Controlling Distribution

The further it goes, the harder it gets.

Skateboarding is cool (it's the shit, the shiznit, or whatever term you like best). No two ways about it–even corporate America knows it. And for whatever reason, things that are cool don't stay cool if they're sold in every corner store. It has something to do with exclusivity. From the legal perspective, the question is, “How do we accomplish the necessary control of distribution in order to create or maintain exclusivity?” Without, of course, violating any restraining trade laws.

Maintaining both international and domestic exclusivity requires restrictions–restrictions on who can carry your products and where they're sold. These restrictions are important for many reasons: they avoid oversaturation of the brand in a particular area, maintain margins, and prevent your brand from being sold in a retail outlet that does not share your company's vision of what a skate shop should be.

At least domestically, it would seem relatively easy to accomplish the maintenance of exclusivity. Simply exercise some self-control and only sell your products to retailers or distributors you approve. And to date, especially with hardgoods, that strategy has been relatively effective, even in the face of the growing demand for everything related to skateboarding.

Rob Valerio of Dwindle Distribution theorizes that the reason domestic distribution has not moved into less desirable retail areas is that the people who run the companies today were in the industry when skateboarding took its last big downturn, around 1990. Valerio notes that World Industries and Dwindle founder Steve Rocco worked for Vision Skateboards and saw firsthand how a company can lose control, and he has learned from that experience. Now, distribution for the World and Dwindle brands is determined by a strategy designed to guard against the destructive cycle of discounting and dilution.

Dwindle, along with its exclusive domestic distributor, Eastern Skateboard Supply, keeps a close eye on the quality of applicant shops and what they're ordering. Eastern Owner Reggie Barnes has people working full-time just to process new dealer applications. Eastern, along with the manufacturers, collects information on a new shop, including its square footage, pictures of the shop, and its exact location in relation to other existing dealers. Both Valerio and Barnes say they can tell from the size of the shop's order if the shop is transferring products to other locations. If it turns out that the shop is redirecting products to another unauthorized location, Dwindle or Eastern will no longer sell to that shop. So far, this after-the-fact method has been satisfactory in preventing unwanted or unintended distribution.

Unfortunately, control of distribution can't always be affected by cutting off the offender, particularly beyond our shores. A perfect example is Australia's flea markets, which are often the destination for unauthorized products. Don Brown of Sole Technology, Inc. tells of shoes sold at such outlets that are made with Etnies uppers sewn onto another skate-shoe brand's outsoles. The hybrid shoes are the result of what Brown euphemistically calls the “Korean sewers' midnight shift.” The presence of these unauthorized products are harmful to the brand's exclusivity, and are obviously very troubling to both the manufacturer and the distributor, taking months–if not years–to bring under control.

Historically, manufacturers have (with mixed results) attempted to use trademark and copyright laws as a way to prevent products from showing up in unintended markets. Courts in the United States have recently ruled to weaken manufacturers' ability to use intellectual property laws to control where their products can be sold after that first sale. Australia has madee it easier for parallel importers to bring their gray-market goods into Australia; even the hybrid shoes are getting through customs despite the efforts of the companies whose components are being pirated. And with the formation of the European Union, once goods are sold in an EU country, they can be shipped and sold in any other EU country without the manufacturer being able to limit the distribution via intellectual property laws.

Litigating over distribution can not only be frustrating but an expense that may not make financial sense. A clear alternative is to draft agreements that specifically state what can and cannot be done with the product.

Some chafe at the idea of a written agreement because the honor of a handshake agreement sounds nice. But unfortunately, it's part of the human experience that misunderstandings are more frequently encountered when agreements are verbal. The frequency of such disputes exponentially increases when the agreement has to do with an exclusive, super-hot product that flies off the shelves. Whether the agreement/limitation has to do with potential overruns of shoes produced in a Korean factory or a brick-and-mortar shop that wants to sell your products online, it's always a good idea to record the understanding of the parties onto paper. Recollection changes, but printed agreements don't.

One of the trickier parts of a distribution agreement is what to do if the distributor or retailer violates it. The established principle of law dictates that damages cannot be awarded to someone if the calculation of those damages is too speculative. And in most situations, it's nearly impossible to arrive at a dollar amount that accurately reflects the harm done to that wronged party. A solution to this type of problem is what is called a Liquidated Damages clause. A Liquidated Damages clause allows the parties to agree beforehand to a figure that is a reasonable approximation of the damages likely to be incurred in the event of a breach. With such a clause both sides will know where they stand in the event that the buyer ships and sells the products to an unauthorized retailer or outlet.

A penalty clause is just one way to prevent distribution to unintended locations. Theoretically, the parties could build an award clause into their agreement, giving a party incentive not to violate the agreement. It is really up to the parties involved to find creative ways to achieve the goals of all involved, and they should strive to clarify where they each stand. The wording of an agreement should also encompass any potential changes in the marketplace, for example Internet retailing, and utilize language that will remain clear over time. A well-drafted agreement is to everyone's benefit, because relying on recollection to achieve one's goals is a proven recipe for conflict and litigation.

Matthew Miller is an attorney-at-law in Solana Beach, California. He can be reached at: (858) 259-6969.