Hardly a week goes by without some American SME confidently telling one of my firm’s China lawyers of how they will be working with a great distributor in China to get the US company’s product into the China market. Our job as lawyers is to write a good distribution agreement, of which we have written many. For the legal side of China distribution agreements, check out the following:
- Getting Your Product Into China Via Distributorship. A Legal Piece Of Cake
- That’s Hot: China Distribution Contracts
- China Distribution Agreements: Exclusivity Is NOT Required
Our China distribution contracts typically provide for the following, among other things:
- An exclusivity provision, or not
- Whether the distributor can subcontract out distribution, or not
- The geographic and market territory given to the distributor
- The term of the distribution agreement and what must be done to renew or terminate it
- The specific products covered by the distribution agreement
- The methods the distributor can use to sell the products
- The pricing the distributor can use for the products
- Payment terms
- The distributor’s performance and sale requirements
- Ordering and shipping procedures
- Who is in charge of what when it comes to such things as defective products, advertising, warranties, technical support, obtaining permits, etc.
- FCPA compliance. Anti-corruption compliance
- Rights regarding new or modified products
- Whether the distributor can or cannot sell the products of others
- All sorts of things relating to intellectual property (trade secrets, trademarks, patents, copyrights, etc.)
- Non-competition during or after the term of the distribution agreement
- Damages for breaches
- Dispute resolution (venue, choice of law, etc.)
I know the above sounds like a handful (and this is only part of what sometimes goes into such agreements), but for lawyers who do these agreements all the time, they do become at least somewhat standard.
But when I read Getting a Good Night’s Sleep While Distributing Medical Devices in China I was reminded how tough product product distribution is in China on the business side. This article was written by my good friend Benjamin Shobert and Juan Jimenez, both of whom have substantial experience dealing with medical device distribution in China. Their article starts out describing the following truly common yet nightmarish scenario:
Somewhere in China right now, a domestic Chinese medical device distributor for an American company is invoicing one of their dealers for a product they sold to a public hospital. This is a good thing. The dealer has built and maintained key relationships with the hospital. This is also a good thing. Both the dealer and distributor likely are covered by some sort of exclusive distributor agreement between them and the manufacturer, which is always a good idea in China. But, unbeknownst to you, when the dealer encounters a situation where your product is too expensive, or would be too complex of a sale for your dealer, they will assume a new identity and, under this assumed identity, sell a competitor’s product. The assumed identity represents another option for the dealer, another way to protect their risk in a market where selling on something more than price is many times an uncomfortable position for an unsophisticated distributor or dealer.
Substitute your product for “medical device” and the same thing is almost certainly going to be true for your product as well.
As a lawyer, I can assure you that we deal with these issues in our distribution contracts, but once the distributor relationship starts, it is mostly on our clients to monitor compliance and to decide how to handle non-compliance and that is where things get tough. If you are selling your product in China through a third party (even if that third party is your own WFOE or Joint Venture), I strongly urge you to read the Shobert/Jimenez article because it will, at minimum, help you to enhance your guard. Unfortunately, I doubt it will make you sleep any better.