Local distributors and commercial agents
What alternative distribution relationships are available to a supplier?
A foreign supplier has a wide range of choices for structuring its distribution system in the US. They include:
- direct distribution using the supplier’s own employees;
- distribution through a subsidiary formed or acquired by the supplier;
- distribution through one or more independent distributors that buy goods from the supplier and resell them at a profit to their own customers, typically under a written distribution agreement that defines the rights of the supplier and distributor;
- distribution using commercial agents or sales representatives who do not purchase from the supplier or take title to the goods. Commercial agents arrange sales on behalf of the supplier and receive a commission when the supplier fulfils the direct sale to the customer. The commercial agent agreement may cover responsibility for other functions as well, such as invoicing, delivery and other logistics;
- distribution through a franchise network. If the distribution relationship meets the legal definition of a franchise, regulations apply at the federal level and at the state level in many states;
- distribution by means of licensing manufacturing rights, where the supplier grants a US manufacturer the right to use intellectual property to make the supplier’s products locally, subject to quality controls, and to sell them through the licensee’s own distribution network or agreed channels; and
- private label distribution, in which the supplier applies the US distributor’s brand to the products, sells them at a profit to the US distributor, and essentially surrenders control over their subsequent sale, distribution, marketing and advertising in the United States.
In theory, a foreign supplier could use more than one of these methods (or other hybrids) contemporaneously in the United States, perhaps in different geographic areas or for different products, although doing so could be a management challenge. The supplier could also enter into a joint venture with a US distribution partner by investing in the partner or jointly forming a new entity.
Legislation and regulators
What laws and government agencies regulate the relationship between a supplier and its distributor, agent or other representative? Are there industry self-regulatory constraints or other restrictions that may govern the distribution relationship?
There is no regulatory scheme in the United States applicable to distribution agreements as a general class. In most cases, parties are free to enter into a distribution relationship on whatever terms they choose, without any mandated terms or formalities or oversight by any government body. General principles of contract law will apply. However, there are several bodies of law that can or will come into play, depending on the goods or services involved in the relationship.
Product distributorships are subject to article 2 of the Uniform Commercial Code (UCC), which deals with transactions in goods. Article 2 has been adopted, with various adjustments, in every US state except Louisiana. Article 2 will apply if the sale of goods is part of the relationship; in some states, the sale of goods must be the dominant or predominant part of the relationship for the UCC to apply. However, provisions of the UCC are not mandatory; rather, they act in a gap-filling capacity when the private contract of the parties fails to cover a particular issue. The parties are generally free to adopt contract provisions that vary from article 2. UCC provisions address the formation and modification of a contract for the sale of goods, the performance obligations of seller and buyer, and breach and remedies.
Certain federal and state statutes govern distribution relationships in particular industries. At the federal level, the Automobile Dealers Day in Court Act and the Petroleum Marketing Practices Act govern supplier relationships with automobile dealers and gasoline retailers, respectively. At the state level, the industries affected include car, truck and motorcycle dealers, farm equipment dealers, construction and industrial equipment dealers, liquor wholesalers, beer and wine distributors, boat and snowmobile dealers, appliance dealers, and garden equipment dealers, among others.
If the distribution relationship meets the legal definition of a franchise, regulations apply at the federal level and at the state level in many states. Franchise investment laws apply to the formation of the relationship and require presale disclosure to prospective franchisees and, in certain states, registration of the franchise offering. Franchise relationship laws regulate termination, non-renewal, ownership transfers and other aspects of the relationship between the franchisor and the franchisee.
Some industries have self-regulatory codes of conduct, but they do not have legal force unless incorporated into the contract between the supplier and distributor.
Are there any restrictions on a supplier’s right to terminate a distribution relationship without cause if permitted by contract? Is any specific cause required to terminate a distribution relationship? Do the answers differ for a decision not to renew the distribution relationship when the contract term expires?
In general, the parties to a distribution agreement can specify the grounds and procedures for termination, and the contract provisions will be enforced unless deemed by a court or arbitrator to be unconscionable or contrary to public policy. However, if a federal or state dealership law applies to the relationship, the statute may supersede the termination provisions of the contract. Dealership statutes typically require good cause for termination, as well as notice of default and an opportunity to cure. Most of them provide that good cause includes failure by the dealer to comply with any lawful (and in some cases, material or reasonable) requirement of the agreement. Most but not all of the statutes define good cause in a non-exhaustive manner, leaving room to argue that good cause exists even in circumstances where the facts do not match any of the examples of good cause in the statute. Some statutes specify circumstances (such as the distributor’s voluntary abandonment of the business, conviction of a crime, or repeated defaults) in which the supplier is not required to provide notice and an opportunity to cure. No two statutory formulations are exactly alike, so the specific statute must always be consulted.
If no dealership statute applies, the terms of the distribution agreement will govern. If the parties have not specified conditions for termination, then UCC provisions may apply.
A few states and US territories have statutes governing termination of dealerships generally. These include Alaska, Delaware, Maryland, Rhode Island, Wisconsin, Puerto Rico and the US Virgin Islands.
Is any mandatory compensation or indemnity required to be paid in the event of a termination without cause or otherwise?
Generally, distributors are not entitled to compensation or goodwill indemnity upon termination or expiration of a distribution arrangement. A few special industry laws require the supplier to repurchase inventory from a terminated distributor, but, generally, there is no goodwill indemnity based on clientele developed by the distributor.
If the foreign supplier violates the terms of the contract or an applicable statute prohibiting termination without good cause, the terminated distributor may sue for damages or an injunction to block termination. Damages for wrongful termination may be measured by the fair value of the distributor’s business in the supplier’s product line or by the net present value of the profits the distributor would have earned but for the termination.
Transfer of rights or ownership
Will your jurisdiction enforce a distribution contract provision prohibiting or restricting the transfer of the distribution rights to the supplier’s products, all or part of the ownership of the distributor or agent, or the distributor or agent’s business to a third party?
In general, contractual restrictions on the distributor’s transfer of equity ownership, business assets, or distribution rights will be enforced. However, in certain industries, statutes limit the supplier’s ability to restrict ownership transfers. For example, state laws governing motor vehicle dealers often require good cause for refusal to approve an ownership transfer.
Law stated date
Correct as of
Give the date on which the information above is accurate.
15 March 2021.