Going through my emails and came across one from co-blogger Steve to a client on how to handle exclusivity on a China distribution agreement for a retail product. Nothing earth shattering here, but since our clients for whom we do China distribution agreements frequently ask us about exclusivity, I figured putting this up on the blog makes sense.  

This responds to your questions about how exclusivity issues in these sorts of distribution agreements are usually handled in China. These are the ways it is typically addressed from the perspective of the manufacturer of the product:

1. Provide for a non-exclusive agreement. Note, however, that two distributors in the same market is usually not a workable situation. Option two below is therefore more common.

2. Limit the territory. You could limit this particular distributor to City1/City2/City3.

3. Limit the term to one year, with you having the exclusive right to renew. This is a very common solution when the product does not require the distributor to put in extensive time or money to create the sales market. This solution is not common if the distributor will need to put in extensive time or money to create the market.

4. Provide for a specific sales target. If the distributor reaches the sales target, renewal is automatic. If the distributor fails to reach the target, you have the option to terminate and appoint other distributors. Usually the sales term is for three to five years, with the sales targets set for each year.

Some agreements provide for automatic renewal at the end of the initial term with a fixed percentage increase in sales targets. Other agreements require negotiation of a new agreement with negotiation of new sales targets as part of that process. This approach is most common where the distributor will expect to invest considerable time and expense in the early years of the distribution cycle to create a market for the product.

In our experience, option 3 is the most common in China. Chinese companies seem to have a problem with negotiating specific sales targets. Worldwide, options 3 and option 4 are common, depending on the specific circumstances.

What have you done?  What have you seen?

Dan Harris

I am a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

I mostly represent companies doing business in emerging market countries. It has taken me many years to build my network and it takes constant communication and travel to maintain it. My work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, setting up a legal framework to move slag from Canada to Poland’s interior, overseeing hundreds of litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt.

I was named as one of only three Washington State Amazing Lawyers in International Law, I am AV rated by Martindale-Hubbell Law Directory (its highest rating), I am rated 10.0 by AVVO.com (its highest rating), and I am a SuperLawyer.

I am a frequent writer and public speaker on doing business in Asia and I constantly travel between the United States and Asia. I most commonly speak on China law issues and I am the lead writer of the award winning China Law Blog (www.chinalawblog.com). Forbes Magazine, Fortune Magazine, the Wall Street Journal, Investors Business Daily, Business Week, The National Law Journal, The Washington Post, The ABA Journal, The Economist, Newsweek, NPR, The New York Times and Inside Counsel have all interviewed me regarding various aspects of my international law practice.

I am licensed in Washington, Illinois, and Alaska.

In tandem with the international law team at my firm, I focus on setting up/registering companies overseas (via WFOEs, Rep Offices or Joint Ventures), drafting international contracts (NDAs, OEM Agreements, licensing, distribution, etc.), protecting IP (trademarks, trade secrets, copyrights and patents), and overseeing M&A transactions.