of the relationship or upon its termination. ABSENT There are some drawbacks to written A FORMAL agreements, though, particularly in nonfranchise jurisdictions. For example, WRITTEN a written agreement may place AGREEMENT, A limits on the supplier’s ability DISTILLER CAN to terminate the relationship, COMMUNICATE TERMS whereas without a written agreement, ordinary contract AND STANDARDS and sale of goods principles OF PERFORMANCE would apply, which generally GOVERNING THE permit termination without cause upon reasonable notice RELATIONSHIP IN after a reasonable amount of time. WRITING THROUGH Absent a formal written agreement, OTHER a distiller can communicate terms and METHODS. standards of performance governing the relationship in writing through other methods — for example, through order acknowledgements and other correspondence.
TOP 10 ITEMS TO ADDRESS IN YOUR DISTRIBUTION AGREEMENT Assuming you decide to enter into a written distribution agreement with your wholesaler, we recommend at the very least addressing the following in the agreement:
1. TERM. Specifying a certain time period for the agreement is key in non-franchise jurisdictions. An initial period of a year or two years is common, with the parties having the option to renew for certain time periods thereafter. As the franchise laws generally bind the parties to each other indefinitely, a finite term in a distribution agreement in a franchise state rarely will be enforceable absent a showing of cause.
2. EXCLUSIVITY. Most (but not all — for example Massachusetts and New Jersey) alcohol franchise laws require exclusive agreements. But in states that do not require exclusivity, consider not making the agreement exclusive in order to give yourself the option to “dual” your brands down the road.
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3. NEW BRANDS / BRAND EXTENSIONS.
Consider whether you wish to offer the wholesaler the right to any brand extensions or new brands (of spirits, or other types of alcohol beverages you may produce). Some agreements give the wholesaler a right of first refusal for brand extensions and/or new brands, which allow the supplier to grant distribution rights to a new wholesaler if the existing wholesaler does not place an order for the new product within a set period of time from the product’s introduction.
4. TERMS OF SALE. At a minimum, the agreement should specify the payment terms for the products (e.g., requiring payment by electronic funds transfer within 15 days of the wholesaler’s receipt of each shipment). This section of the agreement should also give the distiller the right to change prices (upon reasonable notice to the wholesaler), and should specify when title and risk of loss pass to the wholesaler. The most common provision (“FOB”) transfers title and risk of loss upon leaving the distiller’s premises. Also be aware that some states have laws regarding terms of sale, such as New York.
5. INTELLECTUAL PROPERTY. You should include a fulsome provision in the agreement stating that you are the sole owner of all trademarks, trade names, brand names, etc. used on bottles, promotional materials, and other items supplied to the wholesaler under the agreement. This section should include a non-exclusive, non-assignable grant to wholesaler of the right to use the trademarks, etc. in promoting and distributing the products. You should also specify that the wholesaler’s rights to your intellectual property terminate immediately upon termination of the agreement. A detailed intellectual property section in an agreement also generally includes a requirement that the wholesaler protect the supplier’s intellectual property, including by notifying the supplier promptly of any actual or suspected infringement by third parties.
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