If your company sells products through “2-step distributors”—that is, distributors or wholesalers who then sell to retailers, you need a written agreement to manage those distributor relationships. This is true whether or not you also have an Authorized Dealer Program, although it is definitely a best practice to have both.
In fact, in several ways, an Authorized Dealer Program can significantly improve your wholesale operations. It can also prevent many potential problems with unauthorized sellers, because these often originate with a manufacturer’s wholesale partners.
In this lesson, we’ll review:
- How an Authorized Dealer Program can improve your wholesale operations
- Key clauses regarding Authorized Dealers that belong in your Distributor Agreement
5 Ways an Authorized Dealer Program Can Improve Your Wholesale Operations
-
It helps you reduce product leakage to rogue retailers.
When a manufacturer or brand does not establish a network of approved retailers for its products, the company essentially outsources to its wholesale or distribution partners all responsibility for deciding which companies can buy product from them. The manufacturer is essentially saying to its distributors: “Sell to anyone who wants to resell our products.”
Even a distribution partner acting in good faith, trying to sell only to retailers that will reflect positively on the brand’s reputation, cannot be expected to vet every buyer interested in acquiring their product, or to know which retailers are going to create poor customer experiences.
By implementing an Authorized Dealer Program, you make these decisions easy for your distributors, with the following guidelines:
- Your Distributors may sell only to the retailers named on your Authorized Dealers list.
- Your Distributors may NOT sell to anyone on your company’s Do-Not-Sell list (even if those companies are also listed among your Authorized Dealers).
-
It gives you more control over where and how your products are sold to consumers.
You can subdivide your Authorized Dealer list for distributors according to product lines, specific SKUs, or other categories. This can help you prevent many of the common challenges that manufacturers face along the distribution chain. For example:
- Geographic restrictions
You can create an Authorized Dealer list according to geography to limit product diversion. Allow your distributors to sell specific products only to Europe-based retailers, for example, to reduce the chances of products you expect to be sold in European markets finding their way into the US or Canada.
- Online vs. brick-and-mortar restrictions
You can also create segmented Authorized Dealer lists that allow distributors to sell certain inventory only to brick-and-mortar retailers and others only to pure eCommerce sellers. This will help you protect the interests and profit margins of your dealers and maintain positive relationships with them.
-
It helps you maintain tighter controls over your brand’s intellectual property.
When you sell products to distributors, who then sell to retailers, you are in practice granting those distributors the right to use your intellectual property—logos, trademarks, sales copy, images, etc.—in their sales efforts. You are also giving those distributors de facto permission to grant those IP rights to the retailers who buy from them.
This means that if you do not limit your distribution partners to sell only to a list of Authorized Dealers, you are in effect granting the licensing rights to your brand’s intellectual property to any retailer that acquires your product from your distributors.
In fact, it is not uncommon for Distribution Agreements to include verbiage to the effect of:
As distributors, we receive the licensing rights to the manufacturer’s intellectual property, which we are free to use in our efforts to advertise and sell the company’s products. Additionally, this agreement entitles us to grant the same IP rights to our retail customers, so they can use it to sell the manufacturer’s products to end-users.
With an Authorized Dealer Program that limits your distributors to sell only to the dealers you have already allowed into your official network, you can cut off these potential misuses and abuses of your intellectual property. In fact, your distributors will not need to grant any IP rights to your Authorized Dealers, because all dealers on your approved list will have already received those permissions directly from your company.*
-
It helps you track your inventory and trace the source of distribution leaks.
An important clause to include in any Distribution Agreement is a requirement that your distributors and wholesalers record the serial numbers (or other unique unit identifiers) of the products they sell to retailers, and to report that sales data to your company on a regular basis. This can help you more easily trace the source of a product your team finds being sold by a rogue retailer.
Keep in mind, though, that this track-and-trace strategy will help you protect your brand only to the extent that your distributors actually keep records of their sales, provide them to you when you ask for them, and then stop supplying inventory to sellers if you find them violating your guidelines.
-
It can bolster your legal standing in “tortious interference” claims.
Combining an Authorized Dealer Program with your Distributor Agreements can also improve your company’s legal standing against a distributor if you believe an unauthorized reseller’s behavior has harmed your business or your brand’s reputation. Here’s how.
Tortious interference is a legal claim alleging that one party has wrongfully and intentionally interfered with another party’s contract or business relationships.
If one of your company’s distribution partners sells to a rogue retailer that somehow undermines your brand, your ability to make a case of tortious interference against that distributor will rest on two legal elements.
First, your business must have some type of limited channel of approved retail partners, such as an Authorized Dealer Program.
Second, your distributor would need to know that this rogue retailer wasn’t on your approved list, but sold to them anyway, knowing it was against your company’s rules.
Assuming you included these restrictions in your Distributor Agreement, that distributor would be in breach of their contract with you. This may allow you to present a legitimate tortious interference claim, but it could also give your company legal leverage to implement other punishments called for in your agreement, such as cutting off inventory to the distributor for a period of time.
But the key to this legal standing is that you have an Authorized Dealer Program in place, and that your distributors know the program exists and that they are prohibited from selling to anyone not on your authorized list. Without such a list, you cannot hold your distributor responsible for selling to a retailer that ends up harming your brand.*
Important Authorized-Dealer Clauses to Include in Your Distributor Agreement
We have reviewed how an Authorized Dealer Program can strengthen your distribution channel. For this to work in practice, you will need to include clear language explaining these rules and guidelines in the standard contract that all of your distribution or wholesale partners sign.
Here are some of the relevant clauses we’ve seen brands include in their Distributor Agreements:
Working with Authorized Dealers only:
The brand specifically prohibits the Distributor from selling the products to any retailer not included on the brand’s Authorized Dealer list.
The Distributor is also prohibited from selling to any retailer on the brand’s “Do Not Sell” list (even if that company is also on the Authorized Dealer list). The brand will make available to the Distributor an up-to-date link to this Do Not Sell list, and it is the responsibility of the Distributor to review it before making a sale.
Selling within approved geographic areas (if applicable):
The Distributor may sell, and advertise for sale, the brand’s products only within the geographic territory specified for those products.
Using the brand’s intellectual property:
The brand grants the Distributor limited and non-exclusive permission to use the company’s intellectual property for the sole purpose of advertising, promoting, and selling the brand’s products. One of these limitations is that the Distributor sells products only to retailers on the brand’s Authorized Dealer list (and not on the Do Not Sell list).
A sale to any reseller that violates these rules will constitute a breach of the IP license the brand has granted to the Distributor and could incur legal action or other punishment.
Supplying records on request:
The Distributor agrees to maintain complete records (including dates, buyer’s name and contact details, units sold, and unique unit identifiers) of all inventory sold to retail customers.
The Distributor further agrees to submit to the brand a report with the above details each month [or quarter] and allow the brand to audit the Distributor’s sales records upon request anytime.
Monetary damages and other penalties for violations:
For each occasion that the Distributor breaches this agreement by engaging in the unauthorized sale of products, in addition to all other remedies available to the brand under this agreement and at law, the Distributor agrees to pay the brand, as liquidated damages and not as a penalty, the greater of the following amounts: (i) the costs and fees associated with the brand’s investigation and enforcement regarding the unauthorized sales; or (ii) five times (5X) the MSRP of the Product(s) per unit of product. The parties agree that these damages are not punitive.*
One final note:
These are only examples of verbiage you might want to use to update your Distributor Agreement to reflect the details of your Authorized Dealer Program. Each company’s specific circumstances and needs are unique, so you will want to update the language of your agreement with the help of legal counsel.
* LEGAL DISCLAIMER: TrackStreet develops software for price monitoring and brand protection. Although our company works closely with antitrust attorneys, the information and guidance in this course does not constitute legal advice. For help understanding the legal ramifications of your Authorized Dealer Program, or other reseller programs and policies, we recommend contacting legal counsel that specializes in business contracts or antitrust law.