BY Cliff Ennico
“I sell merchandise online on Amazon.com using their popular Fulfillment By Amazon (FBA) program, where they handle all shipping and fulfillment of customer orders from their warehouses around the country.
I have a handshake relationship with a local manufacturer. I buy merchandise from them at wholesale and then resell at a profit. I don’t want to lose that relationship as their merchandise accounts for a significant portion of my sales. I’m concerned, though, that once the manufacturer sees that there’s a huge online market for their merchandise, they will try to ‘cut out the middleman’ and sell on Amazon directly.
I would like to ask the manufacturer for an exclusive relationship but am not sure how to go about it. Can you give me some pointers?”
You are absolutely right not to rely on your handshake relationship with the manufacturer. A verbal contract isn’t worth the paper it’s not printed on.
Items listed on Amazon appear on a “product page” devoted to a specific SKU or Universal Product Code (UPC); often buyers are unaware they are buying from a third party seller and not directly from Amazon. Because of that, third party sellers on Amazon have more difficulty building “brands” for their merchandise than they do on eBay and other sites. Accordingly, although you have helped this manufacturer develop an online market for its products, you have no leverage if the manufacturer decides to sell directly on Amazon or hire another reseller to do so.
You definitely should get a written agreement with the manufacturer, but if you present the manufacturer with a complex exclusive distributor agreement written in “legalese”:
you are likely to spook them – many small companies are not comfortable with legal documents and will not want to spend the money to have their lawyer review your “boilerplate” contract; and
they will want something extra in return for granting you exclusive selling rights, such as a minimum purchase requirement (forcing you to buy a specific number of products each month whether or not you think you can resell them), a higher wholesale price for the items you buy from them, or an agreement that you will not resell their products below a certain minimum price (called “minimally acceptable pricing” or “MAP pricing”).
You should contact the manufacturer informally via e-mail and see if they are willing to commit to an exclusive relationship before sending them a contract. If they are, here are some points to consider:
How “Broad” Is Your Exclusivity? Do you have exclusive rights to sell only on Amazon, or anywhere online? An “online sales” exclusive may require you to sell on eBay, etsy.com and other Internet retail venues. If your exclusivity extends only to Amazon sales, make sure it covers all of Amazon’s affiliated sites worldwide.
How Long Will Your Exclusivity Last? You want your exclusivity to last as long as possible, but a perpetual exclusive is not possible. Five years is recommended, with “automatic” renewals thereafter. During the first five year period, the agreement should be terminated only “for good cause” (someone is breaching their obligations under the agreement, or has engaged in illegal activity). After that, the agreement should be terminated by either party but only with lots of advance notice (90 or 180 days). If the manufacturer terminates the agreement, make sure you can continue to sell your existing inventory, or sell it back to the manufacturer with a guaranteed margin (say, 10%).
What Happens if the Manufacturer Breaches the Agreement? You can sue them, of course, but you should give the manufacturer an easier “out” if they violate the agreement due to a good faith mistake (they didn’t know one of their customers was reselling merchandise online). You will need a “liquidated damages” clause saying you are entitled to a significant percentage (50% is not uncommon) of any sales the manufacturer makes in violation of the agreement.
Who is Responsible for Online Marketing? If you are asking for the exclusive right to sell online (not just on Amazon), the manufacturer will expect you to market and promote their products online, which will increase your cost of goods sold (COGS). Consider instead having them market the products online with your guidance, for which you will of course charge an additional consulting fee.
Is the Agreement Binding on Amazon.com? The short answer here is “no.” Your agreement is strictly with the manufacturer. While you may be able to show the agreement to Amazon if you see someone else selling the same merchandise on the site, there’s no assurance Amazon will help you enforce it.
Finally, keep in mind that no agreement is self-enforcing. If the manufacturer goes behind your back and deliberately, willfully and wantonly breaches your agreement, you will have to sue them to get them to stop. Suing a vendor that accounts for a significant percentage of your revenue will not be easy, even if you are in the right.
Cliff Ennico (email@example.com) is a syndicated columnist, author and host of the PBS television series ‘Money Hunt’. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com. Copyright 2013 Clifford R. Ennico. Distributed By Creators Syndicate, Inc. Follow Cliff: @cliffennico.