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Reseller-agreement negotiations: Notes from an IACCM panel discussion

Introduction

This post is based in part on comments made by the panelists during a one-hour Negotiations Community of Interest “ask the expert” conference call this past Tuesday, October 20, presented by the International Association for Contract and Commercial Management (IACCM).

During the call, we talked about a few selected excerpts from the TATE Compendium, with my co-panelists role-playing as counsel for a vendor, a reseller, and a customer, respectively, and with me as moderator and commentator.

(As planned, we ran out of time before running out of discussion material in the excerpts.)

ADDED 2009-10-24: A very readable memo covering many of the relevant issues is Robert A. James, Antitrust Aspects of Drafting Distributor Agreements (Pillsbury Winthrop 1999, accessed 2009-10-24).

Territory and term

Some of the most important business points typically negotiated in a reseller agreement are the territory, the exclusivity, and the term.

A vendor might be willing to grant a comparatively-long term to give the reseller time to do sales- and marketing activities to build up the territory.

On the other hand, the vendor may want a short term and a comparatively-small exclusive territory (if any exclusivity at all), so as to preserve its flexibility —

  • to make sales itself in the territory (which of course may cause the reseller to be concerned about being undercut by the vendor)
  • to “hire” other resellers in the territory if the first reseller doesn’t work out
  • to grant exclusivity in other territories to other resellers (the larger the reseller’s territory, the harder that is)

A reseller, in contrast, will normally want a longer term, a bigger territory, and exclusivity —

  • in the hope of making more money during the time available in the term
  • so that it doesn’t make a significant investment in training, salaries, etc., to sell the vendor’s product or service, only to have the vendor yank the territory at the end of a short term. (That may be a particular concern for the reseller if the product or service is a new one that has yet to be proven in the marketplace and doesn’t “sell itself.”)

Customers often don’t especially like exclusive-reseller arrangements, because they want alternative sources of supply — not least so they can play the alternative sources off against one another).

Training

Some reseller agreements require the reseller to send people to be trained in the provider’s products and services.

It’s usually uncontroversial for the reseller to pay its personnel’s travel and lodging expenses.

Whether the reseller should pay a training fee to the provider, to help cover the provider’s internal training costs, will likely be influenced by who brings what value to the table:

  • A reseller with an established track record could argue that the provider should bear its own internal costs of providing training to reseller personnel as an investment in potential future sales.
  • For a less-experienced reseller, on the other hand, the provider could argue that it has no guarantees whether the reseller will actually be able to sell anything, therefore it’s the reseller that should make the investment in training its people.
  • The arguments can be reversed, of course, if the provider does not yet have much of a track record but the reseller does.

Sales targets

The bigger the territory the longer the initial term, and the more-proved the product or service, the higher the vendor will want the minimum sales targets to be.

The vendor may also want to have the targets be increased by X percent year-over-year.

If the reseller fails to hit its targets, the vendor may want to be able to “fire” the reseller so that it can bring in someone else.

The reseller, however, may take the view that its sales problems were due to problems with the product or service.

One possible compromise is “progressive discipline” — IF: The reseller fails to make its targets (or to pay the vendor an equivalent amount in cash); THEN: Not necessarily in the following order:

  • the reseller’s discount(s) get reduced
  • its exclusivity goes away
  • the product line available for resale is cut back

How often should sales be measured against targets — annually? Quarterly? Monthly? That may depend largely on the length of the sales cycle for the product or service — for a product with a six- to nine-month sales cycle, it might not make sense to measure the reseller’s progress every month, at least not initially.

Resale restrictions

Vendors will prefer not to see a secondary market develop (a so-called gray market), which could happen if Reseller sells Vendor’s products, not to end-customers, but to other resellers or distributors. Vendors may be concerned about, for example:

  • list-price undercutting
  • product quality
  • customer support obligations
  • warranty obligations
  • brand reputation
  • legal liability, especially where regulated products are involved such as pharmaceuticals and medical supplies

Depending on the jurisdiction, though, Vendor may find it challenging or even impossible to stop certain secondary markets from developing.

For example, in the European Union, parallel imports between EU member states are generally legal — see this 2004 European Commission press release explaining Commission policy on parallel imports. On the other hand, imports into the U.S. of trademarked goods that are materially different than the trademarked goods offered in the U.S. market, without the trademark owner’s permission, are illegal under 19 USC § 337 — see this October 2009 Steptoe & Johnson memo.

Concerning antitrust implications of resale restrictions, see the Robert James memo cited above (scroll down to “Legal Principles”).

Franchise-law liabilities

[Added 2009-10-24] Providers entering into reseller- or distribution agreements should be careful not to become an “accidental franchisor,” for example by charging any kind of “fee” (a term that can encompass a lot of economic arrangements). Doing so can give rise to enormous complications and potential civil and/or criminal liability — see this useful overview by attorney John Tang.

Acknowledgements

Many thanks to the other panelists (listed in reverse alphabetical order, so as to strike a blow against end-of-the-alphabet discrimination):

and to Katherine Kawamoto and Mark Heminway of IACCM.

The other panelists brought up a number of the above points during our discussion, but they don’t necessarily endorse or agree with the write-up in this blog posting, the responsibility for which is entirely mine.

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