One of our readers wanted to know how large companies like Etailz and Netrush enforce exclusive distribution contracts on other third party sellers. Knowing how these contracts work can help you for two reasons:
- How to setup the agreement if you are working on an exclusive agreement with a brand owner.
- How you should expect to get treated if you try to sell an item you do not have an exclusive agreement with, but someone else does. (Online / Retail Arbitrage / Liquidation)
First let’s talk about what an “exclusive agreement” is. This is an agreement you have with a brand owner that allows you the exclusive right to distribute a product in a specific territory. In some cases that territory might be the United States as whole, certain states, or specific channels (online vs. brick and mortar). For most of our situations, we are looking for an exclusive right to distribute products on the Amazon selling channel.
But what does that really mean?
When you have a legal exclusive agreement contract, it should have stipulations of how to handle situations when other third party sellers start selling on Amazon. The contract will likely prevent the brand owner from knowingly selling to other companies that intend to sell the product on Amazon. The contract should also state what happens if the brand owner willingly or un-willingly sells product to another company which then sells on Amazon. Whatever those agreements are – they are agreements between the brand owner and the distirbutor that signed it.
Generally, the agreement will have one or more of these stipulations:
- Brand owner requires all other resellers to sign an agreement that they will not sell the product on Amazon. If they do, brand owner must cut off all orders to that reseller.
- If the brand owner doesn’t cut off the orders to the other resellers, the Amazon distributor (Etailz, Netrush, you) would have some sort of monetary recourse from the brand owner.
- Brand owner gives the distributor authority to resell product to other companies who want to sell on Amazon.
- Brand owner will put language on all applications and on wholesale website stating resellers are not allowed to sell on Amazon.
- Brand owner requires all other distributors to monitor their sales to companies that may sell on Amazon.
- Brand owner requires all other distributors to identify all customers purchasing from them, and their distribution channels.
- If the Amazon distributor identifies another company selling on Amazon, they immediately notify the brand owner. If the brand owner identifies another distributor is selling to the company identified, the distributor must shut off sales to that company.
- If companies that have purchased the product need to liquidate the product, the brand owner offers to buy back inventory at a lower price. (This can be in place to stop liquidation leaks).
As you can see, it can get extremely complicated if there is a large web of distributors already in place. Unless there are agreements all the way down the line to all distributors and all companies potentially purchasing the product, it’s nearly impossible to enforce this exclusivity agreement.
What can you do to help enforce this agreement?
An Amazon distributor really can only do so much to enforce the contract. They can only hold the brand owner responsible, and likely only have repercussions that are in line with whatever the contract states. They can’t really do much of anything to the other companies reselling the product on Amazon. You don’t have an agreement with those re-sellers.
That being said, what Amazon distributors will generally do to help enforce the contract include the following:
- Send a letter to the offending re-seller through the Amazon messaging system letting them know they are in violation of the agreement with the brand owner (assuming it’s in place).
- Send a cease and desist letter to the re-seller through the Amazon messaging system or to the registered address of the re-seller.
- Open an infringement claim with Amazon to remove the seller (which is illegal unless they have legitimate basis for infringement).
- Try to get Amazon to gate the brand.
If you are a non-exclusive reseller on one of these items, you may see some of these tactics placed against you. If you are reselling a legitimate, new item in the same exact condition on the Amazon page, you have a right to resell it per Amazon’s guidelines. As Amazon specifically states on the infringement page:
This tells you that Amazon will not help brand owners with exclusive distribution. This specific reason is why it’s incredibly difficult for any exclusivity agreement to hold up unless there are extremely tight guidelines, and there are exact things the Amazon distributor can hold the brand owner accountable for.
In reality, an exclusivity agreement for selling on Amazon usually isn’t the best option for brand owners. If they already have an established distribution network, it’s extremely difficult to control, and really doesn’t give the brand owner a lot of upside.
Now that you know all about exclusivity agreements, how would you go about setting one up?
In my opinion, the best way to gain exclusivity is to gain FULL control over distribution of a product. If this is a larger brand, this is nearly impossible to do for their entire catalog. If it’s a smaller company, you may be able to become the exclusive distributor for brick and mortar AND online of their entire catalog. This gives you control over who you sell to. You can take full control over determining who is going to try to compete with you on Amazon, and who isn’t.
If it’s not a really small company that has a couple products, the next best thing is to get full control of distribution over one specific product. The easiest way is to have a product made specifically for you. This could be a different color or different size of an existing product, a bundle of complimentary products, or an entirely brand new product. This is the exact method large retail stores use to secure their “exclusive” products. You’ll likely need to pay for an entire production run of the product. For smaller companies it could be as few as 100 units, and for some larger companies it could be an entire container from China. You won’t know until you chat with them.
Once you’ve come to an agreement with the brand owner on an exclusive item, you’ll need to determine if you need a signed contract or not. If you trust they are not going to sell the product to anyone else, a firm handshake can seal the deal. If you are really concerned they may sell your product to someone else, you’ll want to have a full contract filled out. Consult with a lawyer to determine the exact language you want included in the contract.
If all goes well, you’ll have some products that are nearly impossible for any other re-seller on Amazon to sell.
Start making those calls!