Manufacturing companies and product developers will often reach a point where they will seek to broaden the reach of their merchandise and leverage compilatory product subject matter experts additional or expansion product offerings. In order to accomplish this, original equipment manufacturer (OEM) and value-added reseller agreements can be used. That seems like a fairly simple term, but it can have a very broad range of meaning.

For the most part, value-added reseller agreements will bundle products together in order to make the selling product more enticing; i.e., “plug and play”. In this capacity both products (yours, as well as the OEM’s product) are completely standard offerings On the other hand, 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. This class of OEM product is viewed as new and distinct product (not an add on, or option). In some circumstances the OEM Product can only be offered with other pre-defined products, as part of that new OEM Product; sort of like Intel inside ®, or powered by Microsoft ®. Its like buying a new laptop with Microsoft. It comes preloaded as part of that bundled Laptop offering.  In some circumstances, the Vendor may only offer special functionality under the OEM Product, and parts or components of the OEM product may not be useful outside of the OEM Product. 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 beneficial 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.

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.

OEM Agreements typically Span Multiple Years, often 3-5 years

For many, a contract that lasts for many years may seem lucrative at first. However, OEM agreements often require special R&D to help distinguish the OEM product; they also frequently required dedicated staff and rigorous Service Level Agreements for support. In order to justify that sort of investment and market development expense, the OEM needs to be assured that they have sufficient time to recoup that investment and make a satisfactory return. Unfortunately, a prolonged contract limits the flexibility parties have and may also reduces other opportunities for growth. When it comes to contract negotiation, it is important to be mindful of evergreen termination provisions. If the vendor commits a territory to and OEM the OEM is required to achieve a certain minimum sales quota. If the OEM fails to meet that minimum sales quota, then typically the territory becomes non-exclusive, or worse yet the OEM Agreement may become terminable.

It is imperative to bear in mind that companies can go through dramatic changes in a year’s time. Although some companies will be eager to continue with the contract, it is best to take these contracts one year at a time in order to work out dilemmas that may have come up.

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.