Making the most of your software distribution agreement

Distribution agreements are prevalent in the business world because they allow third parties, known as distributors or licensees, to sell a developer's product to consumers. Software distribution agreements specifically allow distributors to market and sell the developer's software to end users. A software distribution agreement sets forth the rights and duties of both the developer and the distributor to avoid disputes later on.

Software distribution agreement basics

Each software distribution agreement is different and, although there's no one-size-fits-all solution, many agreements have common terms. The developer usually decides if the distributor has an exclusive software distribution agreement, which would prevent other distributors from selling the software in the same region, or a nonexclusive agreement, which would allow other distributors to sell in the same market.

The best developer-distributor relationship works like a partnership, as you both have the same goal of selling the product and making money.

Working together makes your job as a distributor much easier because you know you have the developer company supporting your endeavor to sell as much of its product as possible. As a developer, a solid working relationship with the distributor gives you peace of mind that your distributor is getting your software into the right markets.

Exclusive rights in software distribution agreements

When a distributor negotiates a contract with the developer, they should try getting an agreement either with exclusive rights to sell the software in a certain market, such as a specific state, country, or even worldwide. Exclusive rights aren't easy to get, as getting them usually depends on the sole discretion of the developer.

If you, as the distributor, can't get exclusive rights, you want to make sure the developer doesn't compete with you by selling its own product and taking away your commission or cutting into your profits. One way to do this is to include a clause in the agreement preventing the developer from doing so. This works well for both the distributor and the developer, because while the distributor doesn't have to worry about competition from the developer, the developer doesn't have to spend the time trying to market their own product.

Another way for a distributor to restrict the developer from selling the product is to present their distribution marketing plan and explain who they're using as software resellers. Resellers are like distributors, although many are small companies that take the product from the distributor and sell it to end users, thereby giving the distributor a better chance of reaching a larger market. A developer who has confidence in a distributor's marketing plan is less likely to get involved in selling their own product.

Noncompete clauses in distribution

Distributors should check the distribution agreement for a noncompete clause, which can adversely affect you after your relationship with the developer has ended. A noncompete clause can prevent you from doing business in a certain region or with similar products and brands, thereby limiting where you can work. If you're a distributor, try to get an agreement without a noncompete clause. Otherwise, you may have difficulty working in the same market if the developer terminates your contract.

Noncompete clauses are generally enforceable if they're reasonable, even if the distributor is an independent contractor. As a developer, you want to get a noncompete clause in your contact, but make sure it doesn't unduly limit the distributor from making a living to prevent the noncompete from being unenforceable. Also, a limited time frame for the clause, such as a noncompete for three years, is usually more enforceable than a noncompete of a longer duration.

Software distribution agreement checklist

Software distribution agreements vary greatly in length, depending on how specific the parties wish to get. A software distribution agreement should state:

• The names and addresses of the parties and the date of the agreement
• That the developer owns the software and the distributor wants to sell the software
• General definitions of key terms, including end-user, license, software, and what the software includes
• Whether the agreement is exclusive or nonexclusive
• In what geographical area or country the distributor may sell the software
• Whether the agreement contains a noncompete clause
• How much the distributor must pay the developer for the product and the right to sell it
• How much commission or profit the distributor makes
• How long this agreement lasts, such as one year with automatic renewal unless either party notifies the other, often 90 days before the renewal date
• Whether the distributor has a license to reproduce the software
• That the developer will upgrade the software as it becomes available
• That the developer will provide training or marketing materials to the distributor to help the distributor make more sales
• That the developer owns the copyright to the software
• That the developer will provide the software to the distributor within a reasonable time, and that the distributor will use their best efforts to effectively market and sell the software
• That the distributor must provide reports to the developer about its sales
• That the developer has the right to see, approve, or disapprove of the distributor's agreement with end users
• Termination terms, such as that either party may terminate the agreement if there's a substantial breach that remains uncured for a specific amount of time or that either party may terminate the agreement without cause upon a certain amount of notice
• Limitation of liability, indemnification clauses, and mutual warranties by the parties
• Which state's or country's laws govern the agreement
• Signatures of both parties and the date signed

Software distribution contracts protect both the distributor and developer, just in different ways. A distributor benefits from knowing their responsibilities and parameters, including the sales territory, what the termination clause contains—which is often the most litigated part of the contract—and other basic distributor contract provisions. Developers, on the other hand, are protected with clauses such as nonexclusive distribution rights and noncompete clauses. Knowing what to look in the contract can help both sides succeed in their goals.