Reseller’s agreements have been an important staple of the tech distribution community, for both hardware products and software products for many years. If some case Resellers are engaged to address geographic or specialized industry segments that the vendor cannot address directly. In some instances the reseller may have related industry expertise that is combined with the vendor’s product to provide customers with an integrated project-like solutions. Reseller agreements represent over 50% of the sales volumes for many large, well established vendors. They vary widely based on the vendor’s product and the nature of both the vendor and/or Reseller’s business model.

Software reseller agreements are legal agreements that outline the rights and duties between software owners, referred to as “publishers” and parties wanting a right to license the software to outside parties, referred to as “resellers”. Software reseller agreements are often called “software distribution agreements” or “software distributor agreements”.

Software reseller agreements contain a variety of essential terms and conditions with regard to the rights of the reseller. Each agreement should be unique and tailored to each circumstance; still, the following are a few key terms that should be addressed in every contract negotiation.

It may sound incredible but frequently the end user is not entirely sure of what rights and duties are associated with which party. Namely, it is not uncommon that the reseller never actually provides the customer with the applicable terms (i.e., license terms) leaving the customer thinking the transaction (including the software) are governed by the general agreement the customer has in place with the Reseller, or by the customer’s PO. The key concept for everyone to remember is “you as the Reseller, cannot convey more than you have a right to convey”. Therefor sloppy reseller transfers can negatively impact each of the parties in various way, but the party acting as “reseller” is in the party in the middle, they are the one that can control what is stated to the customer, and what terms the customer agrees with, so they can shape the liability and they are generally the one found liable in most circumstances.

Legal Considerations with your Software Reseller Agreement

These are a few practical considerations when you are looking to establish an effective, mutually beneficial reseller, and it is related to who controls what risks:

• The Vendor is the only part that can control appropriate rights in the IP, either because they developed the software or they need to secure appropriate license rights in any 3^rd party IP included in the Software. So any IP indemnity must come from the Vendor, not the Reseller. (This presumes that Software is unaltered by the Reseller).
• Support obligation and Software revisions are another matter. The revisions to the Software are under the Vendor’s exclusive control, however support responsibilities can be divided. Often the Reseller will have a person trained by the Vendor on the Software and they may accept the responsibility to take the customer’s 1^st call, troubleshoot the problem. This needs to be addressed and it is also a consideration for after the reseller Agreement expires or is terminated.
• Warranties should also come from the vendor (except in an integrated custom defined “Deliverable” under a mutually agreed SOW from a Reseller/integrator). Of course the reseller Agreement needs to include a representation from the Reseller that they will: i) not make additional functional Software claims; and ii) distribute the Software subject to the vendor’s EULA which will include an exclusive warranty.
• Software is not one-size fits all, as a result your Reseller Agreement might want to include a referral option. If the customer opportunity is heavily non-standard, it may be best for all concerned to have the vendor contract directly with the Customer and pay the Reseller a referral fee. Just because you have a Referral option does not mean you must utilize that option.
• A good vendor Reseller Agreement might include: (i) some technical pre-sales training to help ensure that the Software is properly presented; and (ii) a demonstration license, so that the Reseller can provide interested customers with a demonstration of the Software.
• Some Vendor’s offer Reseller Agreements that present the reseller with a right to offer the Software under the Vendor’s stipulated EULA at a certain % off the Vendor’s suggested list price. However, some other reseller Agreements require that the vendor provide a quote for each opportunity. Vendor’s need to deal fairly and consistently with the pricing so that they are not accused of anti-completive trade practices by Resellers.

Software Resellers: Exclusive vs. Non-Exclusive

A vast majority of commercial software reseller agreements are considered non-exclusive. This means that publishers could grant other parties the right to resell the software. In certain situations, an agreement can be exclusive and this would disallow publishers and other resellers from distributing or reselling the software to particular end users. In some circumstances a reseller might have a primary Territory for instance if they invest in promoting your Software in a location (perhaps a country) where you do not have representation, you may need to make them an exclusive reseller in order to justify their investment; However, to make that reasonable and effective you will need to carefully craft what their commitment to the reseller relationship is to justify that exclusive, and generally if performance levels are not met after a stated period of time the arrangement becomes non-exclusive.

Generally, the terms of exclusivity in an agreement are limited by industry, referred to as “field of use” or by geography, such as “the United States”. Thereby, publishers may be able to grant licenses to parties outside the boundaries of the restrictions.

Whenever any type of exclusivity is permitted, publishers should seek to include performance requirements in their agreement. Doing so could provide that exclusivity on the software is dependent on the reseller distributing a specific number of licenses or generating a specific level of revenue every year. For products entering into a new market, any requirements set on performance levels will usually be stair-stepped, meaning, they will increase every year throughout the duration of the agreement. There are also a number of related issues that might be explored as an alternate to a firm purchase commitment, like the need to train a certain number of sales-staff, technical staff, the need to participate in certain industry trade shows, and view that obligation as an acceptable alternative (sharing of the risk) with the reseller.

Payment Terms and Renewals on Software Reseller Agreements

Any compensation made to resellers is usually the difference between the amount the customer or user paid and the amount the reseller paid to the publisher. In almost all circumstances the reseller will set the sales price with the customer. In most cases the reseller sells, distributes on premise software and bills the customer. The reseller has a duty to pay the licensor, that is independent from their collection from the customer (i.e. if the customer is late paying the reseller that does not impact the reseller’s duty to pay the Licensor); i.e. the Reseller takes the customer credit and collection risk, not the vendor; so the Reseller must pay the vendor even if the customer defaults in their payment obligation. Despite this general contract flow, software reseller agreements can sometimes grant resellers to gain sales commissions based on licensing fees paid directly to publishers by customers for services that are provided directly to the Customer from the Licensor’s host platform (like AWS or Azure). This is particularly true in contracts  where the software also include some related administrative support responsibilities  most commonly known as “software as a service” or “SaaS agreements”.

Further, when the license has been granted on an annual basis or a renewable subscription, the agreement should specify if the reseller can obtain compensation from the renewal. This is also the case if the user has the opportunity to make additional purchases on products and services offered by the publisher. Often reseller agreement makes specific contractual arrangements to address renewal that may include among other things, a sliding scale so discounts reduce over several renewal terms. Often part while the Reseller may make a renewal fee part of the bargain may be a non-compete with the licensor for that renewal, i.e., the reseller will not solicit that customer with a competitive product to “un-hook” them from the initial license.

In situations where the software reseller is truly reselling the software, the reseller is buying the licenses from the software publisher and selling these licenses to their customers. The reseller will seek to have the publisher commit to a pricing point so that up charging the property is possible in order to make a reasonable profit. Related to that point, it is a common prerequisite under many reseller agreements that the reseller must resister the sales opportunity prior to the proposal. The rationale is to avoid having the licensor or any other authorized reseller from trying to sell the same product to the same customer. This is usually a commit not to allow other to offer the licensor product for a stated limited period of time. In a renewal context this general provision might be cross references as part of the consideration in the licensor paying a renewal commission fee.

Payments are usually made when the purchases are made, however, payments can be aggregated on a month-to-month basis or quarterly. Some reseller agreement request marketing plans and ongoing sales reports.

Updates and Maintenance Conditions

Software reseller agreements should consider addressing if the publisher will need to provide maintenance and/or upgrades to the software for end-users. They should also address where additional fees will be required in the event maintenance and upgrades are made, as discussed above.

Training, Installation and Other Services

Every software reseller agreement will need to address if resellers are required or permitted to provide training, product installation, or other software-related services. In many cases, software resellers are IT service companies that provide software products as a tool or add-on products to their customers or third parties. For these types of arrangements, the agreement must address potential issues related to the interplay of various systems.

Agreement Duration and Cancellations

The term of the agreement describes the time the reseller will be permitted to resell the product. In most situations, this will be for an initial period but will be prolonged or extended for an additional term. This will be contingent on the reseller having met certain obligations during the initial term. Often the initial period is 2 or more years to justify the up-front reseller investment, and often that flows into an annual renewal unless one party elected to discontinue (not renew) at least 90 days in advance.

Without regard to the duration of the term, software reseller agreements must address the rights and responsibilities of both parties should the contract be terminated or it otherwise expires. A variety of post-termination terms should be addressed, such as the responsibility for any ongoing agreements related to the product, whether future monetary commissions are owed to the reseller and the impact on the end-user license renewals.

International Agreements

When resellers are granted territory outside of the country, publishers will need to consider the laws of the jurisdiction and the impact these foreign laws may have on the agreement. For instance, some countries may require resellers to register. Also, some foreign laws render exclusivity terms unenforceable.

Moreover, publishers will need to include specific language within the agreement that prohibits resellers from registering the publisher’s trademarks internationally. Also, that the reseller will cooperate and help the publisher in enforcing the publisher’s intellectual property rights abroad.

Lastly, international agreements must include language that requires resellers to comply with laws in the United States which serve to regulate international trade, like sanctions, preventing the bribery of foreign officials, export controls, and avoid dealing with restricted parties. While resellers are largely independent of publishers, a violation of any rule by resellers can result in serious, irreparable damage for publishers.

Protect Your Rights in a Software Reseller Agreement

Software reseller agreements serve to define the relationship between the software publishers and the software reseller. These agreements should identify each party’s rights and responsibilities, along with outlining the terms of reselling the property to end-user customers. In order for a product’s licensing to be successful, a software reseller agreement should be beneficial to the parties involved. To ensure a long-lasting business relationship is achieved, speaking to a well-established attorney is recommended.

Technology Attorney John P. O’Brien is highly experienced in drafting and negotiating software reseller agreements. Attorney O’Brien recognizes the importance of establishing a high-quality software reseller agreement, however, he understands that these agreements are usually complex and multifaceted.

Software reseller agreements require in-depth legal knowledge and skill to draft an agreement that protects all the parties involved. Attorney John P. O’Brien offers tailored solutions to the legal challenges faced when constructing these types of agreements. To schedule a complimentary consultation with Attorney John P. O’Brien and discuss industry-driven solutions, consider calling (732) 219-6641 or complete the confidential contact form here.