What is a Dealer Agreement?
It is common for manufacturers to use dealer agreements in their distribution systems for sales of their products. Dealer agreements may also be referred to as distribution agreements, distributorship agreements, franchise agreements, etc. Dealer agreements are business agreements under which products are sold from one entity to another. So, under this definition, it is relatively easy to determine the purpose of a dealer agreement – a dealer agreement is a contract between a manufacturer/distributor (the "supplier") and a dealer/wholesaler/retailer/distributor. It is a contract between two entities for the sale of a product, usually at some form of wholesale level.
That said, there are many types of dealer agreements. They vary in name and scope and often have differences in their terms and terminology used. From the name, it is clear that the parties have differing intentions – the supplier is granting a right to sell while also limiting the scope of that right; the dealer is obtaining a right to sell but is also being limited.
The basic ten, but potentially critical, elements of dealer agreements are:
While there is some overlap in these elements, each has its own nuances. For example, while the first two elements, the parties and purpose, may seem like the same things but they are not necessarily. It is important to ascertain the real parties to a dealer agreement and not make assumptions based on what is written in the agreement.
The third element , the term, does not define how a dealer has a right to sell the products in a particular geographic area. It only refers to the duration of the agreement. The actual rights may be set forth in an exclusivity or best efforts clause – i.e., the term does not mean exclusivity.
The fourth element, pricing, is often misunderstood. Most dealer agreements have a "suggested retail price" or "suggested resale price". This is not, however, "resale price maintenance" as used in the United States Supreme Court case of Leegin Creative Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007). A "suggested resale price" is a just that – a suggestion. Many dealers charge pricing that is below the suggested resale price. Those that do may mistakenly believe that they are receiving a discount. However, they are not receiving a discount because none was ever given to them. What was given to them was a suggestion that they might want to sell at that price. This should not be misconstrued as a discount. Moreover, the question of discounts in the context of dealer agreements is much more complex than merely the difference between "suggested" prices and the actual prices charged. Pricing under dealer agreements must be carefully analyzed on a case-by-case basis.
We will discuss each of these elements in turn in upcoming articles. For now, it is critical to understand why parties enter into these agreements and the most important elements that affect their bottom line.
What are the Essential Elements of a Dealer Agreement?
Dealer agreements can be complex, but they also have some common characteristics. For example, most dealer agreements will include a term for the agreement that is both the obligation of the dealer and the manufacturer from whom the dealer purchases products. Contracts will usually contain a clause that allows either party to terminate the agreement if the other party defaults on its obligations. The consequences of termination can be significant for a manufacturer, and as a result, the circumstances that can lead to termination may be strictly limited in the agreement. Even if the manufacturer does not have a contractual right to terminate the agreement, a lengthy or substantial breach by the dealer may give the manufacturer a claim for damages.
In addition to containing the different terms and conditions, a dealer agreement will also contain a number of important definitions that will define the scope of the agreement. For example, a dealer agreement may define what products are subject to the agreement, as well as where the products are to be sold. Further, the agreement may also define the specific type of dealer. For example, who is a "motor dealer" in a motor vehicle dealer agreement.
The agreement will typically provide that the agreement is only binding upon the dealer if the manufacturer accepts the agreement. The agreement will also typically provide that the dealer agreement is binding upon the manufacturer only if it is signed by the manufacturer’s president, vice president and secretary that is also delivered to the dealer.
Finally, the agreement will typically provide what law governs the agreement.
What Types of Dealer Agreements are there?
There are several types of dealer agreements used in franchising; however, a basic example of each type is described below.
Exclusive Dealer Agreements
Under an exclusive dealer agreement, the manufacturer or supplier agrees to sell the dealer only the authorized products of the manufacturer and grant the dealer the exclusive right to use the manufacturer’s trademarks on those products. The exclusive dealer also is given representation responsibility for a specific territory.
Non-Exclusive Dealer Agreements
Under a non-exclusive dealer agreement, the manufacturer or supplier agrees to allow the dealer to use the authorized trademarks used by the manufacturer in connection with the authorized products, but the right to use the trade names is not exclusive. Under such an agreement, the dealer has no right to use the authorized designs of the manufacturer or supplier and only has the right to use products received from the manufacturer or supplier.
Territory Dealer Agreements
Under a dealer agreement with a geographic territory, dealers are authorized to sell certain products and may use the authorized trademarks. However, unlike an exclusive dealer agreement, dealers do not obtain the right to exclusively promote the trademarks and distribution of the branded products in the designated territory under a typical territory dealer agreement. That is, the manufacturer may license other dealers to sell the same products authorized for sale by the dealer in the dealer’s territory.
Dealer Agreements: What are the Legal Issues?
Beyond the commercial aspects of establishing key metrics and scaling operational functions, the legal enforceability of contractual provisions is one area dealers and manufacturers must pay attention to. While this is not an exhaustive list of legal considerations, there are a few topics dealers and manufacturers should keep in mind when negotiating and drafting dealer agreements.
Intellectual Property. Between territorial exclusivity and the sharing of data—sales by make and model, market research, competitive intelligence, etc.—intellectual property can be a significant consideration in dealer agreements. In particular, manufacturers should take care to maintain ownership of intellectual property in the face of termination. In many jurisdictions, the mere act of transferring certain data to a dealer could cause all rights in the data to be transferred from the manufacturer to the dealer.
Compliance with Local Laws. Most jurisdictions will impose a minimum amount of statutory requirements that cannot be overridden or contracted around. This comes into play most often with respect to the franchise relationship—unilateral termination, annual minority open point dealership laws, and other statutory protections are generally non-derogable. Looking at the laws in each jurisdiction is imperative. Of course, the overarching law and regulations in the jurisdiction in question must also be considered.
Preparation for Disputes. The mere mention of any alternative dispute resolution (ADR) provision can be contentious. The manufacturer may want no local remedies and simply require arbitration as the only method for dispute resolution, while the dealer is likely to insist on an ability to go to court to seek provisional remedies and/or injunctive relief. Seldom is the dealer (who may be much bigger than the manufacturer) willing to forego a right to file suit if it believes it has a substantial claim. It is therefore important to discuss ADR in detail. A few other ADR related topics to consider include:
Like many things in the laws of contract, if the parties to the dealer agreement both walk away smiling and satisfied, they will have successfully completed their negotiation. If there are issues, however, then anticipating future problems and proactively addressing those issues in the contract through negotiation will ensure that the manufacturer/dealer relationship will run more smoothly down road.
Dealer Agreements: What to Negotiate
When it comes to negotiating an agreement it is all about leveraging the right information to get the best deal. Understanding the specific interests of the company is crucial. Also understanding the marketplace is key. There are always other companies in the industry, or similar industries that can be leveraged against the one you are currently dealing with. For example if you are currently dealing with a company like "Giant Widgets Inc.," but there are others out in the marketplace that would offer the same opportunity, then you can use that information to drive down fees or expect better territory or some other interest of yours. Being able to pit companies against one another will help you. This is why knowing the rest of the industry is so important. You do not have to directly deal with the companies you are seeking information about, you just have to know what they are offering. The internet is one way to find good information. Online forums and cap logs are also another good way to find alternative companies.
When you sit down with the company, they will usually lay out the deal they can offer. Once you have heard their offer, do not speak , instead wait to see what they say next. Silence creates tension and puts the ball in their court, compelling them to fill in the silence, generally with more favorable terms. This comes from a psychological principle called reciprocity. Reciprocity states that when someone does something nice for us, we feel obligated to do something nice for them in return. Apply that rule to your negotiations, and you will create a better deal for yourself.
A common pitfall in negotiation is talking too much. Those who are successful negotiators know when to speak and when to listen. Many new dealers want to talk about their accomplishments, their sales figures, and why they are better than other dealers. While this might be a good tactic once you have landed the deal, it will generally only drive the company away. It is bad form to brag about yourself too much before you have actually made them a deal. The best way to add value to your deal is actually to get a legal opinion that helps give you leverage in your negotiations, as I mentioned above. Talking too much might also expose information that they do not need, in the process weakening your own bargaining position.
Dealer Agreements: Common Pitfalls
Although there are many approaches to drafting a dealer agreement, and many elements that require consideration and attention, not every issue needs to be addressed or considered. Frequently, businesses make a few key mistakes while considering and drafting dealer agreements. Some of these mistakes include:
1. Failure to identify and develop the process for entry into a Franchise Disclosure Document exemption.
Franchise Disclosure Document exemptions are available for various discrete product lines. While all products may not need to be disclosed, the determination needs to be made carefully in order to avoid improper disclosure. This issue arises frequently with respect to internal or private label products that are produced by or for larger dealer businesses.
2. Failure to include or understand accrual provisions.
Accrual provisions can come into play when determining whether premium payments or other ongoing fees need to be paid and/or when the payment periods under an agreement begin to run. This is a very important aspect of an agreement that can have unintended consequences if not addressed properly. An example would be failure to identify when suspensions of franchisor services will end.
3. Failure to consider the length of the Term.
Not only should the term be addressed from the perspective of renewal and termination rights, but also from the perspective of expiration and transition to the new model, should there be a change in the program.
4. Failure to address assignment of the agreement.
Most dealer agreements do not afford their counterparties the right to assign their interests in the agreement or franchise. Over the years other businesses have attempted to carve out this right when dealing with automotive dealers. Other businesses should not fall into this trap when addressing dealer agreements.
5. Failure to address termination rights.
While most agreements will address material breach consequences, damages, and the parties’ rights with respect to those breaches, the agreement should also address the specific consequences of breach. In some circumstances, such as where service levels are not met, there can be difficult issues in determining whether the agreement can be terminated, or simply suspended until the issue is resolved.
Recent Dealer Agreements Trends
Over the last several years, dealer agreements—those that grant the right to sell products, services and/or trademarks or trade names—have evolved more rapidly than most agreements. This is primarily due to changes in technology, digital transformations and greater e-commerce considerations.
The greater pursuit of alternative sales channels such as online sales, to the end consumer, is probably the largest change over the last decade. Changes have been particularly notable in the automotive industry where, over the last few decades, the right to sell automobiles had grown from manufacturer / dealer, to manufacturer / dealer / franchisor, to manufacturer / dealer / franchisor / lessor (i.e., lessor of vehicles), to manufacturer / dealer / franchisor / lessor / distributor. E-commerce sales are now also growing in the vehicle industry.
The need to think differently was most visible in the last couple of years when consumers moved online for the purchase of many products and services. Rising concern about the influence of direct sales of manufacturers’ products on traditional retailers, to the detriment of both retailers and manufacturers, caught the attention of many state legislatures. "Any sale" statutes were passed to allow a retailer to have standing to complain of trade dress or trademark dilution or unfair competition, even if the injury was minimal. Laws in some states are now aimed at preventing key-manufacturer / dealer agreements from restricting a manufacturer’s ability to sell over the Internet.
We also have seen a number of large, traditional retailers seek to pioneer new methods of selling and distributing products. Some start-ups in this area, like Jet.com, had great success in making online product sales and distribution, something almost impossible to resist.
The racing industry has also been impacted by these trends , and the industry may be on the verge of becoming a viable industry for investor speculation. Due to e-commerce, an explosion of the number of racing teams in the NASCAR circuit has become a reality. In some respects, race teams can now generate revenue and promotion through social media and other entrepreneurial endeavors. Team and driver promotions are increasingly being conducted online.
The success of websites like TradeRev and Carvana have disrupted automotive dealerships, permitting the buying and selling of cars with a click of a mouse. These platforms allow dealers and the public the ability to buy and sell cars from virtually anywhere in North America without having to travel to a physical auction.
We have also seen a rise in online marketplaces for business-to-business sales (e.g. Grainger). These "distributors" often make products and parts available for purchase without physically stocking them and may avoid state regulation of their sales because they are not actually engaged in retail sales. Depending on the state, that can permit them to avoid state licensing requirements, state taxes and certain state protections of consumers, dealers and distributors.
The medical industry provides similar examples. Medical practices use e-commerce web sites to provide and sell products to hospitals, doctors and consumers. Some sell telehealthcare services to individuals over the internet. The sometimes contractual relationship formed through a dealer agreement raises questions as to whether it is appropriate or lawful for the seller to contract away state laws or provider licensing requirements, statutory protections and private rights of actions.
The greater push for innovation will also undoubtedly see additional changes in dealer agreements. The potential market for new types of products and services, such as autonomous vehicles, 3-D printed parts, and biomedical applications, should provide fertile ground for growth in dealer agreements.