Managing Intellectual Property in Distribution Relationships
Foreign companies looking to enter the Latin American market will often choose to do so through an established distributor. The main advantage is that companies can tap into the distributors already established relationships while reducing the costs (incorporation, employees, back office, etc.) that are generally associated with opening a new market. The disadvantage is that companies will have to work with a third party and the natural risks that come from that type of commercial relationship.
To control the risks and manage the relationship, foreign companies will enter into distribution agreement. A distribution agreement has many parts and comes in all shapes and sizes. In general, it provides both parties with a road map to their obligations and rights in the relationship.
One part of a distribution agreement that is often overlooked is how confidential information and intellectual property are managed throughout the relationship and then again when it finishes. In many cases, a foreign company has something unique to offer which means the intellectual property is often its biggest asset.
Particularly with technology and highly specialized manufactured goods, the foreign company will at some point need to share trademarks, patents, copyrights, know-how, trade designs, pricing information, client lists, etc. A well drafted distribution agreement will ensure that the intellectual property is properly managed as to not put the company’s biggest asset at risk.
Typical Intellectual Property Related Clauses
Confidentiality and Non-Disclosure Clauses
Confidential information is an extremely important business asset, and therefore it is vital that it is protected. Confidential Information may be stored in several different formats, such as electronically, in hard copy or otherwise, may include documents, illustrations, specifications, software, databases, know-how, customers, suppliers, financial information or other resources.
Confidential information that needs to be protected can include information on inventions or industrial processes that do not meet the requisite patent criteria and therefore can only be protected though confidentiality. An example of this could be a client database (lists of customers).
In some situations, a standard clause may suffice but, in many situations, a tailored, fully considered agreement that deals with confidentially may be recommended. As with any business situation, the more valuable or important the situation or transaction, the more important it will be to have an agreement that is bespoke.
The Parties
One of the basics is ensuring that the distribution agreement and related confidentiality clauses covers all the parties that are subject to the agreement and that could have access to your intellectual property. For example, do you include only the contracting parties or should is also cover holding companies and/or subsidiaries? Perhaps employees and owners?
Definition of Confidential Information
The definition of what is considered confidential information should be given careful consideration when drafting the agreement. Each company will have different circumstances depending on their situation and what will need to be shared throughout the relationship. A confidentiality agreement should be clear and unequivocal as to what information is covered by the agreement.
Permitted Use
The purpose for which confidential information is being provided and the circumstances in which it can be used.
Disclosure Period
The disclosure period is important since it binds the parties under the confidentiality agreement during those times. Any disclosure made outside of the disclosure period will not be considered a breach of the confidentiality agreement. Careful consideration needs to be made for what happens if or when the distribution agreement comes to an end.
Other Provisions
Other provisions that require careful consideration include:
- The degree of effort on the part of the contracting parties to ensure that confidential information is kept confidential. For example, must the parties use “best endeavours” or “reasonable endeavours”? Should confidential information be kept in a secure place and with what level of security?
- Perhaps an obligation or an indemnity to ensure that, where a permissible disclosure is made, the receiving party also keeps the information confidential; and
- A clause that requires the parties, at the end of their working relationship, to return to the other party all information they hold about the other.
- Third Party Rights – a clause that prevents third parties from enforcing any terms of the agreement.
- Severance – a clause that prevents the invalidity of a particular clause from rendering the whole agreement void; and
- No waiver clause – a clause that provides that any failure or delay in exercising a right under the agreement will not constitute a waiver of that right, for example, a right to terminate the agreement in the event of a breach.
- Industrial property – such as patents and trademarks.
- Exclusivity or not – will you grant the distributor exclusivity in the country or region. Can you also sell in parallel?
- Regulate the use of the patent and trademark. When how and where they can use it. If they need to pay royalty for such use.
Conclusion
There are many considerations when it comes to dealing with intellectual property in distribution relationships. Each business will be different in terms of how specific and detailed they want to be when drafting their agreement. In some cases, a simple boiler maker clause will suffice and in others, the importance of what is being shared will call for more attention.
What is important is that companies have a good understanding of the importance of intellectual property. They need to evaluate what information will be shared during the relationship that is important and could it potentially be used. With this step, a company can then understand what really has value and focus its efforts on those.
As a final tip, companies need to also think what happens with their intellectual property should the distribution relationship come to an end or be terminated.
Ax Legal is a legal and business advisory firm that works with foreign companies in Latin America. Our team of legal and commercial advisors have a distinguished track record of helping foreign technology and services companies to grow and operate in Latin America. Over the years, we have worked with starts up, mid-size businesses, and publicly listed companies. The one common factor that connects are clients is that they are leaders in their field, providing innovative technologies and services to the industrial sectors.
To better understand how we can support you in the Region, please contact Cody Mcfarlane at cmm@ax.legal
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