Legal Perspective

Effectively Managing Distributor and Sales Representative Relationships
By Mark Hanson & Todd Guerrero | July 01, 2005
The biodiesel business involves relationships with distributors, dealers and sales representatives. As a result, you should be aware of issues that can lead to legal trouble when a manufacturer, supplier, broker or master distributor decides to terminate or change those relationships.

In the past, businesspeople handled distribution relationships with a handshake and a good reputation. Those days are over. Having a business relationship with a distributor or dealer without a written agreement, setting forth rights and obligations, can be an invitation to be sued if the relationship sours.

Among many other matters, a written agreement should set forth: performance expectations and/or requirements; territory rights (and whether it's exclusive); duration; termination provisions; pricing or commission and payment terms.
Even with a "memorialized" distribution relationship, however, additional restrictions may be imposed by law. A network of statutes, regulations and laws exist, primarily on a state-by-state level, that may regulate the distribution relationship.

Franchise laws
At least 19 states have enacted some form of franchise regulation that may apply to distribution relationships. Even distribution relationships that do not resemble the common notion of a franchise (e.g., fast food) may nonetheless fall within the purview of franchise regulation. While there are many variations, a franchise is created when (i) the franchisor enters an agreement with a distributor granting the right to offer, sell or distribute the franchisor's goods or services using the franchisor's trademarks or commercial symbols, (ii) there is an
expectation of mutual economic benefit or a marketing plan imposed by the franchisor, and (iii) the distributor is required to pay the franchisor an initial or ongoing "franchise fee." Determining whether a relationship is a franchise is fact-specific. Often, however, manufacturers and suppliers are unaware they are considered a franchisor until they've been sued for violating franchise laws.

The requirement of the payment of a "franchise fee" prevents distribution relationships from being deemed franchises in most-but not all-states. Most distributorships are not charged royalties or joining fees, and thus are not subject to franchise regulation. Frequently, however, disgruntled distributors claim "hidden" franchise fees in the form of license fees, advertising or marketing contributions, charges for services or training, manuals or literature, or in any payment by the distributor/dealer to the supplier/manufacturer for anything other than a bona fide wholesale purchase of goods.

If your business allows or requires your distributor/dealer/sales representative to sell or offer your company's products using your trademarks (in marketing materials, catalogs, signs, door logo decals, etc.), you need to be aware of the specific franchise statutes that may apply, evaluate the risk and make informed decisions. Should a franchise law apply to your distribution relationships, it may restrict your company's right to terminate, non-renew or substantially change the competitive circumstances of the relationship.

Sales representative regulation
Many suppliers and manufacturers (and even many sales representatives) are simply unaware of statutes protecting independent commissioned sales representatives from improperly withheld or delayed commission, or even from termination or non-renewal of the sales representative agreement.

Thirty-five states and Puerto Rico have enacted some form of regulation protecting independent representatives. These laws typically apply to principals who use independent contractor sales representatives (not employees) to solicit wholesale orders within that state and are paid, in whole or in part, by commission. Some statutes require agreements to be in writing. Some address how commissions during the course of the relationship are paid. Two statutes are expansive and require "good cause" to terminate a sales representative. All of them address the payment of commission after termination of the agreement, and most provide penalties (of up to two or three times the actual commission due) for withheld commissions or those paid later than the statutorily payment deadline (between five and 45 days after termination, depending on the state). Most of these laws have "anti-waiver" provisions, making them applicable even if the representative agreement has inconsistent terms. All provide for the recovery of attorneys' fees and costs if the representative prevails.

Mark Hanson and Todd Guerrero are members of the agribusiness and alternative energy practice group of Lindquist & Vennum PLLP, a leading provider of legal assistance on bioenergy projects throughout the country. They can be reached at (612) 371-3211.
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