Distributorship Agreement and Copyrights

International Business Law

Date: June 15, 2006

1. Distributorship Negotiation with Grande Trade (GT)

Unlike agency agreement with Zeller, by appointing GT as a distributor in Germany, IUJ ill have more benefits and fewer liabilities. For example, GT will take all risks in distributing products; IUJ needs to enter only in sales transactions to GT; IUJ can not held liability to its distributor; GT has an incentive to sell IUJ’s product and increase IUJ’s market share; IUJ does not face any fluctuation in terms of prices and market conditions. However, IUJ may have disadvantages such as loss control over prices and distribution situation in Germany, price reduction to GT, limited understanding of market demand and customers’ preferences. Therefore, IUJ should consider carefully conditions of the Distributorship Agreement with GT.

In response to the 5 requirements of GT, IUJ should analyze these requirements carefully and consider counter-solutions. From the point of view of IUJ’s overseas sales department head, he or she should consider the analysis below before entering the distributorship agreement with GT:

Type of distributorship: GT wants to become IUJ’s exclusive distributor in Germany. This requirement is reasonable and IUJ should accept because:
1) GT will take all risks and responsibilities to distribute GIZMO within German territory.
2) This arrangement assure that there will be no competition in this territory for distributing GIZMO and thus GT has strong motivation to effectively promote this product and bring IUJ secure financial return.
3) The excusive distributorship will motivate GT to expand fast the market for GIZMO by using its nationwide distribution networks and marketing experience. Therefore, IUJ can capture huge market in Germany without any investment in building distribution channel there.
4) IUJ should appoint only one distributor in one territory and should not distribute GIZMO to other firms for use or resale. This point is to avoid conflicts of distribution of GIZMO, secure the rights to make profits for GT and motivate it to use its best efforts to develop business in, to promote the sale of, and to sell the product.
However, IUJ should impose some restrictions on GT such as: not to enter into any distribution agreements involving competing products; not to sell GIZMO outside the German territory; not to remove or repack the product in this territory; follow recommended retailed prices provided by IUJ; be able to provide sale & customer support and maintain sales staff to expand the market. These restrictions help IUJ prevent GT from selling competitive products, marking up prices so high that GIZMO is much more expensive than competitive products or reducing too much prices to enter unfair competition, selling outside assigned territory and being unable to develop markets.

Buyer-seller relationship: GT requests that the seller-buyer relationship should be the relation between IUJ and GTHK. This relationship might not have any effect on the distributorship agreement with GT. However, IUJ might face a high financial risk in selling GIZMO to GTHK since it owns no property and other assets with substantial value. The other risk is that GTHK can resell GIZMO to other GT’s group members even though it has no sales to other outside parties. Therefore, IUJ could accept this requirement when imposing other conditions: 1) GTHK, under any circumstance, will not be allowed to resell GIZMO to any other parties; 2) the payment shall be made in L/C in advance to IUJ’s bank account (to make sure that IUJ receives payment before producing ordered quantity by GTHK); 3) sales contracts shall be made under the Japanese commercial law; prices and all other sales conditions are agreed by IUJ and GT; 4) GTHK shall not be GT’s representative in working with IUJ. It means that GTHK shall automatically follow the agreement reached by IUJ and GT and shall not intervene in any discussion and negotiation between the two parties. This condition allows IUJ to control over GT in terms of prices and selling conditions.

Delivery: GT requests that the delivery should be made directly from IUJ to its warehouses or retail shops or business customers in accordance with its designation to be made from time to time. This requirement seems to be unreasonable and unrealistic because IUJ could not know the specific locations in Germany designated by GT. If IUJ can know these places, the delivery costs will be very high as IUJ needs to hire a freight company to do such specific deliveries and IUJ could not have necessary control over those deliveries. Under general international trade practices, international delivery terms are commonly FOB and CIF. Therefore, IUJ should reject this requirement. Instead, IUJ should propose FOB Tokyo, and the date of the bill of lading shall be taken to be the date of delivery of the product. IUJ shall not be liable for delays in delivery or failure to manufacture due to strikes, lock-outs, riots, civil commotions, insurrections, wars, acts of God, operation of law or any other causes beyond its control.

Duration and termination: GT’s request on duration and termination is reasonable and IUJ should accept this proposal because a 5-year agreement and possible renewals will build a long term business relationship with GT, generate its loyalty and devotion to work with IUJ in the long term and motivate it to become IUJ’s reliable business partner who is willing to distribute IUJ’s products in Germany. However, IUJ should impose conditions on the sales performance such as the minimum monthly sales GT needs to achieve. Otherwise, IUJ shall have right to terminate the agreement at any time if GT fails to achieve this target.

Non-competition after termination of an agency contract: Because the case does not provide detailed information about the agency contract between IUJ and Zeller, I suggest two options:
- First option: if the agency contract between IUJ and Zeller has already imposed obligations on non-competition for a certain time after the termination of the agency contract, GT’s request on prohibition against Zeller from selling GIZMO is not necessary. In this case, I guess that the non-competition should includes prohibitions to manufacture products of the same type as GIZMO; to sell under trade marks and refrain from altering the products or packaging; to maintain adequate stocks to meet anticipated demand after termination; to continue to provide after sale service after the termination; to inform his clients about the termination and to settle consequences of the termination such as to clear remained stocks and stop to sell GIZMO right after the termination. Hence, the request to prohibit Zeller from selling other similar handled computer games and software in Germany is not reasonable because Zeller has the rights to re-organize his business and to become an agent or distributor of other manufacturers after the termination of agency contract with IUJ. Therefore, IUJ should reject this requirement.
- Second option: If the agency contract between IUJ and Zeller has not imposed obligations on non-competition for a certain time after the termination, a non-competition agreement with Zeller upon the termination is necessary to avoid potential conflicts of distribution of GIZMO between GT and Zeller in future. However, it is quite difficult to persuade Zeller to enter into such agreement as Zeller needs to re-organize his business after the termination and he has no obligation to sign such agreement. Thus, IUJ needs to negotiate with Zeller and if necessary sacrifice by giving him certain compensation or letting him sell GIZMO in markets outside Germany if possible. In this case, IUJ only can accept GT’s requirement after successfully signing a non-competition agreement with Zeller. However, this option is quite rare because in general every company should have non-competition clauses in their agency agreements.

Besides, IUJ should impose obligations on non-competition after the termination of the distributorship agreement as discussed above. IUJ also should request other conditions on intellectual property, confidentiality, consequences of termination, arbitration, notification, legal jurisdiction, currency & currency fluctuation, competition law and force majeure.

2. Analysis of the relationship between IUJ and Zeller

The relationship between IUJ and Zeller is the legal relationship between a principal and an agent engaged in an agency contract. IUJ and Zeller, through consent, signed a 5-year agency contract in June 2001 in which Zeller is IUJ’s agent to sell GIZMO product in Germany. Under the agent agreement, both IUJ and Zeller have legal duties toward each other. For example, Zeller has the duties to obey instruction from IUJ, to hold personal liability to IUJ, to act with skill to promote GIZMO in the German market, to avoid conflicts of interests with IUJ, to protect confidential information, to notify IUJ all information that may be useful for IUJ to evaluate the matter at hand, and to account financial report to IUJ. On the other hand, IUJ has duties toward Zeller such as to compensate Zeller for his service and effort to sell GIZMO and to support Zeller in selling GIZMO. However, IUJ is liable for contracts made by Zeller to the third party as he acts in a fiduciary to IUJ. It has both direct and indirect liability for the torts caused by Zeller to the third party and Zeller also has personal liability for any torts he committed. In case of disclosed principal, Zeller has no personal liability for contracts made on behalf of IUJ. In partially disclosed principal situation, Zeller is liable for the contract and IUJ may be liable on the contract also. But in case of undisclosed principal, IUJ is liable on the contract.

The agency contract will expire in July 2006. Due to Zeller’s limited capability to expand the market in Germany, IUJ want to terminate this contract when it expires. This termination is by the act of IUJ and legally right. Both IUJ and Zeller have responsibilities to settle all consequences of termination.

3. Copyrights and the Production and Distribution of Pocket Monster in Germany

According to the information in the case, Pocket Monster is new software invented by a copyright holder in which he features the characteristics of a famous Japanese cartoon. Under the copy right law, he has the rights to reproduce the original, make derivative versions and distribute copies. IUJ has had his permission to produce and sell it in Japanese language and in Japan. The legal relationship between him and IUJ is that he grants IUJ the right to reproduce and distribute those copies of Pocket Monster in Japanese language and in Japan under a copyright contract or a copyright agreement. But he does not grant IUJ the right to make derivative versions such as translated Pocket Monster in German language and to distribute copies of the original outside Japan.

The copyright prohibits IUJ from distributing copies of Pocket Monster in markets outside Japan and making translated versions of this software. Therefore, to produce Pocket Monster in German version and sell it in Germany, IUJ needs to enter a new copyright agreement or a new copyright contract with him in order to have the legal right to do 3 things:
1) produce a derivative software in German version
2) reproduce this derivative software
3) sell it in Germany
Only after having such agreement, can IUJ start to make a German version, produce it and sell it in Germany.