Negotiating the Distribution of Patented Products: Questions to Ask

When a company is ready to bring its debut product to market, excitement may run high. The importance of protecting the company’s intellectual property rights in the new product is paramount.

While the company may enter contract negotiations with its distributor in good faith and in anticipation of creating a mutually beneficial agreement, a lack of experience or difficulty foreseeing certain issues may result in a contract that doesn’t adequately protect the company’s rights, or that doesn’t allow room for the relationship to grow and change. It’s important to ask the right questions.

Here are just a few of the questions companies may overlook in negotiating the distribution of a patented product:

1. How will this agreement affect our product’s market potential in 3 to 5 years?

What happens if a better opportunity comes along? What happens if the agreement fails? Simply “agreeing to agree” at a later date forces both parties back to square one in order to renegotiate the deal – a waste of time and energy that can easily fail. Instead, consider including performance thresholds, scheduled fee increases, carve-outs for market events, and non-solicitation and non-compete provisions.

2. What promises are we making about corporate structure and records history that our distributor will rely on?

Are the people agreeing to the deal legally capable of binding the company to a transaction? Have they dotted their I’s and crossed their T’s with respect to authorization paperwork and notifications? Attempting to address these issues after the fact is often “too little, too late.” Instead, ensure that these authorizations are in place before the deal is negotiated.

3. How does this agreement set a precedent for the treatment of our intellectual property rights?

Does the agreement adequately protect intellectual property rights, not only from the distributor, but also from third parties? Does it contain quality control and enforcement provisions that can effectively protect the company from any later claim that it abandoned its intellectual property rights? It is also vital to include terms that protect both parties to the contract in case a third party infringes intellectual property rights or brings a challenge.

4. How will we know the other party is complying?  If there is a dispute, how will we resolve it?

Attending to details surrounding royalty accounting, reporting, and profit distributions can end many contract disputes before they begin. If a dispute does arise, ensure that the contract allows for dispute resolution strategies that are cost-effective for everyone involved. Litigation can be burdensome, but options like arbitration, properly prepared, can reduce the burden and produce fair results.

Attorneys experienced in intellectual property and corporate transactions have specific language they expect to see in distribution agreements which address the questions raised above.