Suppliers and wholesalers should have a written distributor agreement. Before entering into such an agreement, both parties should check the applicable law and rules of each state in the proposed territory. Some states have franchise laws that make it difficult to cancel or curtail such an agreement. In addition, there may be laws that limit whether the supplier can add another distributor. 

The agreement should specify the territory for which the distributor will be responsible. Subject to the laws governing the territory, the agreement should state whether the distributor has the exclusive right to sell the products in the territory.  It should also set out the term of the agreement and the circumstances under which it renews. 

There should be provisions explaining the initial price the distributor will pay for the goods and the amount of notice which the supplier must give before it raises its prices. Many states require the distributor to post its prices at a fixed time before they become effective.  If the supplier does not give the distributor sufficient warning of a price change, the distributor could be caught with a filed price that substantially reduces its margins. In addition, the agreement should lay out the terms of payment. Keep in mind that federal law forbids consignment sales. If the payment terms offered to the distributor are too generous, the TTB may determine that it is the structural equivalent of a consignment sale.  Although 30 days is generally deemed safe, there is no set maximum number of days. See Industry Circular 2022-1.  The distributor should be allowed to set the prices it will charge retailers. However, there may be a provision in the agreement which allows the supplier to consult with the distributor on that issue. 

The agreement should address the obligations of the parties to advertise the brand. Will the supplier provide point of sale advertising? What efforts, if any, will the distributor undertake to advertise the brand? 

The agreement should also address the supplier’s intellectual property. The supplier should grant the distributor the right to use its trademarks and trade dress in connection with the sale of the products. When the agreement is terminated, the rights to use that intellectual property should be limited to that which is necessary to wind down the relationship between the parties.  The supplier should indemnify the distributor against infringement claims from third parties. The distributor should agree that as between the supplier and it, the distributor will make no claim of ownership of the intellectual property. 

The parties should agree upon the circumstances under which a party may terminate the agreement. Must the supplier pay a termination fee? Are there specific grounds upon which the agreement can be terminated? Will the agreement contain performance standards? If so, how will they be set? Keep in mind that the price at which the distributor purchases the goods is a key factor in determining the price at which it will be sold to retailers, which in turn is a key factor in determining how saleable the goods will be. 

Keven Danow is an attorney representing members of all three tiers of the Beverage Alcohol Industry and member of The Danow Group, 605 Third Avenue, New York, NY 10158.  (212 3703744). Website: thedanowgroup.com; email:kd@thedanowgroup.com