Manufacturing companies and product developers will often reach a point where they will seek to broaden the reach of their merchandise. In order to accomplish this, original equipment manufacturer (OEM) and value-added reseller agreements can be used. In many cases you may notice that you product is paired with another product on a recurring bases to provide the user great overall ease and productivity.

For the most part, value-added reseller agreements will bundle products together in order to make the selling product more enticing. This is a snap and play strategy, and with more and more industry standards and some many more software option, this sort of OEM structure will likely thrive. On the other end of the OEM spectrum, original equipment manufacturer agreements will sell products by taking components from a number of sources in order to build a new product sold under the company name. In some instances, one vendor approaches a the other Vendor and asks them to modify their standard offering to the OEM’s specification. Between the two extreme’s you may have an embedded OEM, where one party’s product is embedded to provide certain functionality within the broader OEM product, like the analytics functionality of the processed data set. Certain companies, notably those in the electronics and hardware markets, will provide the parts of a product to the OEM market. In addition, they will also act as the OEM.

The following is a brief list of tips to negotiate an agreement that results in a favorable outcome for original equipment manufacturers and value-added resellers alike.

An Agreement Should Strive of a Mutual Balance Between Both Parties

A vast majority of manufacturing companies treat the dealers they work with well. In response, many dealers reciprocate the sentiment and each party recognizes the benefits of the partnership to their business efforts. Like all relationships, however, markets tend to go through changes – what may look benieficial today may not look as appealing tomorrow. This is particularly true when considering that some parties have inherent advantages over the other. Thus, when drafting an agreement, it is important to establish a sense of equality so that individual parties can continue to gain what would not have been otherwise possible.

When a contract features terms that favor one party instead of being balanced, the business partnership can be negatively impacted and the party that feels displaced could seek legal action. It is important to note that when either party lacks legal experience in drafting an OEM or VAR agreements, maintaining a sense of equality throughout the contract can be much more difficult and complex. Certainly with the more complex OEM structure you are generally looking at a multi-year agreement with various commitment to sales volume or at least a stated budget from the OEM party, the vendor would generally be required to commit specialized resources to develop the likelihood of sales, but something less than a firm pre-commitment.

It is Important to Clarify the Reseller’s Marketing Responsibilities

Contracts must indicate the specific marketing responsibilities resellers will need to handle. Smoothing out these particulars in the early stages of drafting an agreement will benefit all parties as it will ensure the reseller assists the service or product reach the intended market.

Resellers should agree to terms related to the marketing of the product only when they believe they have the necessary skills needed to achieve the results expected by their partner. Generally, suppliers provide marketing resources to resellers, and this means channels must be set in place that would advertise the product in the intended territories.

A failure to establish the extent of which resellers must handle the marketing of the product or service can result in misunderstandings between the parties. This is especially true if one of the parties believes it has fulfilled its obligations meanwhile the other party disagrees. With a clear agreement that leaves little room for misinterpretation when it comes to marketing, both parties will be well-aware of their responsibilities in the partnership.

Penalties for the Evidence of the Use of Counterfeit Products

An OEM has to be diligent when it comes to avoiding the contamination of their supply chains with parts that could be or are counterfeit. If the OEM is unsuccessful in deterring this, the issues arising from the contamination can result in injuries to the consumer and even permanent damage to their reputation. A VAR and an OEM agreement must consider delving into what should happen when a counterfeit part makes its way into the supply chain. Counterfeit products are a serious concern as it is reported that each year, companies lose close to $250 billion as a result of non-authentic parts.

Even if the non-authentic part did not lead to personal injury, the subpar product could frustrate consumers and it can lead to product returns. As a result of high return rates, parties that have a mutually beneficial agreement could end up in disagreement with one another.

In addition, resellers who knowingly offer counterfeit products or parts may face significant fines and even time in prison. Ideally, contracts should contain a clause discussing the grounds for an immediate termination of the contract when counterfeit products are associated with the supplier or reseller. Including this type of clause will essentially protect both parties as it will emphasize the importance of carefully monitoring the supply chains and working solely with suppliers that can be trusted.

Agreements Should Be Negotiated With Care – Speak to a Well-Versed Attorney Today

When a VAR or an OEM is seeking to enter into an agreement in order to resell products and is inexperienced in doing so, either party can be hasty in entering into the agreement. While the aforementioned tips serve to prevent pitfalls among the parties, these agreements are highly complex and it is important to exercise due diligence when drafting a contract. As a VAR or OEM, consider obtaining the support of a professional who can thoroughly assess the contract before it becomes a legal obligation.

Attorney John P. O’Brien is exceptionally skilled in negotiating OEM and VAR agreements. These contractual obligations require strategic planning and methodical negotiation to achieve a profitable partnership. Attorney O’Brien can help you draft an agreement that represents your interests to the greatest extent. Consider contacting Technology Law Attorney John P. O’Brien for a complimentary consultation today.