Granting exclusivity to a reseller, OEM or distributor
Granting important customers, distributors, resellers or other third parties exclusive rights to pricing, products, channels, etc. is not uncommon, but these arrangements must be entered into cautiously. By giving a third party exclusive rights to something, you are agreeing not to give that same thing to anyone else. As a result, you are foregoing other potential opportunities and you should be convinced that the benefits of the exclusive arrangement outweigh those lost opportunity costs.
Assuming you are, the terms of the exclusive arrangement would be implemented via a clause in the applicable agreement. These provisions often can have unanticipated consequences if not drafted clearly and with consideration of the impact on the businesses of both parties. If they are too broad or too narrow, they can have very negative effects or can make a positive business relationship disastrous. Some arrangements may not be permissible under applicable law or regulation, depending on the context. The following are some of the key considerations in establishing exclusivity arrangements in a reseller, OEM, distributor or license arrangement:
- Subject products or technology. What products and/or technology are subject to the clause? Is the clause applicable to the party’s entire business or only a specific product or technology? Does it cover similar products and technology, or future developments?
- Scope of Exclusivity. What fields of use, applications, geographic territories or activities are subject to the exclusivity obligation?
- Term. How long will the exclusivity last? Can the exclusivity be easily terminated by one or both parties?
- Requirements. What must the benefitting party do in order to maintain their exclusivity rights? There are often periodic minimum royalties, sales, milestones or other targets that must be met in order for the rights to continue or to remain exclusive. Those targets must also be very carefully defined to avoid disputes, as the maintenance of exclusivity can often be of very significant economic value.
- Antitrust. Exclusive arrangements should also be analyzed by an antitrust expert before they are put in place. In certain jurisdictions, these provisions are subject to significant regulation because they can amount to a restraint on trade.