Despite the fact that resellers in the computer industry often believe they are "exclusive distributors", there is considerable confusion about what this term means.
An exclusive distributor is a person or a company with the exclusive right to distribute all or some of a particular supplier's goods in a certain area.
The extent of the exclusive right depends on what is agreed between the parties and stipulated in their contract. Exclusivity may encompass all goods of a particular brand or type - or it may be limited to a specified territory, industry or market segment.
For example, a distributor might have an exclusive right to sell company X's word processing software - but not its hardware - to wholesale but not retail customers in three States. Alternatively, its exclusive right might be to retail but not wholesale or mail order sales.
In an exclusive distributor arrangement, the supplier must not sell to any other distributor in the protected territory, industry or market segment. A distributor wanting full exclusivity, however, should also ensure that its contract expressly prohibits the supplier itself from competing in the protected territory or market segment.
If the supplier breaches these terms, an exclusive distributor can:
- sue for breach of contract
- recover damages, including the value of lost sales and - seek an injunction to prevent the supplier from continuing with its offending behaviour.
Contracts which grant exclusive rights have to be worded carefully. If a contract is so restrictive that it breaches the Trade Practices Act, it will not be enforceable. Section 47 of the Act prohibits "exclusive dealing" if the supplier only sells goods to the distributor on the condition that the distributor does not sell similar goods obtained from certain other suppliers.
The Act also covers the less common situation where the distributor only buys goods from a certain supplier on the condition that the supplier does not sell to certain other distributors.
Such arrangements fall foul of the Trade Practices Act if they substantially lessen competition in the relevant market. Unfortunately, there is no easy way - short of going to court - to decide what is the relevant market. This depends largely on how much supply and demand there is for the particular product or for similar products which customers could use as substitutes. Other factors - including the potential for other suppliers or resellers to enter the market in the future - are also taken into account.
Contract terms which constitute exclusive dealing in breach of the Trade Practices Act are not only unenforceable but can lead to prosecution and severe fines. People who are considering entering into exclusive distributorship arrangements should seek expert advice before signing their contracts.
Alternatively, they should discuss their circumstances with the Trade Practices Tribunal or apply to have their contract authorised by the Trade Practices Commission.
If an exclusive distributorship involves an exclusive licence of a trade mark, copyright or other intellectual property rights, the situation is much more complex and other issues need to be considered. The simple message is "seek expert help and proceed with caution".
Matthew Kennedy is a communications and information technology lawyer in the Sydney office of national law firm Clayton Utz.