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:

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.

  • BlueApple

    The situation described by Benjamin Shobert and Juan Jiminez is pretty much normal in most parts of the world (Northern America, Western Europe and Singapor may be exceptions). Actually the situation is not as bad as it sounds, if a hospital wants to by a machine with a functionality A that costs 8000 US$ and your company has only a machine to offer with a functionality B that costs 10000 US$, the hospital won’t purchase your machine, so you don’t really loose money if your distributors sells a machines of a competitor.
    The solution is in your R&D department, what you need is a modular design, so that you product can cover a range of, lets say, 5000 to 20000 US$.
    Having said that, for a company seriously engaged on the Chinese market, I strongly recommend to have your own representation in China. Chinese hospitals will trust a manufacturer much more than a distributor, very important if your product needs maintenance and provision of spare parts.
    Your nation-wide exlusive distributor may do a good job. But in a highly volotile environment you never know wether your distributor will still make a good job tomorrow or next year or five years later.
    One VERY important hint, always keep registration and distribution separated. Do NOT ask your distributor to do the registration for you.

    • ahimsa333

      Dear BlueApple- Can you tell me a little bit more about why you think a distributor should NOT do your registration for you?

  • neroden

    That’s pretty much what retail dealers do in the US too. So, normal.