Clowns to the left of me, Jokers to the right – Part 2

June 30, 2015

When being appointed as a distributor in a given territory, it would be easy to celebrate the appointment and not consider the potential intellectual property issues which should be addressed.

Although not the supplier of the products, a distributor may be pursued by a third party who considers that the goods are infringing its intellectual property rights, which may be, for example, a trade mark, design right, or copyright. This is because the distributor will be importing, offering for sale and/or advertising the relevant goods. To assume that the supplier will be the liable party and that the distributor can wash its hands of the matter is to adopt the position of the ostrich. It is not correct and is asking for trouble. Indeed, third parties seeking to protect their rights often target the distributor as it represents the choke point. Invariably, it is smaller and more vulnerable than the supplier or more contactable if it is based in the same territory. This is different to the issue of product liability, where a customer will generally have recourse against the supplier despite there being no direct contract between the parties.

Ideally a distributor will have contractual protections such as a warranty from the supplier that its goods do not infringe any third party rights or an indemnity to cover any costs incurred as a result of such alleged infringements. Alternatively, there may be a provision which sets out that it is the supplier’s responsibility to take command of the matter directly with the third party. Unfortunately from the point of view of the distributor, distributorship agreements rarely contain sufficient provisions or there may not even be a formal distributorship agreement in place. So…what can the distributor - stuck between the supplier and customer - do in such circumstances?

Firstly, the formal distributorship agreement (if there is one) should be looked at. It may contain an obligation to keep selling the products until the supplier (or Court) dictates otherwise or at least a duty to inform the supplier of the situation. It may be a natural reaction for the distributor to want to immediately remove the products from the market to satisfy the third party. However, by doing so, it may be in breach of a contractual duty or a possible implied term (for example, to promote the goods) in the agreement with the supplier. Further, this does not take into account the question of whether the third party’s claim is a good claim or what demands the third party is making.

Although a distributor cannot escape liability, and is likely to be a party to any Court claim, it could attempt to bump the matter on to the supplier. If the supplier’s details were unknown to the third party or if the third party considers that the supplier is likely to have more money to pay damages, the third party’s focus may transfer to pursuing the supplier. However, this is unlikely to be conducive to maintaining the relationship between supplier and distributor, and indeed the distributor may gain a bad reputation amongst present and potential future suppliers!

A collaborative approach between the supplier and distributor is likely to be the most effective way to respond to any allegations by a third party. An agreement could be reached between the two parties to share legal resources and/or costs. But the principal benefits of this approach are that a united stand will be taken (the third party could not seek to create tension between the supplier and distributor as it could if they were seeking to resolve the matter separately and had separate agendas) and the relationship between supplier and distributor should be maintained (if not strengthened).

In determining how the united response should be made, the legal merit of the allegations should be assessed and the third party demands considered in context. If the claims are weak, the allegations should be strongly rebutted. However, if the claims have merit, it may nonetheless be possible to negotiate favourable terms – such as a sell off period to allow the running down of remaining stock or a confidentiality clause to prevent negative media.

Overall, the distributor needs to take care for otherwise it will be…stuck in the middle


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