Distribution Symposium: Avoiding the Legal Landmines in Distribution

September 13, 2012

Thank you to everyone who was able to attend the first Distribution Symposium. Below are some great reference materials for you when navigating through "the legal landmines of distribution."
Top 10 Takeaways from 2012 Distribution Symposium

  1. State revenue enhancement: The states are desperate for money and trying to collect more revenue using a variety of approaches. For example, some states are trying to attribute nexus status to a parent because an affiliate has an office in the state. Other states are using the escheat laws to recover old credits and refunds due to a customer, such as from unused gift cards.
  2. Pricing issues: Although the U.S. Supreme in Leegin said reasonable minimum price restraints are permissible, many states do not like them. Sellers struggle on how to implement minimum price restraints without running afoul of the law because it is difficult to know whether the rule of reason is satisfied and many states have a per se rule. Use of a Colgate-type retail pricing policy is difficult to implement because there is no flexibility when a violation occurs and sales to the violator must stop.
  3. Product liability and safety issues: When dealing with a foreign supplier, especially when importing from China, there is often no effective remedy against a supplier when there is a defective product or a recall. The U.S. importer essentially becomes the manufacturer with all the attendant liabilities and responsibilities.
  4. Impact of foreign laws: Foreign law may supersede the terms of distribution agreements and it is important to understand the impact. Terms that are typical in U.S. distribution agreements, such as exclusive territories may not be enforceable. It may also be significantly harder to terminate a distributor and sometimes manufacturers must expect to pay damages for doing so.
  5. Gift cards: When you issue gift cards, ensure you have no expiration of the underlying funds for at least five years from issuance; no fees for the first year, and only in certain circumstances after that; no gift cards with more than $2,000 loaded on them, and no more than $10,000 sold to any one person/entity in a 24-hour period.
  6. When establishing your marketing campaign: Protect your intellectual property by establishing and memorializing in writing contractual ground rules for your distributors or sales force before they represent your product or name. If your marketing campaign includes an on-line presence, be sure to develop adequate terms and conditions and privacy policies, including how and what information you or your distributors gather and use - paying particular attention if you have reason to believe children will be accessing your site.
  7. Importance of good compliance programs: Staying on top of ethics and compliance matters is key in any distribution system and especially when dealing with distributors abroad. Non-compliance can be costly. A good compliance program has buy-in from senior management and down, and sets up procedures that will allow everybody in the company to avoid compliance pitfalls simply by following routines.
  8. Choices when choosing a distribution model: Different retail distribution models will present different challenges but also different opportunities for manufacturers. Analyzing existing strategic goals, assortment, distribution/channels, infrastructure and processes, controls and supply chain can help a retailer identify sales and margin opportunities and help manufacturers pick a model that will be a good fit for its business. This assessment may also lead to operational and distribution improvement opportunities. If franchising is the distribution model of choice, it is important to understand whether the business model lends itself to franchising and is possible to replicate by franchisees. For distribution systems relying on independent dealers, involving those dealers early on is often the key to a successful conversion of the system to a franchise. Before franchising internationally, a franchisor must consider how well the franchised products or services translate to the foreign market and understand the financial challenge of being geographically removed from its franchisees.
  9. Terminating a distributor or dealer: Terminating a distributor or dealer often becomes difficult if the state has a relationship law or there is specific industry legislation, such as the Petroleum Marketing Practices Act. Termination often has to be handled conservatively to minimize risk exposure to the manufacturer or seller appointing a distributor or dealer.
  10. Bankruptcy issues: If you think your customer might be a candidate for filing a Chapter 7 or Chapter 11 bankruptcy, then when you receive payment, do not automatically apply it to the oldest unpaid invoice. Rather, look at the history of their past payments; suppose the average is 46 days after shipment or invoicing. Then look to see if there is an unpaid invoice that is around 46 days after shipment or invoicing. If so, apply the payment to that invoice. It will give you a better "ordinary course of business" defense if the customer does file bankruptcy within ninety days to avoid preferential payment.

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