Distributors work hard to build the goodwill in a product with the expectation that they will profit from the increase in goodwill through increased sales. To do this, they need to build the brand. But unless distribution agreements are carefully drawn, the time, money and effort invested in building the brand can be lost to competitors or, worse yet, the manufacturer. There are some steps, however, that can be taken to minimize this risk.
Trademark Infringement Claims
Last week we wrote about a recent decision in the Southern District of New York, Prince of Peace Enterprises, Inc. v. Top-Quality Food Market, LLC, 2011 U.S. LEXIS 3917 (See blog post here). In that case, a distributor had secured the exclusive right of distribution together with the exclusive right to use the trademark of a product called “Po Chai” pills. When the distributor discovered that similar products were being marketed with the same trademark, it filed suit for trademark infringement under Sections 32 (1), 43 (a) and 43 (c) of the Federal Lanham Act. The case was dismissed because the agreement that granted the plaintiff its exclusive right of distribution and use of the trademark was insufficient to convey standing to prosecute the trademark infringement claim under federal law.
Over the years, we’ve seen other cases in which the manufacturer decides to compete with the distributor by conducting its own distribution in competition with an exclusive distributor. Other problems that can come up involve copying by third parties and importation of gray market goods, sometimes with the knowledge or consent of the manufacturer.
Drafting Exclusive Distribution Agreements
There are a few techniques that we use in an attempt to secure the distributor’s franchise and the right to profit from the goodwill built in a new brand. Of course, none of these approaches are guaranteed, and a manufacturer or some other third party that is intent upon infringing on the distributor’s exclusive rights will often do so even when there is a contract that prohibits this type of behavior. Nonetheless, here are some intellectual property considerations for drafting an exclusive distribution agreement.
- Be clear that the exclusive right of distribution entitles you to prohibit others, including the manufacturer, from conducting any sales of products within the territory of your exclusive right. (We usually define this as any first sale of the product.). If the right of distribution is not exclusive, there is little hope of being able to enforce infringements of intellectual property rights.
- If possible secure an assignment — not a license — of all of the applicable trademarks, copyrights, patents or trade secrets. This can be tricky, as under applicable law, when the manufacturer retains any interest in this intellectual property, the assignment may be deemed to be nothing more than a license to use. Whether that assignment or license will be sufficient to prevent others from infringing on the exclusive rights will depend on specific issues.
- Include a power of attorney that authorizes you to bring infringement claims in the name of the manufacturer, as well as contractual provisions that obligate the manufacturer to cooperate in the event that you have to bring a trademark, copyright or patent infringement claim.
- Be careful with termination provisions. We constantly struggle with termination provisions that will protect our client’s investment in a product. It’s not unusual that a manufacturer decides after a distributor has built up a brand that it can do a better job itself (retaining the distributor’s margin, of course) or seeks out another distributor willing to work for a lower price. Termination provisions can protect the distributor’s investment.
A successful distribution agreement depends on a continuing, productive relationship with the manufacturer. At the same time, a distributor that hasn’t carefully planned for the development of the product or which doesn’t have adequate enforcement in its contract is going to be at a clear disadvantage when trying to protect its investment.