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End-User License Agreement

The parties must collaborate to determine what agreement will ultimately govern the use of the distributed product. Distributors will frequently have little or no say in this regard, as manufacturers should be able to ensure that their products are used in accordance with their terms and conditions (e.g., in the software context, the manufacturer’s end-user license agreement). The distribution agreement should contain a process for how the applicable agreement will get to the customer (i.e., will the distributor or the manufacturer initiate that process) and who may accept the agreement on the manufacturer’s behalf. In some cases, the distribution agreement will require that the distributor ensure that each customer is bound by terms and conditions at least as protective of the manufacturer as those contained in the manufacturer’s standard terms and conditions, which would typically be attached to the distribution agreement as a schedule.

The overall structure of the contract is designed to ensure neither the distributor nor the manufacturer is placed at risk. In general, each will have a direct contract with the customer. Each is able to draft its own desired terms.

One of the most important drafting points in a distribution is to ensure the contract does not create the possibility of an “end run” around the end-user agreement. An easy example of this would be a request by a distributor for an indemnity from the manufacturer for any claim that arises from the product being distributed. Other than the request for intellectual property infringement indemnification, this type of provision creates a substantial hole in the protection of the end-user agreement. The end user’s remedies against the manufacturer are strictly limited by the end-user agreement. So, instead of suing the manufacturer directly, the end user sues the distributor, and the distributor then seeks indemnification from the manufacturer. This, essentially, renders the protections in the end-user agreement illusory. The only way to protect against this possibility is to refuse this type of omnibus indemnity and insist the distributor have its own, well-drafted agreement in place with the end user. Such an agreement would generally make clear the distributor is not responsible for claims relating to the product being distributed and that the end user’s sole remedies are those provided in the manufacturer’s own end-user agreement. A key consideration in any distribution agreement is who ultimately “owns” the customer who purchases the product. The manufacturer will commonly want control over the end user and the data generated from sales of its products. However, this information is also extremely valuable to the distributor. Care should be taken to ensure that the rights with respect to ownership of the customer are precisely articulated in the distribution agreement.

Development of the Product

Where the manufacturer and distributor collaborate to develop the product that will ultimately be distributed, the distribution agreement will contain a detailed process and precise obligations of both parties with respect to the development.

■ Identify the representatives of each of the parties responsible for oversight of the development process.

■ Describe the process for scheduling and conducting regular meetings and the location (physical or virtual) of those meetings.

■ Draft a development plan, attached as a schedule to the distribution agreement, that clearly sets forth all of the technical aspects of the design of the product.

■ Ensure that the parties have agreed ahead of time with respect to the allocation of expenses during the development process (i.e., will the parties be responsible for their own expenses, or will some other allocation be agreed upon?).

End-User Data

Data of customers of the distributed product can be extremely valuable to both parties to the distribution agreement. Each distribution agreement should clearly articulate whether that data is owned by one or the other party to the distribution agreement or is shared by both parties.

Obligations of the Parties

The specific obligations of the parties to a development agreement will depend entirely on the scope of the business deal. In many development agreements, it is common to include the following obligations:

■ The distributor is generally responsible for the distribution and sale of the product. Where the product is a subscription-based application, this will include a responsibility to distribute and sell the initial subscription, coupled with marketing and sale obligations with respect to renewal subscriptions.

■ The manufacturer should be responsible for training all of the distributor’s employees with respect to the marketing, sale, and distribution of the manufacturer’s product. In the case where a product developed mutually by the manufacturer and distributor is being distributed, the distributor will be responsible for any training associated with any portion of the product that it developed.

■ Obligations of customer support are handled on a case-by-case basis. In some cases, the initial line of support for the distributed product will be the responsibility of the distributor, with second-line support handled by the manufacturer. In other cases, the manufacturer will want to maintain sole control over the support of its products.

■ Marketing of the product is commonly an obligation of the distributor, and the distribution agreement should precisely articulate the specific efforts that the distributor will be required to make with respect to the marketing of the product. It is commonly appropriate for the manufacturer to assist the distributor with marketing the product, including development of the marketing materials and a marketing plan. Both parties can agree to distribute press releases (approved by both parties) announcing the distribution relationship.

■ Each party may want to assign a primary contact to work with the other party on marketing, promotion, and sales efforts.

■ The manufacturer should ensure that, with respect to the marketing of the product, the distributor cannot:

  • - Make any reference or claim about the manufacturer or the product that has not been preapproved by the manufacturer.
  • - Use any deceptive, misleading, or illegal practices in promoting or selling the product.
  • - Fail to inform the manufacturer as to problems and complaints encountered with the product.
  • - Make any representations or warranties with respect to the product.
  • - Use only marketing tools approved by the manufacturer.
  • - Assign or sublicense any of its rights or obligations under the agreement.
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