?

As a distributor, you do not own the product and you do not control the territory in which you operate. Your rights to both are established by contract. Territory is especially important. Distributors may request “exclusive” rights to sell within a specific territory. A distributor that negotiated a right to sell in a territory non-exclusively may find that they are competing with the manufacturer for sales. In these cases, the manufacturer can destroy the distributor’s business, and the distributor would have no legal recourse to protect it. Additionally, other distributors can create problems for your distribution company. This is why exclusive territory provisions in distribution contracts are so important.

Lastly, a distributor will want to negotiate a severance package as, sooner or later, the manufacturer will move on. Additionally, there may be a cooling-off period during which the distributor is not allowed to sell a similar product. So, this will be part of any negotiation.

Who owns the product?

Ideally, the manufacturer still owns the product. Otherwise, you’re not a distributor but a customer. Distributors provide the overhead to sell products and generally earn commission on a per-sale basis. What you don’t want is to purchase the product and then incur the risk of resale, problems emerging from non-payment, and more issues that emerge from this type of arrangement.

Protecting your interests as a manufacturer

While manufacturers have the upper hand, distributors can sometimes cause problems by offering competing goods in the same territory. Manufacturers tend to demand a duty of loyalty to avoid this problem. Meanwhile, distributors help dozens of businesses distribute products. What happens when one company begins selling a product that competes with your product? Strong contractual wording can prevent lawsuits from emerging.

Talk to a Silicon Valley Business Litigation Lawyer

Manufacturers and distributors get into disputes. A San Jose litigation attorney can help protect your interests and enforce your contracts. You can call (408) 441-7500 in Silicon Valley or (310) 818-7500 in Los Angeles, or you can contact us online to schedule an initial consultation.