04.12.2013 Divorcing Your Distributor - What Happens Upon Separation?
BY: ROBERT C. DEWAR
Many foreign companies find that the easiest way to get their goods to the largest market in the U.S. is through a distribution arrangement. Generally, that approach is attractive because the distributor has already established channels for the goods that would otherwise need to be created by the manufacturer. By engaging a distributor, foreign companies can also avoid the additional cost and delay required to obtain visas in order to put their own personnel on the ground.
While the distributor relationship can be an attractive option, foreign businesses should pay particular attention to provisions in the distribution agreement relating to the possible termination of such a relationship.
First, the foreign company should consider whether to repurchase any existing stock of its goods that may be in the hands of the distributor at the time of termination. If the distributor has paid for those goods, the distributor would be allowed to sell those goods in the ordinary course following the termination of the distribution relationship. In particular, this may concern the foreign manufacturers because:
- Depending on how quickly inventory is turned over, the foreign manufacturer or a newly appointed distributor or agent may have the old distributor as a competitor in the same market;
- The old distributor may be responsible for the performance of installation or warranty work with respect to the goods. It is questionable whether a distributor seeking to quickly liquidate its position with respect to goods that it is no longer going to market would devote its highest priority or resources to such work.
- The old distributor may seek to liquidate its inventory quickly, thus driving down the price of the goods and making the manufacturer or new distributor less attractive as a seller.
The insertion of a provision in the distribution agreement that affords the manufacturer the option of repurchasing any existing stock of goods upon termination or within a specified period after termination may eliminate the above problems.
In addition, upon termination, the manufacturer should take reasonable steps to protect its intellectual property rights, particularly trademarks and trade names. A distributor that is selling down its remaining stock of goods following the termination of the distribution agreement is entitled to use any trade name or trademark associated with the product to the extent necessary to adequately describe the goods. For example, it is permissible to describe audio components as Bose speakers, so that the public is adequately aware of the quality or the manufacturer.
The manufacturer should take measures (and insist on provisions in any distribution agreement) that would make it clear that, following termination, the distributor:
- Will only use any trademark or trade name of the manufacturer to the extent absolutely necessary to identify the goods;
- Will not represent or hold itself out as the authorized distributor of the manufacturer;
- Will not use the trademarks or trade names on any website or other promotional materials;
- Will refer any inquiries relating to additional products, or warranty or other inquiries related to the manufacturer’s products, to the manufacturer or its agent.
The use of the trademarks by a terminated distributor may cause confusion for customers and other merchants that may be interested in doing business with the manufacturer. More concerning, however, is the fact that, if the manufacturer permits a terminated distributor to engage in the use of trademarks or trade names in a particular territory for an extended period of time without challenging such use, the manufacturer may be deemed to have abandoned the trademarks or trade names and, thereafter, may be unable to enforce such trademarks or restrict the distributor’s use of them in that territory.