Exclusive Distribution Agreements

I write a fair number of distribution agreements. Distribution agreements are agreements between a supplier of goods, and a distributor or reseller of those goods. The agreements usually give the distributor the right to sell the supplier’s goods over some kind of geographic territory. Time may be limited or unlimited. And most importantly, the distributor may have either exclusive or non-exclusive rights.

Dealing with non-exclusive rights is relatively easy. There is no need for the supplier to ensure that the distributor does anything at all. If the distributor sells the goods, great! If the distributor fails to sell the goods, then the supplier will just sign a new agreement with a new distributor. After all, the contract does not grant exclusivity. The situation becomes hairier when the supplier wishes to grant exclusive rights.

I often put in provisions that force the distributor to do onerous things. Provisions like annual minimum advertising expenditures, annual business plan submissions, mandatory show room, and provisions that force the distributor to use contractors and subcontractors that conform to certain human rights standards. Clients always ask “what are these provisions for?” They look at these provisions and say “The Distributor will never sign that!”

And I always retort, “Then you shouldn’t either!”

I always tell the same story. The case of Wood v. Lady Duff Gordon. The case is a classic law school case about the “sufficiency of consideration,” which is just fancy lawyer speak for a “promises that are good enough for the court.”

Example 1: Things for Things

Consideration is a legal term that encompasses the thing that is exchanged. In simple, contemporaneous contracts for goods, the consideration is concrete. For example, if I buy an apple for a dollar. My dollar is consideration for apple, and the apple is consideration for the dollar.

Example 2: Things for Promises

Now let’s take a slightly more complicated example, say I promise to pay you a dollar for your apple, and you give me your apple now. In this case, my promise to pay you later is consideration for the apple, and the apple is consideration my promise to pay.

Example 3: Promises for Promises

Now let’s take a slightly more complicated example, say I promise to pay you a dollar for your apple, and you promise to give me give me an apple. Neither of us have exchanged anything except promises. You haven’t given me an apple, and I haven’t given you a dollar. The promises themselves constitute the exchange.

Example 4: Promises for Conditional Promises

Now let’s take a slightly more complicated example, say I promise to pay you a dollar, if I ever have one, and you promise to give me give me an apple. Neither of us have exchanged anything except promises. But my promise is contingent on me ever having a dollar. If I never have a dollar, the conditions for my promise never mature, and thus, my obligation to give you a dollar never becomes due.

This is exactly the case of Lady Duff Gordon. Lady Duff Gordon was a fashionista of her time. She gave Wood exclusive rights to use her name to brand a proposed clothing line he wanted to produce. In return, they agreed to split the profit they would make. But AHA! the unspoken rule of profits are that they may or may not exist. So in reality, they agreed to “split the profits if there ever were any.” Which is exactly like my promise to pay a dollar if I ever have one.

Lady Duff Gordon argued in court that Wood’s promise to pay under the condition that he had any profits wasn’t a real promise. Unfortunately for Lady Duff Gordon, the court disagreed.

Which brings us back to exclusive distribution agreements. If you’re the supplier, how do you prevent the distributor from gaming you? The answer lies in making them do things that A REAL BONEFIDE BUSINESS would do: annual business plans, minimum marketing expenditures, monthly accounting, quarterly reports, minimum order amounts.

The provisions may seem onerous, but that’s the price of exclusivity.