Local distributors are an excellent
resource to help companies penetrate
global markets. But the distribution of products in non-U.S. jurisdictions presents
legal challenges that business owners need
to consider when structuring distributor
relationships.
“Local laws will differ in each jurisdiction,
although the European Union has adopted
various directives intended to create a consistent body of distribution laws and regulations for the member countries,” said Mary
Wasik, partner, Corporate Practice Group,
Levenfeld Pearlstein, LLC in Chicago.
“Obtaining competent and responsive local
counsel is recommended to provide the necessary guidance.”
Smart Business asked Wasik why non-competition restrictions may not be permissible overseas, how to best protect intellectual property and what to consider when terminating a foreign distributing relationship.
How should a foreign distribution network be
structured?
Your decision to distribute products
through third-party distributors or through
sales agents will depend upon the nature of
your product and the market in which it is
distributed. The laws and regulations of the
applicable jurisdiction may provide your
distributor with certain rights and benefits
and impose obligations on you, which vary
with the legal structure of your relationship.
Can you restrict a distributor from selling
competing products?
In the U.S., you may restrict a distributor
from selling competing products during the
period of your relationship and for some
time after the relationship ends. The
European Union has, however, adopted
strict regulations regarding restrictions on
competition. Non-competition restrictions
are not permissible when they reduce the
availability of competitive goods in the relevant markets where the goods are sold or
purchased. If restrictions are permitted, you
can prohibit a distributor from distributing
competitive goods during the term of your
relationship, and then only up to five years.
Restrictions after termination are only permitted for up to one year, if necessary to
protect your substantial and indispensable
techniques and know-how. It is not an
infringement of EU regulations if you
require that nonpublic proprietary information be kept confidential. The decision to
impose a restrictive covenant and the likelihood of enforceability should be addressed
with local counsel, particularly if there is a
risk that information, techniques and knowhow given to a distributor might be shared
with a competitor.
What should be considered before a distribution relationship is terminated?
The laws of foreign jurisdictions will
sometimes impose legal requirements on
the manner in which your distribution relationship can be terminated. The distributor
may also be entitled to monetary entitlements. For example, under the EU agency
regulations, the activities of the agent may
be considered to have contributed to your
good will and, therefore, unless appropriately addressed in your distributor agreement, the agent could arguably be entitled
to compensation for the loss of future commissions. Further, under certain circumstances, EU agency regulations might require a minimum of three months notice of
termination. If you and your distributor continue to perform under an expired agreement, a question could arise as to whether
you or the distributor intended the agreement to continue for an indefinite term. In
Middle Eastern jurisdictions, local recordation requirements could cause the distributor to obtain affirmative distribution rights,
which could interfere with your ability to
subsequently appoint other distributors.
What steps should be taken to protect intellectual property?
Filings for local trademark and patent protections are obvious first steps in preserving
your intellectual property in foreign jurisdictions. Provisions in contracts that affirm
your interest in IP are also necessary, but
sometimes a distributor will also want to
use the name of the product or manufacturing company in its business name. If this is
acceptable, address this issue by the grant
of a license to the distributor to use the
name and require that such use ceases if
your relationship ends. Police the use of
your trademarks in all potentially applicable
classes. If trademark registrations have not
been made, sometimes the distributor will
make filings in its own name. Further, such
filings could be in different trademark classes that could be of value at some point in the
future.
What law should govern the agreement
between a product owner and distributor?
Any well-established body of law can be
selected to govern your distributor relationship, but of primary importance is the question of whether a judgment issued by a
court in the governing jurisdiction will be
recognized and enforced by a court in the
jurisdiction where the distributor is located.
Some jurisdictions, particularly in the
Middle East and Asia, will more readily
enforce an arbitration ruling by an international arbitration body, so disputes may be
best resolved through arbitration.
MARY WASIK is a partner in the Corporate Practice Group at Levenfeld Pearlstein, LLC. Reach her at (312) 476-7568 or
[email protected].
