Here is the third article of the series, 5 Important IP Contracts. In this article, Varshita Dogra of VIPS discusses Distribution Agreements.
Read Part 1 of the series – 5 Important IP Contracts
IP Licensing Agreements – The First in The Series of 5 Important IP Contracts
Distribution Agreements
A Distribution Agreement governs the relationship between a manufacturing firm and its sole selling agent. In terms of IP, an owner enters into a distribution agreement with distributing agents in order to make their property accessible and available in the market. There are a variety of distribution agreements, from a simply royalty sales agreements to a global licensing, manufacturing and distribution agreement. For different type of intellectual property, different strategy would be required in the agreement to protect it, which would also differ in terms of territory of the agreement.
Although, a distribution agreement might explicitly state the retention of ownership over the IP,embedded in the distributed product, with the owner, it must also specify the length of any license to exploit the IP has been granted under the agreement.
Foreign Companies hiring distributors in India
In order to enter and exploit Indian markets, foreign companies appoint an Indian company to distribute its products, in all or a particular territory in India. In case of such distribution agreements, IP plays an important role as the foreign company would have to license its trademarks, know-how, etc. to the Indian distributor.
Key Considerations while drafting a Distribution Agreements
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Nature of exclusivity
Whether the distribution is exclusive or non-exclusive must be made clear in the agreement, as it can have profound consequences for either of the party. In case of exclusive distribution agreements, the owner should have some effective method of enforcing minimum performance criteria within the territory, such as by using a minimum royalty clause. In the similar contract, to safeguard the interests of the distributor, if he has agreed not to promote competing goods or services, then the agreement should also provide for adequate commitment and support from the owner.
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Territory
The territory in which the distributor shall sell or distribute the product must be clearly specified in the agreement. The owner must make sure, when he has several territory exclusive distributors, that there is no overlapping of territory in agreements for adjoining regions. Consequences of selling goods or service outside the territorial limit as under the agreement shall also be mentioned. The agreement must have provisions covering the issues of sale over the internet (ecommerce) with respect to territory. Usually, if it is a territory exclusive distribution, the distributor must not be allowed to sell or permit sub-dealers to sell goods online. It must be ensured that the goods are sold with methods appropriate to ensure and maintain the image of the brand.
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Pricing
Constraints on pricing of the goods and services are necessary to be present in a distribution agreement, so that the distributor does not take undue advantage. The agreement should provide for the prescribed range of pricing, which must be ensured by the distributor. But the distributor should also be allowed to give discounts, from time to time. The agreed terms between the parties, with respect to this, should be provided for in the agreement.The consequences of breach of such a clause must also be specified, as this is an important clause in a distribution agreement for the owner.
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Improvement, Enhancements and Modifications
In case of distribution agreements where the product is licensed for manufacturing and distributing to the distributor, it becomes extremely necessary to provide in the agreement if the distributor is allowed to make improvements, and to what extent, and who would own the rights to such improvements. This is also important as distributors can often provide with a valuable feedback according to the needs of the market, and allowing him to make improvements would mean creation of new intellectual property, whose treatment must be specified in the agreement.
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Product claims and representations
The market claims that can be made while promoting a product or service can be a significant issue for both the parties in a distribution agreement. From the owner’s perspective, it is often important to control the representations that are made by the distributor for the product. Serious and irreversible damage can be done to the reputation of the brand or product if false claims are made by the distributor, leading to liability on the owner. For a distributor, reliance is often placed on the product testing undertaken by the owner to validate the product claims. It is essential for the distributor to obtain appropriate assurances from the owner that will enable him to prove the accuracy of the product claims, if challenged.
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Non Compete / Restrictive Covenants
Depending upon the type of product for which the distribution agreement is entered into, a non-compete clause in an agreement can prove beneficial for the owner. It can be provided that the distributor shall not engage in manufacture, sale or promotion of other products, competitive in nature to the product of the owner, for a limited period after expiry or termination of the agreement. Non-compete can also be with respect to selling any competitive product during the term of the agreement in the same territory by the distributor.
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Intellectual Property: Scope of use, ownership and infringement
An umbrella clause specifying that all the rights in the intellectual property in the agreement shall remain with the owner, is a must. The agreement should provide for instructions on the usage of intellectual property by the distributor. The distributor may require to use the IP for the purpose of sale and marketing efforts. It can also be stated as a duty of the distributor to inform the owner if there has been any infringement of IP of the owner in the territory of operation of the distributor. Distributors can also safeguard their interests with respect to infringement by including a clause stating the right of the distributor to take legal action against infringement in his territory of operation.
Read Part 2 of the series – 5 Important IP Contracts
Assignment or Transfer Contracts – The Second in The Series of 5 Important IP Contracts
Points to note while drafting different types of distribution agreements
- It is advisable that for a distribution agreement, the owner should not assign the rights with respect to the IP, but license the rights, if required. Such as the proprietor retains ownership of the product design but the distributor has control on the brand/trademark applied to the product in the licensed territory. A license would work better in distribution agreements, as otherwise, it could lead to significant problems when the distribution agreement comes to an end.
- It is better to have a separate license agreement for Trademark while entering into an agreement with a distributor. This is because, registration of trademarks is specific to territory and it may be required from the distributor to provide the trademark license agreement in the process of applying for the registration of trademark in the territory of his operation.
Sample Distribution Agreement
DISTRIBUTION AGREEMENTS
Software Distribution Agreement
EXCLUSIVE DISTRIBUTORSHIP AGREEMENT
This agreement made and entered into day of by and between ……………………. INC, a corporation duly organized and existing under the laws of Taiwan with its principal place of business at Taipei Taiwan (hereinafter called Seller )
and
……………………………… LIMITED, a company registered under the Companies Act, 1956 with its principal place of business at ………………………………………. NEW DELHI, INDIA (hereinafter called Distributor ).
Whereas Clause
WHEREAS, Seller is desirous of exporting the products stipulated in article 4 hereof to the territory stipulated in Article 3 hereof and WHEREAS , Distributor is desirous of importing from Seller and selling the said products in the said territory; NOW, THEREFORE, in consideration of the promises and the mutual covenants to be faithfully performed herein contained, IT IS HEREBY AGREED AND UNDERSTOOD AS FOLLOWS:
Article 1. Appointment
During the effective period of this agreement, Seller hereby appoints Distributor as its exclusive distributor and Distributor accepts and assumes such appointment.
Article 2. Privity
The relationship hereby established between Seller and Distributor during the effective period of this Agreement, shall be solely that of Seller and Distributor has no authority to assume or create any obligation in the name of or of any kind on behalf of Seller.
Article 3. Territory
The territory covered under this Agreement shall be expressly combined to entire territory of INDIA. (hereinafter called territory ).
Article 4. Products
The products covered under this agreement shall be expressly confined to Uninterruptedly Power Supply (UPS) (hereinafter called Products).
Article 5. Prices
As applicable from time to time and conveyed by the Seller to the Distributor in writing & Distributor giving its consent in writing to the Seller.
Article 6. Technical Improvement and Patent Application
During the term of this Agreement, Seller shall furnish to Distributor any technical improvements and inventions relating to the Products made by Seller without any delay and free of charge. As Seller has right to apply for the issuance of patents thereon, Distributor agrees to make reasonable efforts to obtain such protection in India. During the term of this Agreement, Distributor agrees to furnish to Seller all technical improvement and inventions related to the Products required by Distributor without any delay and free of charge in consideration of services in Article 6-1 above.
Article 7. After Sale Service
Seller will provide one year full guarantee to Distributor after the shipping date. In case of faulty Products, Seller shall replace the faulty units with new All-in one PCB. Distributor shall send faulty PCB back to Seller for repairing. Whenever Seller has received a complaint as to the products from distributor, Seller shall immediately make investigation and take a proper action.
Article 8. Exclusive Right
In consideration of the exclusive right herein granted, Distributor shall not purchase, import, sell, distribute or otherwise deal in any products competitive with or similar to Products in Territory, and Seller shall not offer, sell or export Products to Territory through other channel than Distributor during the effective period of this Agreement. The Seller shall not provide assist, supply directly or indirectly to the technical details of the products to anyone in the Territory.
Article 9. Minimum Purchase
Distributor shall purchase at least US$ ……………………(U.S. Dollar …………………only ) of product during one (1) year ( 12 months ) during the effective period of this Agreement and its extension thereof, if any.
Article 10. Individual Contract
Each individual contract under this Agreement shall be subject to this Agreement but such contract shall be concluded and carried out by Seller’s sale note or confirmation which shall set forth the terms, conditions, rights and obligations of the parties hereto arising from or in relation to or in connection with such contract except those stipulated in this Agreement.
Article 11. Payment
Payment by either irrevocable letter of credit or remittance by telegraphic transfer through bank. Letter of credit: Within 7 days after the receipt of Seller’s confirmation of order, Distributor shall cause irrevocable confirmed Letter of Credit(s) available by Seller’s sight draft to be established with a prime bank satisfactory to Seller. Remittance by Telegraphic Transfer. Payment shall be received by Seller 7 days prior to shipment effect.
Article 12. Information and Report
Both Seller and Distributor shall periodically and/or on the request of either party furnish information and market reports to each other to promote the sale of Products as much as possible. Distributor shall give Seller such reports as inventory, market conditions and other activities of Distributor.
Article 13. Sales Promotion
Distributor shall diligently and adequately advertise and promote the sale of Products throughout Territory. Seller shall furnish with or without charge to Distributor reasonable quantity of advertising literatures, catalogues, leaflets, folders etc.
Representatives of Seller may periodically visit Distributor and advise Distributor in methods and means best suited to promote the sale of Products throughout Territory.
Article 14. Industrial Property Rights
Distributor may use the trade-mark(s) of Seller during the effective period of this Agreement only in connection with the sales of Products, provided that even after the termination of this Agreement Distributor may use the trade-mark(s) in connection with the sale of Products held by it in stock at the time of termination. Distributor shall also acknowledge that any and all patents, trademarks, copyrights and other industrial property rights used or embodied in Products shall remain to be sole properties of Seller, and shall not dispute them in any way
Article 15. Duration
This Agreement shall become effective on the day appearing at the first above written upon the signing of both Seller and Distributor and shall remain effective for a period of one year. At least three (3) months before the expiration of the term, Seller and Distributor shall consult with each other for renewal of this Agreement.
Article 16. Prohibition of sale outside Territory
Unless prior notice and approved by Seller, Distributor shall not sell or export, nor cause any other person, firm or corporation in Territory to sell or export Products outside Territory during the effective period of this Agreement.
Article 17. Assignment
Neither party shall assign and/or transfer this Agreement in whole or in part to any individual, firm or corporation without the prior written consent of the other party.
Article 18. Observance of Secrecy
Both Seller and Distributor shall keep in strict confidence from any third party(s) and all important matters as to the business affairs and transactions covered by this Agreement.
Article 19. Notice
All notice which may or shall be given under this agreement shall be made by registered airmail or cable to the address mentioned below or to such address as are notified in writing by the parties hereto. If either party has changed its address, a written notice thereof shall be given to the other party. All notices shall also be deemed to have been given on the day when deposited in post.
Article 20. Assembling
To secure regular supplies in the territory, if both the parties agree, the seller shall provide all parts of the product to assemble the product in the territory. If the Seller wish to establish its manufacturing unit in the territory, the Distributor shall be given preference to establish such unit.
Article 21. Governing Law & Arbitration
This Agreement shall be governed and interpreted by the laws of India. In case that any dispute or controversy arises out of or in relation to this Agreement between both parties shall be settled amicably but, in case of failure, these disputes or controversies shall be finally settled in London by arbitration in accordance with International Commercial Arbitration Association where the award shall be final binding upon the parties hereto.
Article 22. Entire Agreement
This Agreement constitutes the entire and only agreement between the parties hereto and supersedes all previous negotiations, agreements, commitments relating to the sale of Products and shall not be released, discharged, changed or modified in any manner, except by instruments signed by duly authorized officer or representative of each of the parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this Agreement in English and duplicate to be executed by their respective duly authorized officer or representative as of the day first above written
…………………………………… INC.
[SELLER] ………………………………………. LTD.
[DISTRIBUTOR]
WITNESSTH
