13 May

Technology companies desire to internationalize their products and enter into new markets. There are couple of internationalization tactics available for tech-companies ranging from simply exporting the products to investing directly in a foreign country. The former one is easiest but almost comes with no protection on Supplier’s IP, the latter one is safe but not feasible for many companies. These companies found quite a few solutions, with the intent to overcome the challenges presented by the new market. Reseller agreements (Reseller Agreement) may be a viable remedy to overcome such challenges. These agreements have generally entered into by and between parties which are (i) supplier and a (ii) reseller. Supplier usually grants the reseller the right to enter into contractual relationship with third parties with the aim of providing supplier’s services or products to the customers.

Companies, even if they work internationally, have little-to-no-viable sales channels and professional contacts, when penetrating into a new market. Reseller Agreements shine out as an efficient solution for such setbacks. Even if suppliers have enough financial power to carry out a costly self-promotion and efficient marketing, they are usually in need of a cooperation with a supplier which has the expertise and qualified manpower. Supplier’s familiarity with the local market is also an important factor for such cooperation. However, parties need to be diligent when sharing control over branding process. Both re-seller’s desire for operational independence and supplier’s tendency to avoid becoming too dependent on re-seller may reflect on the contract negotiation process. In addition, parties need to agree on minimum promotional and staffing expenditures, supplier’s obligation to assist re-seller and contents and frequency of reports drafted by re-seller at the very early phase of contract negotiations.

Data Protection and Security

Parties to the Reseller Agreement may suffer from security breaches, even though rapidly expanding data security and data methods. Moreover, confidentiality agreements between parties may be insufficient for data protection. Provisions regarding data protection and security should be stipulated under the Reseller Agreement as unauthorized access to the data may hurt both parties. In addition, prescribing indemnification provisions, in case of security breaches may provide a relief to the injured party. A common mistake that is observed in Reseller Agreements is data breach are provisions which are only focusing on to protect proprietary business information. However, protection of personally identifiable information is as important as business information and breaches of such information may result in civil and criminal liability and also damage the reputation of the business in question.

Post-Sale Provisions

Effective post-sale support is as nearly important as sale, especially if the product is related to technology. As a natural consequence of that, parties to reseller agreements, carefully draw up warranty clauses which include service, maintenance, and technical support warranties provided by both re-seller and supplier. There are three different warranty choices with their unique positive sides, which parties should consider. First, re-seller warranty would be a good choice if their focus on fast solution for customer. Second, supplier may want to undertake warranty of products in order to solve customer’s problems with their accomplished employees. Last, layered warranty between re-seller and supplier would be a most flexible solution for parties. But thinking twice before opting last one is reasonable, related to strong touch channel requirements between parties.

Confidentiality and Intellectual Property

As well as other agreements that require broad cooperation, Reseller Agreements comes with the remarkable confidentiality problems. In order to optimize re-seller’s work, supplier may need to provide their trade secrets, know-how and other relevant intellectual property rights to re-seller. A prudent supplier should adequately stipulate confidentiality clauses for the protection against a potential infringement. Any potential breach may do more than economic damage, especially, copyright infringements. Copyright infringements are often the reason for the disputes between the parties to the Reseller Agreement For instance, at the field of software law, copyrights commonly protecting software as a whole. Reverse-engineering or attempting to obtain source code may be conducted by the reseller as copyrights sometimes lack sufficient protection. Therefore, prohibiting such conducts with contract provisions would be a wise choice for supplier.

Exclusivity

Exclusivity and relevant limitations is another crucial matter, Limitation commonly refers to geographical and industry restrictions in which supplier performs its obligations under the Reseller Agreement. Such limitations may apply to both parties. Re-seller in compliance with the provisions of the Reseller agreement, may have to limit its activities related with the contract to certain geographical area or industry or certain end-users. Supplier on the other hand may not enter into other re-seller agreements with other third parties in certain geographical area or industry. Such clauses are generally prescribed for the prevention of competition between the parties. Re-seller may want to be the exclusive buyer of supplier’s products, or supplier may want to prohibit the reseller from selling competing products. Parties should conduct a careful evaluation prior to an agreement. Underperformance may also be an issue for the both parties, especially the underperformance of the sale of products.  In order to avoid the adverse effect of such underperformance parties may prescribe performance or quality clauses to compensate the losses suffered.

Boundaries to the Freedom of Contract

Freedom of contract is a general rule of contract law, but mandatory provisions and decisions of the governmental bodies of the country where the contract is performed may limited such freedom. Thus, Parties to the Re-Seller agreement have to comply with such rules and decisions and they have significant influence over Re-seller Agreements, particularly highly regulated industries (Such as pharmaceutical, defense technologies). Therefore, boilerplate provisions may do their purposes due to lack of flexibility arise from mandatory rules. In order to utilize such provisions, parties need to determine the clauses of the Re-seller Agreement that may cause compliance problems and how they feasibly amend such boilerplate clauses that would both comply mandatory provisions and interest of the parties. Within this context, export, import and tax provisions deserve special attention because every state designates regulations related with export, import and tax issues convenient to their exclusive needs. For example some developing countries such may impose additional taxes on some technological goods, in order to protect their foreign exchange reserve and canalize consumers to buy local technology. Since the taxing is a significant determinant factor on pricing, both of the parties should carefully consider the effects of taxes on profit margins as a prudent merchant. Moreover, regulatory requirements and governmental bodies’ decisions may have adverse effects especially amendments in import and export regimes, political climate and fluctuations in the currency (as fluctuations may significantly impact sale of the products).

Reseller Agreements inherently requires strong cooperation. Well- drafted agreements and with meticulously drafted clauses that broadly protects the rights of the parties are necessary. Financial success of the parties would depend on the success the agreement.

Author: Furkan Demirkol

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