This clause restricts the distributor's ability to sell products outside a defined geographic territory and typically includes provisions preventing the distributor from selling to certain customer classes or channels (e.g., online sales, direct-to-consumer). While categorized as intellectual-property, this clause actually functions as a territorial restriction that protects the supplier's intellectual property rights and brand control by preventing unauthorized distribution channels that could dilute brand value or create channel conflict. The clause matters because territorial restrictions directly impact the distributor's revenue potential and market reach. Overly restrictive territories can make a distribution agreement unprofitable, while poorly defined territories create ambiguity about whether a sale violates the restriction (e.g., is an online sale to a customer in another territory a breach?).
The clause should specify whether restrictions are exclusive (only this distributor can sell in the territory) or non-exclusive (the supplier retains the right to appoint other distributors), and whether the distributor can sell to customers outside the territory if those customers initiate contact. It should also address gray areas such as internet sales, mail orders, and sales to customers who relocate outside the territory.
Define the territory with specificity using zip codes, counties, or countries rather than vague terms like "the Northeast region." Clarify whether the restriction is exclusive or non-exclusive, and if exclusive, specify the performance obligations the distributor must meet to maintain exclusivity (e.g., minimum annual sales targets). Establish clear rules for passive sales (e.g., "distributor may fulfill unsolicited orders from customers outside territory but may not actively solicit or advertise outside territory"). Address e-commerce explicitly by specifying whether online sales are restricted by customer location, shipping address, or billing address. Include a termination provision allowing the supplier to appoint competing distributors in the territory if the distributor fails to meet minimum sales targets for two consecutive years. Require the distributor to use reasonable efforts to prevent transshipment (where customers in other territories purchase through this distributor to circumvent territorial restrictions).
Frequently Asked Questions
What does this clause mean in simple terms?
This clause restricts the distributor's ability to sell products outside a defined geographic territory and typically includes provisions preventing the distributor from selling to certain customer classes or channels (e.g., online sales, direct-to-consumer).
Why should I care about this clause?
While categorized as intellectual-property, this clause actually functions as a territorial restriction that protects the supplier's intellectual property rights and brand control by preventing unauthorized distribution channels that could dilute brand value or create channel conflict.
What are my options?
The clause matters because territorial restrictions directly impact the distributor's revenue potential and market reach.
How does this affect small businesses?
Overly restrictive territories can make a distribution agreement unprofitable, while poorly defined territories create ambiguity about whether a sale violates the restriction (e.g., is an online sale to a customer in another territory a breach?).