International Trade/Offshore Manufacturing/Sourcing/Export/Import/Consulting European Protection for Agents By Evelyn Ashley Probably the most common method of distributing a company's products outside the United States is through independent distributors and resellers. Less common, although utilized, are agents. In the United States, terminating these relationships is fairly easy, regardless of the amount of time the contract has been in place between the parties: depending on what the agreement states, notice of termination is provided and at the end of the notice period, the contract ends. In the European Union and European Free Trade Association, however, the act of terminating a distributor can be a complex affair, requiring lengthy notice periods and, sometimes, payment of compensation to the terminated distributor. A distributor is any individual, partnership, corporation, association or other legal relationship that stands between the manufacturer and the retail seller in purchases, consignments or contracts for the sale of consumer goods. When distributing high tech goods, the distributor is the entity between the manufacturer and the end user. On the other hand, an agent is a person authorized by another to act for him; a business representative whose function is to bring about, modify, affect performance of or terminate contractual obligations between a principal and third persons. Since an agency relationship is considered not unlike an employment relationship, most companies look to independent distributors to market, distribute and sell or license their products. In creating distributor relationships, companies desire to (and should) maintain the ability to legally terminate their agreements with as little time, cost and effort as possible - in order to prevent a slow down or complete halt in their distribution channels. The reasons for ending these relationships are endless: changing business goals, non-payment, inadequate market penetration, profitability, difficult relations between the parties, etc. In Europe, the laws governing distribution agreements differ widely from state to state. Nowhere is this so dramatic as when it comes to ending those relationships. Not only does the law of the individual countries play a role in terminations, European Union-based competition rules may also be applied. Continental European countries have always been more protective of local commercial agents (since agents tend to focus all of their energies on the products and services of one supplier) than of distributors (who often sell the products/services of more than one supplier) when their relationships are terminated. This protective stance has been made even more evident by European Community Council Dir-ective 86/653, which imposes a number of duties on both the agent and the "principal" during the agency relationship, protecting the agent if the principal/supplier ends the agency without a reason. Most importantly, these protections are required under law and may not be avoided by mutual agreement of the parties. Under the directive, an agency contract having a fixed term (i.e., one year, two years), which is continued beyond its expiration date, is automatically converted into an agency contract of indefinite duration. The directive sets out minimum notice periods of one month per year up to three years (EU members are required to implement these rules) or six years (the greater notice period is at the discretion of the EU member). In addition, the supplier may be required to compensate the agent on termination. Any required compensation is paid for the benefit provided to the supplier by the agent over time (bringing new custo-mers/business to the supplier), is to be equitable with regard to the agent's lost customers and may be equal for up to one year's average remuneration of the agent. Conversely, there is no written law relating to distribution agreements (with the exception of Belgium) and countries generally apply the law of general commercial agreements in the event of a dispute. In some jurisdictions, though, the recent trend has been to apply, where possible, principles of agency; so, increasingly, many of the protections afforded to commercial agents are being made available by national courts to distributors. In addition, there are trends (and some mandatory rules) applied with respect to termination of distributors. In determining whether problems will be encountered as a result of terminating distributor agreements without a reason, suppliers need to focus on whether the agreement has a fixed or indefinite term (or if a fixed term has been continued for an indefinite period, the conversion to an indefinite term), and depending on which applies, what damages will be payable if the distribution agreement is terminated unlawfully and what compensation may be due to the distributor in the event sufficient notice of termination is not provided. In addition to national rules based on commercial contracts, it is also necessary to consider the effect of applicable national and EC competition rules (or as we call them in the United States, antitrust laws), especially if they are part of a larger channel restructuring exercise. Anti-competition rules can apply in a number of ways: a dominant supplier (basically, suppliers with a market share of upwards of 25 percent) has to be careful not to discontinue supplying a distributor without objective justification. "Objective justification" is determined by a court and suppliers are likely to have considerable scope in terms of their own legitimate business requirements when it comes to objectively justifying altering distribution arrangements. Generally, it is impermissible to terminate a distributorship on the grounds of conduct that the competition laws typically protect, such as low priced sales, dealing in competitors' products and restricting parallel imports from one country to another. The best way to assure your agreements are terminable with the least effort is to have them reviewed by local counsel in the applicable country prior to entering into the agreement. When this article was first published, Evelyn A. Ashley was an attorney in Atlanta, where she focused on domestic and international transactions for technology clients. Advertise on this site Put your company on this site!