In the early stages of doing business, emerging businesses often use a distributor to introduce a product to the US market without a full sales force. This requires a solid distribution agreement. As your business expands, manufacturing your products locally is often a key element of long-term growth strategy. Business owners are not always ready to acquire a US manufacturing facility at the start. An alternative for emerging businesses to consider is licensing the technology and know-how used to manufacture your products to a US licensee. With this arrangement, the licensee will receive the exclusive US license to market your products under your product trademark.

What are the licenses needed to manufacture and sell products?

When you license the manufacture and sale of your products to a licensee, there are two licenses at work.

1. The first covers the technology and know-how used to manufacture your products. You may charge a separate royalty for technology and know-how or a combined royalty. The licensee and its employees should agree to keep the technology and know-how confidential, to use it only for your products and not to use it after the license agreement is terminated.
2. The second license is the right to use the product trademark on products that are manufactured. The key issue here is quality control. For the first time, your trademark will appear on goods manufactured by others. You must supervise the quality of the licensee’s products to ensure that your standards are met. Failure to do so can result in the loss of trademark rights.

Top license agreement issues to consider:

1. Exclusivity: The licensee will probably insist on exclusivity. When accessing the license term may be longer than the distributorship because of the manufacturing commitment. However, try to seek as short a term as possible to keep options open, as again, you will know not know how successful sales may be.
2. Inventory: You should also have the right to purchase the licensee’s inventory after the License Agreement terminates.
3. Compliance: Compliance with local laws is the licensee’s responsibility, while Manufacturer’s responsibility includes filing trademark and patent registrations. The par­ties should cooperate in developing the marketing plan.  Manufacturer expects to license the “Product” trademark for other goods. It hopes that the public will associate these goods with the high quality Products for which Manufacturer is known. These licenses will present many of the same concerns as the Manufacturer/Licensee license.
4. Quality control: You must take appropriate measures to protect your business and the product’s image and prevent reputational damage in the market, including legal remedies and specific insurance products to cover for the unfortunate situation in which public pressure threatening its reputation.

In the early stages of doing business in the US, it may be too soon for a company to form its own U.S. sales organization. There are several ways to enter the US market without a full sales force. One option is for companies to use a distributor to introduce their product to the US market. When hiring a distributor, a solid distribution agreement is key. This checklist provides some best practices when structuring your agreement.

What is a Distribution Agreement?

A distribution agreement governs the relationship between a manufacturer and distributor. The arrangement calls for the manu­facturer to sell finished products to the distributor and establishes all pricing and delivery terms. When preparing an agreement, it is important to understand how the relationship works and to incorporate key considerations for flexibility as your business grows.

Distributor Responsibilities

Billing and collection are usually the distributor’s responsibility, as well as ensuring compliance with local legal and regulatory requirements. Certain products are also subject to import/export controls and other regulatory constraints at the state and federal levels.

Exclusivity

The distributor may ask to be your exclusive U.S. repre­sentative. If the term of the distribution agreement is relatively short, exclusivity is often granted. The duration of the distribution agreement can be a matter of difficult negotiation. You may want to change your method of distribution in the future, perhaps by creating your own sales force. When the distribution agreement is initially entered into, it may be difficult to predict the volume of sales so flexibility is beneficial.

Distribution Agreement Checklist

• Specify the duration of the relationship including methods of ending the relation­ship and fair compensation on termination
• Reserve your right to repurchase the distributor’s inventory of products at cost, in order to facilitate a change in distributors
• Include a statement that the distributor is an indepen­dent contractor with no authority to bind you as manufacturer
• Require the distributor to take reasonable steps to avoid product diver­sion outside the U.S. or into inappropriate retail channels
• Insurance provisions protecting the distributor from liabil­ity for defects in the products and you from liability caused by the distributor’s negligence
• Request monitoring third-party use of your  trademark and any infringements
• While the distributor may develop the initial marketing plan, you may want con­trol of the marketing effort – your agreement should allow significant input into the distributor’s marketing efforts and on receiving regular sales reports