By Thomas Thorup, attorney-at-law (California, District of Columbia) and Advokat (Denmark), partner in Thomas Thorup Law, a law firm focused on Danish-American business law, with offices in Copenhagen, Denmark and Washington, D.C.
Introduction
This article briefly outlines key legal considerations to take when you as a Danish business negotiate contracts with U. S. sales agents or distributors for the purpose of getting your products/services sold on the U. S. market.
Your Danish Business and the U. S. Market
You have business and you have a product or service. You have success on your home market and are ready to take on the U. S. market. Perhaps you already have some U. S. customers whom you have been dealing across the Atlantic.
You have determined that, in order for you to really increase your sales in the U. S., you need some “legs on the ground” on a daily basis. However, you are not ready to establish your own company in the U. S. just yet. What to do? No problem! You find a U. S. based business partner who can sell your products/services for you.
Now, I – the lawyer – can’t help you find this business partner, but what I can to is point out some key legal considerations to take before you enter into negotiations and ultimately a contract.
What to do before you start negotiating the contract
So you have found a potential business partner. Before you even start discussing the main terms of a possible collaboration with this partner, you need to ask yourself the following:
When talking with the potential partner, will I (knowingly or inadvertently) give them information about my business which they could use for their own, or for my competitors’, advantage?
If the answer to that question is “yes”, then you need to protect yourself even before you enter into such discussions. You do this by having the potential partner sign an agreement restricting them from using any information you give them for their own commercial purposes without your consent. Such an agreement is often called a “Non-Disclosure Agreement” or simply an “NDA”.
Essential terms to include in an NDA:
- The parties to the NDA – who are bound by the restrictions? It is often necessary to include not just the business entity you plan to negotiate with, but also its owners, management and potentially other individuals, as well as affiliated companies.
- What information is confidential? Make sure the NDA identifies all the information (including your intellectual property) you want to protect as confidential or proprietary (owned by you).
- Describing the restrictions on use of the information.
- For how long do restrictions apply?
- Consequences of breach / unauthorized use (damages, penalties, injunctive measures).
- Choice of law and venue for any disputes. (This is more important than you think… more on that below).
The Distribution Model – Sales Agent or Distributor
After you have secured the NDA, you are ready to negotiate the commercial terms of your agreement with the potential U. S. business partner. First item on the agenda is to decide what distribution model you will use: Will the U. S. partner be a sales agent, or a distributor? What’s the difference?
Basically, a sales agent does not sell your products or services, but only facilitates sales. Once a sale has been set up by the agent, you sell directly from your Danish business to the U. S. customer, and the agent typically receives a commission.
A distributor, on the other hand, buys the products from you, and then resells them to the U. S. customers, thereby earning a profit for himself.
There are of course pros and cons associated with both models. I will mention a few of these:
Sales Agent – Advantages:
- You earn the profits from the sale to the U. S. customers, while (only) paying the agent a commission (in most cases this gives you higher profits than in a distributor setup).
- You have all the information about the U. S. customers immediately (thereby minimizing the risk of losing the customer base if the collaboration with the agent terminates).
Sales Agent – Potential Drawbacks:
- More legal exposure to the U. S. because you have direct contract liability toward all your U. S. customers.
- Potential tort liability for the agent’s actions (while a sales agent is normally considered independent from you such that you are not liable for the agents actions, this can change if the agent holds him- or herself out as being part of your company, e.g. if she/he uses business cards with your name/logo etc.).
- Potential taxation in the U. S. of profits made in the U. S., depending on the circumstances, e.g. if the agent is allowed to enter into binding contracts for sales of your products without your prior approval, you may be considered to have a “permanent establishment” in the U. S. which can subject you to U. S. federal and/or state/local taxation (income, sales taxes)).
Distributor – Advantages:
- Limited contract liability in the U. S. – most often, your only contract with a U. S. party will be with your distributor. If the distribution agreement e.g. provides for the application of Danish law and dispute resolution in Denmark, your risk of being involved in U. S. litigation will be limited).
- Predictable taxation – no tax liability or reporting requirements to U. S. authorities for your Danish business.
Distributor – Potential drawbacks:
- Lower profits (because the distributor has to make a larger profit that the comparable commission to a sales agent (in most cases)).
- Perhaps a lower level of control/influence on the development of your sales in the U. S.
- Who owns the U.S. customers? The U.S. customers do not necessarily have a relationship with you, and you do not necessarily know who they (all) are. When the relationship with the distributor terminates, you may have trouble getting access to all the customers.
Important Terms – Things That You Need to Regulate in Your Contract
While the distribution and sales agent models have fundamental differences, many of the terms in your agreement with your U. S. business partner that you need to consider are the same. I will mention the most important ones here:
- The Parties. While this may seem obvious, it is important to know exactly with whom you have contract. If your U. S. business partner is a legal entity (as is most often the case), be aware that the U.S. corporate legal system is much more complex and much less transparent than the Danish system. (Entities are incorporated in a U.S. state; there is no such thing as “U.S. federal corporation”. There are generally no requirements that a legal entity have a certain amount of capital/equity. Financial reports, by-laws, information about owners, directors, officers of a corporation are either not publicly available or difficult to obtain). Find out what you can from public sources, obtain credit reports from credit agencies (Experian, Dun&Bradstreet), and ask the potential business partner about information that you need about them before you will commit to a business relationship.
- Purpose, background. While not strictly necessary, it is often beneficial to describe the background and the purpose of the agreement. If at some later point there is dispute as to the understanding of specific contract terms, a description of the background, purpose and intentions of you and your U.S. business partner as they were when the contract was written can help.
- Define what geographical area (the U.S., or parts thereof (overseas territories included), North America, or other) in which the agent/distributor is to sell your products (and/or other definition of the market, e.g. retail only or other); and be very specific about not selling outside of such territory, if that is what you want. (Note here that U.S. competition law differs from EU competition law on a number of points, including the issue of “passive sales” to customers outside a territorial restriction in e.g. distribution agreements).
- Exclusivity re. Territory. Does the agent/distributor have exclusivity in the Territory? This is often the case, and if so, you need to know how to get out of the contract if sales are not going well enough. See below re. early termination.
- What prices does a distributor pay (discounts for large orders etc.); what currency applies; who has the risk of exchange rate changes; changes in prices of raw materials or other sourcing. For a sales agent, is there a set price schedule which the agent can offer to the customers?
- Delivery terms. Be specific about who is responsible for shipment, freight insurance, duty/taxes etc. and when the risk passes from you to the distributor. (It is often advisable to use well defined terms, e.g. one of the Incoterms).
- Exclusivity re. products. Is the agent/distributor allowed to sell other, similar/competing products?
- Are You selling into the Territory through other channels. Many companies sell on-line also to customers/end-users in the U.S. Consider whether such sales are still allowed if you grant the agent/distributor exclusivity.
- Do you have specific requirements, restrictions etc. as to how the agent/distributor is to conduct marketing in the U.S.? Do you provide marketing materials yourself, and who pays for that? What about on-line marketing, do you need to direct U.S. based internet users to the agent/distributor’s website?
- Allocation of legal risk/liability. If a third party sues the agent/distributor and/or you for claims related to the use or marketing of your products (IP-infringement claims, product liability claims), how are the costs of defending such claims, as well as any actual liability for damages, split between you and the distributor?
- Use of your trademarks and other IP. If you have a trademark which you use for the marketing of your product (as is almost always the case), is it already registered in the U.S.? If not, get it registered! And make sure the agreement with the agent/distributor specifies how and when (for the term of the agreement only) the agent/distributor may use your trademark. Also, restrict the agent/distributor from using and registering trademarks and internet domains that are similar to your own.
- Non-competition. Do you need restrictions on the agent/distributor’s right to be engaged in dealing with products that are similar to your own during and after the term of the contract?
- Minimum sales/purchases. Consider whether you require minimum sales/purchases by the agent/distributor and what rights you have if such targets are not met (usually a right to terminate early).
- Term and Termination. Does the agreement need to have a specified term? If not, you need a right to terminate the agreement for no reason with a reasonable notice.
- Early termination. It is advisable to specify the circumstances under which you are allowed to terminate the contract earlier than an agreed to term, particularly if the contract is governed by U.S. law (more on that below). For example, if the agent/distributor uses your trademark in a manner which you disapprove of, you should have a right to terminate the contract, at least if the problem isn’t cured within a reasonably short time. Or if minimum sales/purchases are not met, then you should be entitled to an early exit.
- Customer Database. Who owns the customer database once the relationship ends?
- You may have had an NDA prior to entering into the agreement but what if the NDA is superseded by the agent/distribution agreement (there are often clauses to that effect in these types of agreements, wiping out all prior contracts between the parties – including any NDA’s). You may need to include new confidentiality/non-disclosure obligations in the agreement also.
- Choice of law – Dispute resolution. This question is often overlooked when negotiating the contract, probably because you and the potential business partner are not thinking about disputes when entering into the relationship. However, disputes are bound to arise sooner or later, and when they do, the choice of law can be very important, and the choice of method and particularly the venue/location for dispute resolution can be absolutely crucial. When a legal dispute is inevitable, it is often half the battle if you have agreed on “home court” from the outset, i.e. if disputes are to be resolved in Denmark. In my experience, more often than not, a U.S. company is unwilling to actually go through a legal battle in Denmark and thus will “give up” before it gets that far.
- Arbitration or Regular Courts. A separate issue is whether disputes are to be resolved by the regular courts or by arbitration. Note here that Denmark and the U.S. (currently) do not have a treaty in effect which provides for one country to recognize and enforce a judgment from the courts of the other country. In other words, if you have agreed to jurisdiction in Denmark, and you win a lawsuit against the U.S. agent/distributor in a Danish court, that Danish judgment will not be enforceable in the U.S. You will need to obtain a judgment from a U.S. court, and the U.S. agent/distributor may bring up a new defense and fight harder when the battle is in a U.S. court. Contrary to this, arbitration awards are recognized internationally (pursuant to the “New York-Convention”), meaning that an arbitration award from a Danish arbitration tribunal is enforceable in the U.S. (and vice versa).
As a Danish businessperson, you may find that the “culture” of negotiation of contracts is different from what you are used to when dealing with U.S. counterparts. The process may be longer, attention to detail may be higher, and the contracts themselves in particular may be (much) longer and perhaps difficult to understand. Hang in there! And seek legal advice…
While the things I have commented on above are main points that you need to consider, this article cannot of course substitute legal advice from an attorney, and it should not be considered as such. I strongly advise you to seek legal advice from lawyers experienced in both U.S. and Danish law when negotiating contracts with potential U.S. business partners.