Distributorships v. Sales Representative Agreements

May 2019

There are two basic ways to sell a product: directly to consumers or indirectly to consumers via a distributor or retailer. Direct-to-consumer sales are typically made through brick-and-mortar stores or e-commerce sites owned and operated by the supplier/manufacturer or on online retail platforms such as Amazon and Alibaba. The most common form of distributorship involves two levels of sale—from the supplier to the distributor and from the distributor to the end user. Distributorships are not the same as sales representative arrangements, and the agreements that govern these two types of relationships are different.

A distributorship arrangement is one in which the supplier manufactures the product, the distributor purchases the product from the supplier, and the distributor sells the product to the end user (or to a retailer, which then sells to end users). Distributorships may be exclusive or nonexclusive, and they may be confined to a certain territory. Under U.S. law, it is generally permissible for the supplier not only to set the prices it charges the distributor but also to set parameters for what the distributor may charge the consumer (this is called "vertical price fixing"). It is important to have a written distributorship agreement that addresses these and other issues, such as term, termination and trademarks.

In the international context, a written distributorship agreement is often necessary to uphold the supplier's trademark rights. In those countries that require proof of use prior to registration, if the only use of the mark in the country is through the distributor, then the supplier must have a written distributorship agreement stating that the distributor's use of the trademark inures to the benefit of the supplier. Even in those countries that do not require proof of use prior to registration, if the trademark registration is the subject of a petition to cancel based on non-use, the supplier may defend against the trademark challenge by relying on its distributor's use of the mark, but only if there is a written distribution agreement. Distributorship agreements in the international context should also include a clause prohibiting the distributor from registering the supplier's trademark or any domain name that incorporates the supplier's trademark.

Many of our clients sell directly to retailers rather than to distributors, and they have developed retail policies to help structure those relationships. Retail policies often include vertical pricing provisions, prohibitions against discounting or dumping, and the right to terminate the relationship at any time, for any reason. Retail policiesmay be published online or provided to the interested retailer after an application process. Retail policies are contractually binding only if the supplier obtains the retailer's written or electronic signature or other manifestation of assent.

When the supplier sells direct to consumers or retailers, it may elect to do so with the assistance of a sales representative. In a sales representative arrangement, the sales representative interfaces with the customer and solicits orders, but the orders are fulfilled by the supplier, and the sales representative does not purchase the product from the supplier. Sales representative agreements typically entail the payment of a commission (based on a percentage of sales revenue) to the sales representative. It is important in sales representative agreements to include performance parameters and provisions affording the supplier the right to terminate the agreement if the sales representative fails to perform. As with distribution agreements, sales representative agreements may be exclusive or nonexclusive, and they may be restricted to a given territory.

Montana is one of only 15 states without statutes that govern sales representative agreements. Companies doing business across state lines, and particularly those with sales representatives in more than one state, need to be familiar with the different requirements applicable to sales representative agreements in various states. Thirty-three states have statutes applicable to sales representative relationships. Most of these statutes address when commissions must be paid to the sales representative and include penalties for non-payment of commissions. Twelve states—including Arizona, Arkansas, California, Georgia, Massachusetts, New Hampshire, New York, Pennsylvania, Tennessee, Texas, Virginia and Washington—require that all sales representative agreements be in writing.

In sum, the agreements that govern the marketing and sale of your products may take a number of different forms. An Exclusive Supply Agreement, for example, is neither a distributorship nor a sales representative agreement but one in which the supplier agrees to provide a certain product only to a particular customer. An Exclusive Purchase Agreement is one in which the customer agrees to purchase a product only from a single supplier. Manufacturing Agreements establish quality controls and address intellectual property rights. We routinely work with clients in various industries to help them develop the appropriate agreements to facilitate their business relationships and protect their intellectual property, both internationally and domestically.


Amicable photo of Toni

Antoinette M. Tease, P.L.L.C.