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Tech & Sourcing @ Morgan Lewis

TECHNOLOGY, OUTSOURCING, AND COMMERCIAL TRANSACTIONS
NEWS FOR LAWYERS AND SOURCING PROFESSIONALS

The terms “reseller” and “distributor” are often used interchangeably to describe entities that purchase goods or services from a manufacturer and then distribute or resell such goods or services to retailers and consumers. However, there are some key differences between a distributor and a reseller and important issues to consider in agreements with resellers and distributors.

A distributor often acts as partner with the manufacturer, is generally first in line in the distribution channel, and is more closely associated with the manufacturer. A strong distributor relationship can be great for a new company that does not have established brand recognition in a new or existing market. The distributor usually buys directly from the manufacturer, holds inventory of the product, provides after-sale services, and resells the product to resellers and sometimes directly to end users. Because distributors generally take on marketing responsibilities for the product, or the obligation to obtain regulatory or government approvals for resale of the product, the manufacturer-distributor relationship is often an exclusive relationship. Therefore, an exclusive distribution agreement must account for minimum sale thresholds or minimum royalties in order for the distributor to maintain its exclusivity. Further, because a distributor may be a company’s first line of introduction into a new or existing market, it is important to find a distributor that will diligently market your products, have the right connections in new territories to obtain regulatory or government approvals for your products, and include an explicit commitment from the distributor to not sell competing products.

A reseller is generally less closely associated with the manufacturer, and sometimes does not have a direct relationship with the manufacturer as it generally buys products from distributors. Resellers usually do not keep inventory of product or provide after-sale services. Resellers generally only sell to end users or wholesalers. For a manufacturer with an established and well-recognized product, a reseller relationship may be the most profitable because resellers are less invested in developing the market for the product and therefore provide higher profit margins for the manufacturer.

Any agreement with a reseller or distributor should be properly documented and reviewed by counsel to ensure that it adequately addresses all of the various issues relevant to such agreements including, to name a few, legal compliance obligations, marketing obligations, exclusivity, and indemnity obligations.