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Presenting a live 90-minute webinar with interactive Q&A Distribution and Sales Agent Contracts: Drafting Provisions on Exclusivity, Territory, Sales Support, Trade Secrets and More THURSDAY, JUNE 2, 2016 1pm Eastern | 12pm Central |

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Presenting a live 90-minute webinar with interactive Q&A

Distribution and Sales Agent Contracts: Drafting Provisions on Exclusivity, Territory, Sales Support, Trade Secrets and More

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific THURSDAY, JUNE 2, 2016

Matthew E. Liebson, Partner, Thompson Hine, Cleveland Jennifer S. Roach, Partner, Thompson Hine, Cleveland Darcy M. Brosky, Attorney, Thompson Hine, Cleveland

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Matthew E. Liebson Jennifer S. Roach Darcy M. Brosky

Distribution and Sales Representative Agreements

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Today’s Topics

 Sales Representative Versus Distributor  Difference Between Distribution and Sales Representatives  The U.C.C. and Product Distribution Agreements  Antitrust Issues Relating to Distribution  State Statutory Landscape  International Considerations  Key Provisions and Best Practices

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DISTRIBUTOR VERSUS SALES REPRESENTATIVE

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The Typical Distributor

 Distributor purchases products from a manufacturer at wholesale prices  Distributor obtains title and physical custody of products  Distributor maintains retail location or showroom  Distributor is responsible for maintaining and storing inventory  May or may not carry competing brands  May or may not be required to pay a fee

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Distributor’s Relationship with Manufacturer

 Manufacturer may provide technical support, advertising materials or an advertising allowance, product training  Distributor’s performance evaluated based on:

 Volume of products purchased from manufacturer;  Customer Service;  Knowledgeable employees;  Facility;  Inventory Control  In-store and local promotion

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Distributor Terminations

 Many jurisdictions have distributor termination statutes to prevent manufacturers from terminating distributor’s without cause  Why?

 Distributors invest in selling products  Leases for retail and storage  Building upgrades  Employee training  Products in Inventory

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The Typical Sales Representative

 Independent marketing resource  Sales representative typically does not typically take title to merchandise or maintain inventories or retail locations  Pass orders along to manufacturer to accept and fulfill  Paid commission on orders  Sales Representatives typically do not have power to complete

rders or otherwise bind manufacturer

 Sales Quotas may be part of Agreement

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What is a Franchise?

 Three main elements of the definition of a franchise under federal law and most state franchise laws  Substantial Association with Trademark  The business must be substantially associated with the franchisor's trademark  Often interpreted broadly  Payment of a Fee  May be indirect such as consulting fees, training fees, etc, are sufficient if required; many statutes have de minimis exemption  Does not include bona fide payments for purchase of goods for resale  Marketing Plan/Community of Interest/Significant Control  Variation amongst the state statutes (written agreement, specific industry)

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Sales Representative or Distribution Appointments May Constitute Franchises

 A Sales Representative Agreement or a Distribution Agreement may constitute a franchise if the requirements are met  State franchise statutes may prohibit termination of a franchise without cause or impose other requirements on a franchise relationship  Consider ways to minimize risk that relationship constitutes a franchise

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THE U.C.C. AND PRODUCT DISTRIBUTION AGREEMENTS

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Is a Distribution Agreement one for the sale of goods?

 Predominance  Outcomes are fact specific  Don’t leave it to chance!

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Written Requirement / Statute of Frauds

 § 2-201  A contract for the sale of goods for the price of $500 or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought or by his authorized agent or broker.

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Warranties

 2-313 – Express warranties  2-314 - Merchantability  2-315 – Fitness for a Particular Purpose

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UCC “gap filler” provisions

 2-305 – Open Price Terms  2-308 – Undefined Place of Delivery  2-309 – Undefined Time of Delivery  2-310 – Time for Payment

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Performance and Termination

Adequate Assurances of Performance  § 2-609(1)  “A contract for sale imposes an obligation on each party that the

ther's expectation of receiving due performance will not be
impaired. When reasonable grounds for insecurity arise with

respect to the performance of either party the other may in writing demand adequate assurance of due performance and until he receives such assurance may if commercially reasonable suspend any performance for which he has not already received the agreed return”

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Covenant of Good Faith

 § 1-304  “Every contract or duty within the Uniform Commercial Code imposes an obligation of good faith in its performance and enforcement.”  “Good faith” . . . “means honesty in fact and the observance of reasonable commercial standards of fair dealing”  § 1-201(b)(20)

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ANTITRUST ISSUES RELATING TO DISTRIBUTION

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The Sherman Act (15 USC §1-2)

1. Every contract, combination in the form of trust or otherwise, or

conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.

2. Every person who shall monopolize, or attempt to monopolize, or

combine and conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony…

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Horizontal Restraints

 Horizontal restraints consist of restrictions established by agreements among actual or potential competitors

 Typically, at the same level of the supply chain  Business Electronics v. Sharp Electronics, 485 U.S. 717 (1988)

 Price Fixing  Group Boycotts

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Price Fixing

Cartels are “the supreme evil of antitrust” (Verizon Communications v. Law Offices of Curtis V. Trinko, 540 U.S. 398, 408 (2004))

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Group Boycotts

 “Group boycotts” are often listed among the classes of economic activity that merit per se invalidation under § 1. Exactly what types

f activity fall within the forbidden category is, however, far from

certain . . . (Pacific Stationery & Printing Co. v. Northwest Wholesale Stationers, 472 U.S. 284, 293 (1985)).  “The per se approach has generally been limited to cases in which firms with market power boycott suppliers or customers in order to discourage them from doing business with a competitor . . .” (FTC v. Indiana Federation of Dentists, 476 U.S. 447, 458 (1986)).

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Vertical Restraints

 “those imposed by agreement between firms at different levels of distribution”

 Business Electronics v. Sharp Electronics, 485 U.S. 717, 730 (1988)

 Examples

 Supplier – Manufacturer, Distributor or Wholesaler  Manufacturer – Customer  Distributor - Customer

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Vertical Restraints

 Resale Price Maintenance  Minimum Advertised Price  Customer and Territorial Restraints  Exclusivity  Tying

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Resale Price Maintenance

 Maximum Resale Price Maintenance

 Initially considered a per se violation  State Oil v. Khan, 522 U.S. 3 (1997)  Now subject to Rule of Reason analysis

 Minimum Resale Price Maintenance

 Leegin Creative Leather Products v. PSKS, Inc., 551 U.S. 877 (2007)  Declares RPM subject to Rule of Reason Analysis  37 states had urged retention of Dr. Miles

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Post-Leegin RPM Issues

 Federal Agency Guidance Limited  State Opposition

 Maryland (Statute – 11-204(a)(1)  New York  Illinois/Michigan  California  Pennsylvania  Kansas

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RPM: The Colgate Plan

 Unilateral announcement of pricing policy  Refusal to deal with distributors departing from it  United States v. Colgate & Co., 250 U.S. 300 (1919)  Key: Cannot “take affirmative action to achieve uniform adherence”  United States v. Parke, Davis & Co., 362 U.S. 29 (1960)  Monsanto v. Spray-Rite Service Corp., 465 U.S. 752 (1984)

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RPM: How Do I Advise My Clients?

 A manufacturer may:  Suggest resale prices  Provide suggested price lists  Advertise suggested resale prices  Pre-ticket suggested resale prices  RPM is still not “per se” legal

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Minimum Advertised Price

 Unilateral action from supplier  Access to cooperative advertising funds  Advertising outside of stores  Coverage of dealer’s independently funded advertising?  Does not govern actual sales pricing  Need for consistent enforcement  What about internet retailers?

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Non-Price Restraints

 Vertical non-price restraints are subject to a rule of reason analysis  Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36 (1977)  Such restraints have “real potential to stimulate interbrand competition” (Sylvania at n.19)

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Customer and Territorial Restraints

 Territorial and Customer restrictions are permissible

 Can limit distributors to territories and prohibit extraterritorial sale  Can exclude national accounts or other customers  Location restrictions

 Exclusive Distributorships are permissible (United States v. Arnold, Schwinn & Co., 388 U.S. 365 (1967))  Consider availability of other brands and competitive products  Manufacturer’s right to select customers

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Exclusive Dealing

 Inducing a buyer to purchase most or all goods from a single supplier  Potential benefits include

 Assured supply  Long-term planning based on known costs  Reduction of selling expenses  Protection against price fluctuations  Predictable market  Standard Oil Co. v. United Stats (Standard Stations), 337 U.S. 293 (1949)

 The risk: foreclosing competitors of the supplier

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Tying- Modified Per Se Analysis

 Inquiry into market conditions before per se analysis applied  Existence of market power?  Must show:  Separate products  Conditioning  Economic Power  Substantial commerce in the tied product  Competitive Effect in the market for the tied product

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The Robinson Patman Act

 “Precision of expression is not an outstanding characteristic of the [Act]”

 Automatic Canteen Co. v. FTC, 346 U.S. 61, 65 (1953)

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Robinson Patman Act

 Section 2(a) prohibits certain forms of price discrimination by a seller  Section 2(b) provides an affirmative defense to discrimination intended to meet competition  Section 2(c) prohibits certain brokerage fees and commissions  Sections 2(d) and (e) prohibit sellers from discrimination in providing allowances or services to competing customers for promoting the resale of the seller’s products  Section 2(f) prohibits buyers from inducing a seller to violate the RPA

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Robinson Patman: 2(a)

 Non-price factors are not relevant  Discrimination “occurs where there is actual difference in prices in relatively contemporaneous sales after taking into account all factors affecting price, such as discounts and rebates.” Texaco, Inc.

v. Hasbrouck, 496 U.S. 543 (1990)

 A plaintiff must prove a reasonable possibility that price discrimination will substantially lessen competition or tend to create a monopoly.  In order to be “competitors,” the resellers must compete with each

ther (i) at the same functional level, i.e., wholesale, retail, etc., (ii)

in the same geographic market, (iii) during the same time period and (iv) with regard to the same goods (like grade and quality).

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Robinson Patman “Lines”

 A competitor plaintiff bringing suit must show primary line injury (reduction in competition in marketplace where sellers compete). This requires showing predatory pricing – very difficult.  A customer plaintiff must show secondary line injury (reduction in competition where seller’s customers compete). Injury to competition can be inferred where a significant price difference continues for a substantial period of time.  In some instances, it is possible for a direct purchaser to compete with a favored buyer’s customers (tertiary line), and the Supreme Court has found fourth line injury in Perkins v. Standard Oil Co., 395 U.S. 642 (1969).

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Robinson Patman Defenses

 Functional availability defense – did the buyer decline to take steps to get the lower price?  Cost justification (if costs are explicitly linked to prices before setting). This one is rare and difficult.  Changing conditions (perishable goods, distress sale,

bsolescence) – courts split.

 Meeting competition defense – same price, reasonably tailored to competitive threat. Codified in 2(b).

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STATE STATUTORY LANDSCAPE

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Statutory Landscape Surrounding Product Sales Through Third-Parties

 State laws limiting termination of franchise and dealer agreements  State laws requiring certain disclosures or registration with the state  State laws governing relationships in specific industries  The FTC Franchise Rule  Business Opportunity Sales Act  Deceptive Trade Practices Act and the FTC Act  State laws regarding sales representatives

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Why Do These Statutes Matter?

 Restrictions on ability to terminate your franchisee or dealer  Preclude you from not renewing or noncontinuance of your relationship  Require specific and detailed disclosure and/or registration  Forced inventory repurchase or payments not defined in your contract

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Key Provisions Of State Laws Regarding Termination Of Franchise and Dealer Agreements

 Community of interest  Good cause needed for termination  Good cause needed for change in competitive circumstances  Duty to repurchase inventory  Required notice periods  Opportunity to cure required  Anti-waiver provisions

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Industry Specific Legislation

 Motor Vehicles (state by state)  Farm, Construction, Industrial, Utility, Outdoor Power Equipment (state by state)

 New Hampshire regulates equipment as motor vehicles

 Liquor, wine, beer (state by state)  Recreational vehicles (state by state)  Other (state by state)  Petroleum Marketing Practices Act (federal)

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What Can You Do?

 Do not require the payment of a franchise fee

 This means INDIRECT franchise fees too  Any payments other than those for the purchase of goods at the bona fide wholesale price

 Consider including performance benchmarks in your agreements  Are non-exclusive appointments an option?  Review termination provisions carefully  Watch involvement in operation of your distributor’s/dealer’s business

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States Where You Want To Be Mindful In Structuring Distribution Relationships

 Minnesota  New Jersey  Washington  Wisconsin  Illinois  Michigan  Arkansas

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FTC Franchise Rule: no private right of action

 Significant control over, or assistance in, method of operation  Payments aggregating more than $500 within six months of commencing operations  Fractional franchise exemption Business Opportunity Sales Acts  Seller provides equipment, products, services to enable purchaser to start a business  One of a list of several enumerated things must occur (e.g. marketing plan, assist finding locations for vending machines, racks, etc.

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Sales Representatives

 Written contract may be required  Provisions regarding when commissions must be paid (e.g. 14 or 30 days after termination)  Treble damages and attorneys’ fees

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INTERNATIONAL CONSIDERATIONS

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International Considerations

 Export Control Laws  Anti-Bribery Laws  FCPA  International Conventions  Local Anti-Bribery Laws  International norms and laws

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Customs/Export Control

 The U.S. Government controls exports of sensitive equipment, software and technology in effort to protect national security and further foreign policy objectives.  Export Control Laws restrict the transfer of subject items to designated end users, end uses, and destinations.  Verify that sales representatives and distributors are familiar with the export requirements and restrictions relevant to the products and region.

 Contract should expressly require familiarity  Consider further steps if sensitive region or product

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State Department’s Red Flags For Export Controls Violations

Distributor or Agent:  Is reluctant to provide end-use/user information  Is willing to pay cash for high-value shipments  Has little background or history in the relevant business  Appears unfamiliar with the product or its use  Declines normal warranty/service/installation  Orders products/quantities incompatible with the relevant business  Provides vague delivery dates or locations Shipment involves:  Private intermediary in major weapons sale  Freight forwarder designated as consignee/end-user  Intermediate consignee's business or location incompatible with end-user's  Shipments directed to trading companies, freight forwarders, or companies with no connection to buyer  Requests for packing inconsistent with normal mode of shipping  Choice of circuitous or economically illogical routing, or through multiple countries;

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The end-user requests  Equipment inconsistent with inventory  Spare parts in excess of projected needs  Performance/design specs incompatible with resources or environment  Technical capability/end-use incompatible with consignee's line of business  End-use at variance with standard practices  Middleman from third country to place order  Refuses to state whether goods are for domestic use, export, or re-export

State Department’s Red Flags For Export Controls Violations

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Penalties for Violations of Export Control

 Criminal and civil penalties for export control violations can be severe.  Dual-use violations can also be subject to civil fines up to $12,000 per violation, as well as denial of export privileges.  In many enforcement cases, both criminal and civil penalties are imposed.

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Foreign Corrupt Practices Act (FCPA)

 The anti-bribery portion of the FCPA (15 U.S.C. §§ 78dd-1, et seq.) prohibits payments to foreign government officials in exchange for business  The Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) share FCPA enforcement authority.  The FBI helps investigate potential FCPA violations  Individuals and corporations are subject to both civil and criminal penalties for violations, including the possibility of imprisonment  Criminal penalties include a fine of up to $2 million per violation for corporations and up to $100,000 and 5 years imprisonment for individuals, including directors, officer, or stockholder includes a fine of up to $100,000 and a maximum of 5 years in prison.  Civil penalties can include a fine of up to $16,000 per violation

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Companies Can be Held Liable for FCPA Violations of Representatives

 Companies face FCPA liability not just for conduct of their foreign subsidiaries and employees but also for conduct of third parties used in the sale of products  Liability does not require significant level of involvement  The Department of Justice takes the position that a firm can be deemed to have made a payment to a third party "knowing" that all or a portion of it will be paid to a foreign official if the evidence shows "conscious disregard" or "deliberate ignorance" on the part of the firm.

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Minimize Risk of FCPA Violations

The agreementshould contain promises or representations and warranties by the agent or distributor that it will:  Comply with local laws and regulations prohibiting bribery and corruption, including any laws implementing or in furtherance of (a) the OECD (Organization for Economic Cooperation and Development) Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, (b) OAS (Organization of American States) Inter-American Convention Against Corruption or (c) United Nations Convention Against Corruption.  Understand the anti-bribery provisions of the FCPA and conduct its business in conformity with them.  Certify at least annually that it is in compliance with anti-bribery laws, including the FCPA

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Minimize the Risk of FCPA Violations

 Engage in thorough due diligence before appointing foreign agents and distributors.  Include explicit compliance representations and assurances in written agreements.  Comply with local laws and regulations prohibiting bribery and corruption, including any laws implementing or in furtherance of (a) the OECD (Organization for Economic Cooperation and Development) Convention on Combating Bribery

f Foreign Public Officials in International Business Transactions, (b) OAS

(Organization of American States) Inter-American Convention Against Corruption

r (c) United Nations Convention Against Corruption.

 Understand the anti-bribery provisions of the FCPA and conduct its business in conformity with them.  Certify at least annually that it is in compliance with anti-bribery laws, including the FCPA

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In the DOJ’s deferred prosecution agreement with AGA Medical Corporation, the defendant, agreed to implement compliance procedures that included use of the following standard provisions in contracts with agents and other third parties: “(A) anti-corruption representations and undertakings relating to compliance with the FCPA and other applicable anti-corruption laws; (B) rights to conduct audits of the books and records of the agent or business partner to ensure compliance with the foregoing; and (C) rights to terminate an agent or business partner as a result of any breach of anti-corruption laws, and regulations or representations and undertakings related to such matters.”

Minimize the Risk of FCPA Violations

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The Organization for Economic Cooperation and Development Anti-Bribery Convention

 The OECD Convention establishes legally binding standards that criminalize bribery of foreign public officials in international business transactions  Parties to the Anti-Bribery Convention agreed to implement measures that will reinforce their efforts to prevent, detect and investigate foreign bribery  34 Member Countries listed here: http://www.oecd.org/about/membersandpartners/list-oecd-member- countries.htm  The United States amended the FCPA in 1998 to conform with the requirements of the Anti-Bribery Convention

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 UN Convention Against Corruption

 Legally binding international anti-corruption instrument aimed at preventing corruption, including domestic and foreign bribery, embezzlement, insider trading and money laundering  140 Signatories listed here: https://www.unodc.org/unodc/en/treaties/CAC/signatories.html  17 UN member states have not ratified the convention

 Most jurisdictions have enacted civil or criminal anti-bribery legislation that should be expressly referenced in agreement

Other Anti-Bribery Laws

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Local Distributor and Sales Representative Statutes

 Many jurisdictions have enacted protective legislation limiting a manufacturers freedom to contract with its local sales representatives and distributors  Many of the laws cannot be waived by agreement  Consider the local laws when drafting your agreements

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Issues to Consider Under Local Laws

 Whether language is adequate to create nonexclusive appointment;  Whether local law renders any provisions unenforceable;  Local Anti-bribery laws to reference;  Whether at-will termination is permissible;  Method for determining whether a notice period is reasonable;

 Which events constitute “cause” for immediate termination;  Whether the representative or distributor is entitled to compensation

r indemnification upon termination;

 Basis and calculation of payment  Whether payment can be waived in the Agreement

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Issues to Consider Under Local Laws

 An appropriate dispute resolution mechanism

 Arbitration- location, rules  Jurisdiction for enforcing arbitral awards

 Whether any provisions are generally unenforceable  Any labor or employment issues if you appoint individual rather than a corporation  Whether an English version of the agreement can be controlling  Whether there is any need to register agreement  Whether there is any need to register IP

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 Whether you may require minimum inventory purchases;  Antitrust implications of exclusivity, territory or pricing scheme;  Whether choice of law outside of representative or distributors place

f business;

 Whether local laws can be effectively disclaimed;

 Expressly disclaimed  Failure of formalities

More Issues to Consider Under Local Laws

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DR-CAFTA

 Free trade agreement amongst the United States, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and the Dominican Republic.  DR-CAFTA allows a US manufacturer to disclaim certain local protective legislation in its sales representative or distributor agreements.  Some of the local laws are very favorable to the local representatives.

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KEY PROVISIONS AND BEST PRACTICES

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Exclusivity/Territory

 Make exclusivity—or lack thereof—explicit in the agreement  Address whether manufacturer is entitled to sell directly into territory  Address whether representative is entitled to compensation for sales made directly by manufacturer into territory  Representing competitive products or manufacturers  If international agreement, consider whether exclusivity is the default and use any necessary ‘magic language’ to counter assumption  Consider whether appointment will breach exclusivity provision of any existing appointments  Penalties for selling outside of territory

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Nature of Relationship

 Be careful that you do not create an agency relationship  Specify representative is an independent contractor  Prohibit representative from making contracts, pledging credit, extending credit or incurring or assuming any obligation or liability on behalf of manufacturer  Disclaim agency, employment, franchise, distributorship or dealership, partnership or joint venture.  Require all orders are accepted or rejected by manufacturer  Manufacturer’s discretion  No compensation due to representative for rejected orders  Representative does not collect money on behalf of manufacturer

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Sales Support

 May differ for Distributor and Sales Representatives  Any service obligations  Warranty response  Consider requirements for facilities, upgrades, training, staff requirements, inventory maintenance, promotions, market analyses  Metrics for evaluating performance  Allocate expenses for travel, advertising, etc.

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Trade Secrets and Proprietary Information

 Include standard language preventing disclosure of trade secret information  Require clause to extend to any staff or other third parties  Require immediate return upon termination of agreement with survival clause

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Intellectual Property

 Establish clear obligations and limitations for use of marks  Approval of advertising materials  Dealer has no interest in marks despite dealer’s efforts to improve a mark’s goodwill  Determine ownership interest in any promotional materials developed by dealer or other derivative intellectual property developed during the course of the relationship  Require immediate cessation of marks upon termination of the agreement

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Insurance and Indemnification

 Include strong indemnification provisions

 Any representations or warranties made by dealer  Any actions of representative or its employees  Cover shareholders, other owners, partners, directors, officers, employees, agents, representatives, subcontractors, contractors, direct

r indirect suppliers and insurers

 Require dealer to maintain insurance adequate to cover anticipated indemnification obligations

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Compliance with Laws

 FCPA  Include other applicable anti-bribery or anti-corruption statutes  Include relevant export laws

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Choice of Law

 Protective legislation from dealer’s state of residence may not be waivable  Some local laws from territory may apply regardless of dealer’s location  May need to expressly disclaim application of laws

 DR-CAFTA  UN Convention for International Sales of Goods

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Term and Termination

 Fixed term: applicable statutes may prohibit termination but not non-renewal  At-will termination  Reasonable notice period

 Statutory requirements  Ability to recoup investments  Consider seasonal investments- trade shows, seasonal demand  Percentage of sales from manufacturer  Reliance on assurances of manufacturer

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Termination

 Specify Cause events for immediate termination  Insolvency, change in ownership, dissolution, assignment  Breach of specific portions of agreement (compliance with laws, representations or warranties about products)  Conflict of Interest  Fraud or misrepresentation  Material breach  Non-exhaustive list  Consider whether cure period is appropriate

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Post-Termination

 Immediate cessation of trademarks and other intellectual property  Immediate return or destruction of proprietary materials  Inventory buyback  Express waiver to indemnification or compensation upon termination  Obligations for orderly handover-turn over all leads on customers and potential customers  Manufacturer may withhold final payments until all post-termination

bligations are satisfied

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QUESTIONS?

Matthew E. Liebson matthew.liebson@thompsonhine.com Jennifer S. Roach jennifer.roach@thompsonhine.com Darcy M. Brosky darcy.brosky@thompsonhine.com