Distribution Pitfalls

November 5, 2014

Distribution—the process by which goods available for sale are delivered to consumers for purchase—is one of the most critical pieces in the commercial puzzle. Without effective distribution, attractive products might never come into contact with markets that are able to consume them, and markets eager to consider and consume new products might remain unsatisfied.

Despite the fundamental role of distribution in the grand scheme of commerce and despite the centuries of history during which effective distribution drove innovation to new markets, the producers of goods and the would-be distributors of those goods often fail to structure their distribution relationship in a manner that satisfies their goals.

The list below sets forth common pitfalls of those attempting to structure a distribution relationship.

Pitfall #1: You're a Franchise under Federal Law

U.S. law characterizes certain distribution relationships as a "franchise" and imposes significant regulations upon them. Among those regulations are requirements regarding disclosures to be made by producers of goods to potential distributors. Those producers who intend to structure their distribution network as a franchise should carefully prepare those disclosures so that they remain in compliance with that regulation. Those producers who desire to avoid the regulatory burdens imposed upon franchisors should carefully structure their distribution relationships so that they avoid being characterized as a franchise.

Pitfall #2: You're Subject to State Regulation

Federal law isn't the only law to consider when structuring your distribution relationships. The laws of many states could affect various aspects of distribution relationships, from the notice period required before terminating a distributor to whether a franchisor must register with a state regulator.

Pitfall #3: You Delegated Too Much Authority to Your Distributor

The agreements that describe distribution relationships are rarely merely descriptions about purchase price, quantity commitments, delivery terms, and similar matters. Rather, they typically extend into other areas, including the extent of the distributor's authority to appear, to consumers and others, to be an "agent" of the producer. Producers not only should choose their distributors carefully but should carefully prepare the distribution agreement language that describes the extent to which the distributor may appear to be a representative of the producer.

Pitfall #4: You Unknowingly Gave Away Your Intellectual Property Rights

In many distribution arrangements, it is desirable for the distributor to use the logos and other intellectual property of the producer for the purpose of advertising. If the distribution agreement does not carefully identify the intellectual property and clearly describe the extent of the distributor's rights to use it, the value of the producer's intellectual property could diminish or other harm could result.

Pitfall #5: You Violated Antitrust Law

As stated above, distribution is the process by which goods available for sale are delivered to consumers for purchase. In any case where the ability of consumers to access and obtain products is affected, U.S. antitrust laws should be considered. The damages for potential violations of these antitrust laws are significant, and therefore producers and distributors should carefully consider antitrust concerns when structuring their distribution relationships.

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