Today I want to discuss the subject of exclusive distributorships in the computer industry.
The first point to make is that the term "exclusive" must be defined in any distribution agreement. Under Australian law, there is a difference between an exclusive distributor and a sole distributor.
In the former, the supplier agrees not to sell in a particular territory except through the exclusive distributor. In the latter, the supplier undertakes only to refrain from appointing other distributors in the particular territory. It does not preclude itself from making its own sales in that territory.
Therefore, if you want to become a distributor - and you are looking for true exclusivity - it makes sense to be appointed as both an exclusive and a sole distributor.
There is nothing more important in a distributorship arrangement than the wording of the agreement itself. When push comes to shove, the courts will enforce a distributor's exclusive rights according to what the agreement says. Hence, the wording is everything.
When presented with a proposed agreement, the prospective distributor should check to see if it contains any qualifications or other conditions that affect the scope of the exclusivity. A supplier will often reach a compromise with the exclusive distributor whereby it (the supplier) is entitled to sell directly to customers within the distributor's exclusive territory so long as it pays the distributor a commission or equivalent compensation.
The supplier may also reserve the right to supply certain nominated customers in that territory or it may include a clause that says it will not be responsible for other distributors or agents trespassing on the territory.
More often than not, the exclusive distributorship rights are subject to the distributor complying with the terms of the agreement, and failure to do so may result in the exclusive distributor becoming non-exclusive.
Non-competition clauses are related to, and frequently confused with, exclusivity clauses. In a sense, non-competition clauses are the reverse of exclusivity clauses. They prohibit the distributor from purchasing and reselling the products of a rival company - or from distributing the supplier's products in adjoining territories. Before signing a distributorship agreement, you need to know if such clauses have been written into any agreements that the supplier has entered into with other distributors.
When disputes arise, the courts will force the supplier to respect the distributor's exclusivity. If the supplier does not respect those rights, the exclusive distributor will be able to sue for damages and possibly obtain an injunction which stops another distributor from infringing its exclusive rights.
However, the obligation to respect the distributor's exclusivity does not extend to people who are not parties to the distributorship agreement. Therefore, if the supplier does not have exclusive supply in the first place, there is nothing to stop a rival distributor obtaining products from another supplier and competing in the exclusive territory.
If the supplier appoints another distributor to the exclusive territory - or to a territory that overlaps the exclusive territory - the first distributor's rights and remedies would generally be available only against the supplier, not the newcomer.
The key point to remember is that exclusive territory is based on contractual rights. Don't expect that terms like "exclusive" distributor in your agreement will give you a monopoly. Read the agreement carefully to see what it means. Check your supplier's rights and find out what rights your competitors may enjoy.
Michael Fagan is a technology, communications and intellectual property lawyer in the Perth office of national law firm Clayton UtzTel: (09) 426 8444 Fax: (09) 481 3095