Drafting Product Distribution Agreements: Allocating Supplier and Distributor Risks

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Drafting Product Distribution Agreements: Allocating Supplier and Distributor Risks THURSDAY, FEBRUARY 15, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: John M. Scannapieco, Shareholder, Baker Donelson Bearman Caldwell & Berkowitz, Nashville, TN Andre R. Jaglom, Partner, Tannenbaum Helpern Syracuse & Hirschtritt, New York The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 1.

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5 The Distribution Contract Drafting Issues Andre R. Jaglom New York, New York February 15, , 2013, 2015, 2018 Andre R. Jaglom All rights reserved. For reprint permission Providing Solutions

6 Supplier Objectives Ensure satisfactory performance or a right to terminate Identify and quantify performance levels Identify all possible reasons for dissatisfaction Specify expectations for sales, advertising, promotion, service, etc , 2013, 2015, 2018 Andre R. Jaglom All rights reserved.

7 Supplier Objectives Consider whether you want control over resale prices, whether any Leegin risk factors are present, and what applicable state law may say Many states still prohibit RPM, as does Europe , 2013, 2015, 2018 Andre R. Jaglom All rights reserved.

8 Distributor Objectives Define support needed Advertising and promotion Delivery Support services accounting, training, etc. Determine reasonable performance levels , 2013, 2015, 2018 Andre R. Jaglom All rights reserved.

9 Distributor Objectives Specify price and quantity guarantees, any limits on price changes Notice Frequency Amount Most favored customer but may be an issue if there is market power U.S. v. Blue Cross Blue Shield of Michigan (survived motion to dismiss; State then prohibited MFC in health insurance); or If it facilitates price-fixing U.S. v. Apple, Inc. (2d Cir. 2015) Compensation on termination , 2013, 2015, 2018 Andre R. Jaglom All rights reserved.

10 Exclusive or Not? Distributors generally want exclusivity Avoids competition for same products Avoids free-riding Allows coordinated marketing of portfolio Allows focus on interbrand competition with competing brands instead of intrabrand competition , 2013, 2015, 2018 Andre R. Jaglom All rights reserved.

11 Exclusive or Not? Should suppliers want exclusivity? Do you want distributors competing with each other or with your competitors? On price or other metrics? For commodity products, non-exclusive territories may be preferred But for products requiring investment in: Marketing and promotional events Education and other pre-sales service Warranty or other service exclusivity can avoid free-rider problems that disincentivize desirable non-price competition Allows coordinated marketing to national and regional chain accounts , 2013, 2015, 2018 Andre R. Jaglom All rights reserved.

12 Scope of Agreement: Product and Territory Product Definition Specified brands and packages Distributors should avoid All products using Trademark X All products meeting defined specifications All products of this supplier Rights/obligations as to new products Same TM Different TM , 2013, 2015, 2018 Andre R. Jaglom All rights reserved.

13 Scope of Agreement: Product and Territory Restrictions on competing products: Define it! E.g., is it Beverages Alcoholic beverages Beer Imported beer German beer Dark beers from Germany Munich Oktoberfest style beers Bottled Munich Oktoberfest style beers , 2013, 2015, 2018 Andre R. Jaglom All rights reserved.

14 Scope of Agreement: Product and Territory Territory or Customer Restrictions By geography, by category, by account Transshipment restrictions Direct and indirect Know or have reason to believe Kirtsaeng v. John Wiley & Sons, Inc. (Sup. Ct. 2013) First sale, even abroad, exhausts owner s distribution right, lawfully made goods can be imported TM goods can be blocked if differ materially (Original Appalachian Artworks v. Granada Electronics) or foreign source is unaffiliated (Tariff Act 526(a)) Transshipment fines who receives? National accounts Invasion fees? , 2013, 2015, 2018 Andre R. Jaglom All rights reserved.

15 E-Commerce Issues Online sales by distributor Online sales by supplier Sales to e-commerce intermediaries (Amazon, jet.com, etc.) Is distributor losing sales Is distributor incurring costs re goods it did not sell? Who provides warranty service? Who redeems empty containers for beverages Can invasion fees compensate? Is online sales reporting available to calculate? Are there other ways to estimate impact? , 2013, 2015, 2018 Andre R. Jaglom All rights reserved.

16 Non-Compete Clauses During term In territory only or everywhere? Post-term Reasonableness Geography Scope of activities define clearly! Duration Independent agreement in consideration of disclosures (bankruptcy issue), but not IP licenses (misuse issue) , 2013, 2015, 2018 Andre R. Jaglom All rights reserved.

17 Termination Provisions Term Specified or indefinite? Automatic renewal or not? Uniform termination date (risk of group leverage) or Dealer anniversary date (administrative burden) , 2013, 2015, 2018 Andre R. Jaglom All rights reserved.

18 Termination Provisions Cause Without cause Performance standards Non-payment Change in ownership, management or control Injury to business reputation Financial instability (Act before bankruptcy!) , 2013, 2015, 2018 Andre R. Jaglom All rights reserved.

19 Termination Provisions Notice Cure periods Inventory repurchase Mandatory One party s option Mutual option As agreed , 2013, 2015, 2018 Andre R. Jaglom All rights reserved.

20 Termination Provisions Compensation Formula Sales multiple Profit multiple Others Fair market value Fair compensation encourages distributor investment New distributor more likely to pay for rights , 2013, 2015, 2018 Andre R. Jaglom All rights reserved.

21 FCPA Compliance Foreign Corrupt Practices Act prohibits bribery of foreign officials, political parties, candidates Strict liability for acts of controlled joint venture Liability for 3 rd party acts e.g., agents, distributors if knowledge Constructive knowledge, willful blindness, deliberate ignorance , 2013, 2015, 2018 Andre R. Jaglom All rights reserved.

22 FCPA Compliance Take steps before, in and after contract Due diligence to vet potential partners Contract provisions Representation that have not violated Agreement to comply spell it out Reporting obligations, audit rights Subdistributors require due diligence, approval Provisions are material, ground for termination Ongoing training, monitoring, audits , 2013, 2015, 2018 Andre R. Jaglom All rights reserved.

23 Other Compliance Areas Employment practices Discrimination Harassment Advertising Substantiation FTC Endorsement Guidelines Disclose connections with endorsers Bloggers, comments on social media Use of Intellectual Property , 2013, 2015, 2018 Andre R. Jaglom All rights reserved.

24 Other Compliance Areas Environmental, Health and Safety Issues Securities Laws Conflicts of Interest and more , 2013, 2015, 2018 Andre R. Jaglom All rights reserved.

25 Indemnification Supplier indemnification of distributor Breach of contract, reps, misconduct Breach of warranty Product liability Use of IP Claims of prior distributors Supplier s other activities , 2013, 2015, 2018 Andre R. Jaglom All rights reserved.

26 Indemnification Distributor indemnification of supplier Breach of contract, reps, misconduct Product liability from modification, improper storage or handling Misuse of IP contrary to agreement/instructions Distributor s other activities , 2013, 2015, 2018 Andre R. Jaglom All rights reserved.

27 Indemnification Third party claims only or all losses? Who pays cost of defending meritless suit alleging indemnifiable claims? Costs of recall Customers may demand full retail, not just their cost or replacement product Insurance who must obtain? Maybe both Additional named insured provisions , 2013, 2015, 2018 Andre R. Jaglom All rights reserved.

28 Thank you! Disclaimer The information presented in this presentation does not represent legal advice, which should come from a legal adviser with knowledge of specific facts and circumstances. About Tannenbaum Helpern Syracuse & Hirschtritt LLP Since 1978, Tannenbaum Helpern Syracuse & Hirschtritt LLP has combined a powerful mix of insight, creativity, industry knowledge, senior talent and transaction expertise to successfully guide clients through periods of challenge and opportunity. Our mission is to deliver the highest quality legal services in a practical and efficient manner, bringing to bear the judgment, common sense and expertise of well trained, business minded lawyers. Through our commitment to service and successful results, Tannenbaum Helpern continues to earn the loyalty of our clients and a reputation for excellence. For more information, visit or follow us on 900 THIRD AVENUE, NEW YORK, NY Providing Solutions , 2013, 2015, 2018 Andre R. Jaglom All rights reserved.

29 Product Distribution Agreements John M. Scannapieco Co-Chair, Global Business Team Shareholder Baker, Donelson, Bearman, Caldwell & Berkowitz, PC

30 Performance Obligations Measuring success or failure Metrics that match the business Adjustment Duty of Care - Ford Truck Sales, Inc. v. Sterling Truck Corp., 341 Ill. App. 3d 438 (4th Dist. 2003) Period for change and implementation Collaboration & Consensus Disagreement & Default Incentives and benefits rebate pricing, additional territory, priority delivery Remedies - Default, territory loss, or loss of exclusivity Commercial reasonableness is a trap for judicial intervention 30

31 Performance Obligations If manufacturer can send an underperforming dealer a "nasty surprise" in the form of a notice of termination, it is not impermissible to require the dealer to acknowledge the standards of performance the dealer must meet to prevent a "nasty surprise." Not coercion to require a dealer to sign and comply with annual reset of "expectations" or "goals. The same potential outcome looms for the nonfulfillment of an addendum or an expectation: termination of the franchise, subject to commercial reasonableness Crossroads Ford Truck Sales, Inc. v. Sterling Truck Corp., 341 Ill. App. 3d 438, 445 (4th Dist. 2003) 31

32 Payment Plan Credit terms Security interest Purchase money Broader scope of collateral Consignment Credit enhancement Letter of credit Personal guaranty Floor plan floating lien Monitoring financial health 32

33 Reporting Activity Wholesale Side: Inventory monitoring/rfid tags Distributor support activity Warranty claims and exchanges Advertising activity/approvals Cooperative claims Financial statements Retailer census Display locations 33

34 Reporting Finance Side: Financial Statements Frequency Slow pay triggers Inventory & Accounts Financing Customer Invoicing and Accounts Lender default notices What triggers COD or Cash with order? 34

35 Reporting Retail Side: Retailer Data End User Data & Warranty Registrations Data Ownership & Licensing Privacy Rights Confidentiality & Use Rights Marketing & Pricing Competition 35

36 Trademark License Distributors who simply resell branded and labeled goods obtained from the trademark owner do not need a trademark license. Star- Kist Foods, Inc. v. P.J. Rhodes & Company 769 F2d 1393 (9th Cir. 1985) Marketing use beyond mere cataloguing argues for a limited license and strict controls on use of marks Processing and finishing so that some variation in product quality occurs requires a license 36

37 Trademark License Limited license with minimum controls Common identity standards for mark presentation Avoid naked license or license in gross Leads to loss of rights in mark under Lanham Act and case law [T]he Lanham Act places an affirmative duty upon a licensor of a registered trademark to take reasonable measures to detect and prevent misleading uses of his mark by his licensees or suffer cancellation of his federal registration. 15 U.S.C. 1064, Dawn Donut Company v. Hart s Food Stores, 267 F.2d 358 (2nd Cir. 1959) 37

38 Trademark License Avoid conversion of a license or distributorship into franchise Federal Trade Commission 16 CFR 436.1(h): Substantial association with mark of licensor Satisfied by branded product Substantial controls or significant assistance in marketing Required payment 38

39 Trademark License Required Payment At least $570 within 6 months after signing; Examples: initial fee; Fee for service not based on T&M or some variable of actual cost; advertising program; equipment and supplies (including such purchases from third parties if the franchisor or its affiliate receives payment as a result of the purchase); training fees; 39

40 State Laws General & Industry Specific laws Cover distributors, non-stocking distributors, retailers (dealers) Covered by broadly defined franchise relationship laws Good cause for termination and non-renewal Makes performance clauses imperative Notice of default and opportunity to cure 40

41 State Laws Wisconsin Fair Dealership Law (3): "Dealership" means any of the following: (a) A contract or agreement, either expressed or implied, whether oral or written, between 2 or more persons, by which a person is granted the right to sell or distribute goods or services, or use a trade name, trademark, service mark, logotype, advertising or other commercial symbol, in which there is a community of interest in the business of offering, selling or distributing goods or services at wholesale, retail, by lease, agreement or otherwise. Community of interest exists (1) when a large proportion of an alleged dealer s revenues are derived from the dealership, and (2) when the alleged dealer has made sizable investments (in, for example, fixed assets, inventory, advertising, training) specialized in some way to the grantor s goods or services. 41

42 State Laws Wisconsin Fair Dealership Law No grantor, directly or through any officer, agent or employee, may terminate, cancel, fail to renew or substantially change the competitive circumstances of a dealership agreement without good cause. The burden of proving good cause is on the grantor 42

43 State Laws Wisconsin Fair Dealership Law (4) "Good cause" means: (a) Failure by a dealer to comply substantially with essential and reasonable requirements imposed upon him by the grantor, or sought to be imposed by the grantor, which requirements are not discriminatory as compared with requirements imposed on other similarly situated dealers either by their terms or in the manner of their enforcement; or (b) Bad faith by the dealer in carrying out the terms of the dealership. 43

44 State Laws Wisconsin Fair Dealership Law at least 90 days' prior written notice of termination, cancellation, nonrenewal or substantial change in competitive circumstances. The notice shall state all the reasons and shall provide that the dealer has 60 days in which to rectify any claimed deficiency. If the deficiency is rectified within 60 days the notice shall be void. 44

45 State Laws Wisconsin Fair Dealership Law If a dealership is terminated by the grantor, the grantor, at the option of the dealer, shall repurchase all inventories sold by the grantor to the dealer for resale under the dealership agreement at the fair wholesale market value. This section applies only to merchandise with a name, trademark, label or other mark on it which identifies the grantor. 45

46 State Laws New Jersey Franchise Practices Act NJSA 56:10-3 a. "Franchise" means a written arrangement for a definite or indefinite period, in which a person grants to another person a license to use a trade name, trade mark, service mark, or related characteristics, and in which there is a community of interest in the marketing of goods or services at wholesale, retail, by lease, agreement, or otherwise. 46

47 State Laws New Jersey Act applies to Distributorships Instructional Systems, Inc. v. Computer Curriculum Corp., 614 A.2d 124 (N.J. 1992) Brand specific investments produce a community of interest Cooper Distributing Co., Inc. v. Amana Refrigeration, 63 F.3d 262 (3d Cir. 1995) California Franchise Relations Act held to apply to distributor required to buy an ample stock of product H.C. Duke & Son, LLC v. Prism Marketing Corp., 2013 WL (C.D. Il. 2013) 47

48 State Laws: General Distribution Relationship Laws Arkansas California Connecticut Delaware Hawaii Idaho Illinois Indiana Iowa Michigan Minnesota Mississippi Missouri Nebraska New Jersey South Dakota Virginia Washington Wisconsin Puerto Rico Virgin Islands 48

49 State Laws: Industry Specific Motor vehicles Gasoline Farm Equipment Construction Equipment Electrical Equipment Liquor & Beer Recreational Vehicles & Boats 49

50 Dispute Resolution Choice of law Home state v. neutral state Consistency of interpretation Statutes are fundamental public policy Forum Selection & Venue Home office jurisdiction What about relocation? Exclusive v. non-exclusive personal jurisdiction 50

51 Dispute Resolution Internal Appeals Procedure Senior Management Meeting Mediation Arbitration Arbitrator Qualification Select Commercial Rules Bet the company on a single arbitrator with no right to appeal on the merits? Private record 51

52 Dual Distribution Perils Sleepy s LLC v. Select Comfort, 779 F.3d 191 (2 nd Cir. 2015) Dual distributor secret shopped company stores of manufacturer Sales people disparaged dealer stores after expiration during holdover period Troubled relationship with hostile conduct dealer terminated and filed suit for breach bench trial found for manufacturer 2 nd Circuit reversed Expiration Termination Conduct can extend term Puffery can be slanderous if pattern and practice of disparaging comments

53 Agreement Checklist Parties Appointment Territory/Channel Product Scope/Exclusions Exclusivity Reserved Rights Customer Definitions/limitations Term & Renewal Non-competes: in-term/postterm Performance Standards Supplier Support Distributor Obligations Order Documents/ Process/Forecasts Pricing, Payment & Security Reporting Product Warranties Service Obligations Returns and Recalls Indemnities Insurance Intellectual Property/Licenses Internet Parameters Customer Data Brand Migration 53

54 Agreement Checklist Termination Rights Post-termination process Inventory buyback/sellback Purchase rights & options Post-term service Assignments Reps, Warranties, Covenants Relationship Limits Choice of law Dispute resolution Waiver Limits Confidentiality Amendments & Unilateral Rights Integration Severability Counterparts Third Party Beneficiaries Notices Language FCPA/OFAC 54

55 Thank You John M. Scannapieco Co-Chair, Global Business Team Shareholder Baker, Donelson, Bearman, Caldwell & Berkowitz, PC