Contracts with American Distributors and Sales Agents in US

An Expert's View about Business Support Services in the United States

Posted on: 1 Jun 2010

Contracts with American Distributors and Sales Agents in US

By Aaron N. Wise, Attorney at Law © 2009


Your Products and Services. Make sure that your products and goods can be lawfully imported intothe USA, that all legal requirements of U.S. customs and import laws are met, that you have all required licenses and permits to import and sell the products, and that your export and import documentation complies with U.S. law. Also, stated very generally, there is US legislation relating to particular types of products, what they can and cannot contain, their labeling etc. Failure to comply can, in some instances, subject the manufacturer, seller and possibly others to fines and penalties. It can also be ammunition for product liability lawsuits for persons harmed by such infringing products.


Here are a few specific examples chosen randomly.


The Consumer Product Safety Improvement Act, a federal law passed in the summer of 2009, makes it illegal for anyone to sell children’s toys, books, clothes or jewelry and certain other goods if the items contain more than trace levels of lead or phthalates. Penalties are stiff, with violators facing potential prison terms and fines of up to US$100,000 per violation. The Act applies not only to new items but existing stock as well.


Recent federal legislation often called for short, the “Bioterrorism Act” applies to exporters of food and beverage products intended for humans and animals. It requires registration with the U.S. Food and Drug Administration, the appointment of a U.S. representative, certain document filing with regard to each shipment, and certain record retention by the exporter. The consequences for violations can be severe.


Certain products destined for the U.S. market can be tested and certified by a private industry organization (e.g., Underwriters Laboratories being one for particular types of products---there are others). Companies will typically want to obtain certification for their relevant products for several reasons, two being: difficulty in marketing them in the USA without it; and, to reduce to some degree the company’s product liability exposure.


Certain services may require special licenses or permits, or may be subject to particular legal requirements.


Trademarks; Other Intellectual Property. If you intend to sell goods or services to the USA under a particular trademark, brand name, promotional slogan etc., have your U.S. lawyer search, before you start business, whether the use of the mark, name, slogan, etc. might infringe any existing, third party trademark. If it does not, consider applying for U.S. trademark protection covering that mark, name, slogan, etc. That applies for the USA and any other Western Hemisphere countries in which you may wish to market your products or services. Essentially the same points apply to other types of intellectual property you may have and should protect (e.g., patents, copyrights and designs), though the search and application procedures for each type and the nature of the rights conferred are different.


Filing Your Copyrighted Works with the U.S. Copyright Office. If you own items that are or may be protected by copyright, you need to protect them in the USA. That is done principally by filing an application for registration with the U.S. Copyright Office. Doing that in a proper and timely way is really a must; failure to do that can result in serious problems for the copyright owner. See Chapter 6, under the subheading “Intellectual Property in the USA” for more on this subject.


What Are They and What Do I Want. Be sure you understand the differences between a “distributor” or “dealer”, and a “sales agent” or “sales rep”. Decide carefully which you want for the U.S. market.


How Many? Think through carefully whether you want to have one exclusive distributor, dealer, sales agent or rep for the U.S. market, or several of them. If several should be the answer, should each have exclusivity for a particular part of the USA or should they all be non-exclusive for the entire USA? There is no one pattern that will suit each and every company. A good market study may be a worthwhile expense.


“Due Diligence”. Check out your prospective U.S. distributor(s), dealer(s), sales agent(s) and sales rep(s) in advance, before engaging them. There are several areas you should check. These include their legal status, financial situation and banking information/references. Your U.S. lawyer can obtain for you at a relatively low cost valuable information about your prospects. Too many non-U.S. companies rush into deals with U.S. parties without doing a proper “due diligence”, and the result is often a messy affair.


The Drafting Initiative: A Critical Point. You, the foreign party, should take and keep the initiative in drafting contracts and non-binding summaries of key terms (“NB- SOTs”). Try your level best not to let your eventual U.S. contracting party submit the first or any later contract draft, or any NB-SOT. Insist that the U.S. side comment on your NB-SOTs and contract drafts rather than submit its own drafts. The “drafting initiative” is a critical element in arriving at what, from your standpoint, is a “good contract”. Remember, the distributor, dealer, sales agent or rep will want a short contract that places on it few obligations, with a long duration and severe restrictions on your right to terminate, no or low minimum targets to meet, excellent payment terms, no security for payment, and disputes resolved in the U.S. party’s “back yard” under that U.S. state’s laws. You, the supplier, will want essentially the opposite, and you should insist on it. After all, they are your products! See below regarding the NB-SOT.


Importance of First Class Contracts; Reducing Risks of Lawsuits. The importance to you, the foreign supplier, of properly drafted, first class contracts for the U.S. market, is paramount. They will help you to attain what you want, and to avoid pitfalls, potential claims and lawsuits. Also, if you do have an actual or potential lawsuit, a signed contract that has been properly drafted, protecting your interests, will give you certain key advantages. First class, U.S. style contracts are your first line of defense, and one of your primary assault weapons. Many lawsuits arise in the USA precisely because of poorly drafted contracts, oral contracts, contracts established by letters or memos, or “de facto” contracts, particularly where non-U.S. parties are involved. It is better to incur legal fees to prepare contracts and related documents properly, at the outset, than to pay the probably much higher litigation costs (plus, of course, the potential damages and losses).


“NB-SOT”. Very often, it makes good sense to begin formal negotiations not with a contract draft, but with a non-binding summary of key terms (“NB-SOT”) prepared by your side (with the aid of competent counsel). Some call it “letter of intent”. There are important strategic and tactical advantages of commencing with a NB-SOT.


Posted: 01 June 2010

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