A Distribution Agreement is a commercial contract between a manufacturer or supplier (the principal) and a distributor that grants the distributor the right to purchase, market, and resell the principal's products within a defined territory, market segment, or customer channel. The distributor typically buys products at wholesale prices and resells them at a markup, assuming the risk of inventory ownership and the cost of sales, marketing, and customer service within their territory.

Distribution agreements operate at the intersection of contract law, commercial law (UCC Article 2 for goods), antitrust law, and in international contexts, trade regulation. The distinction between a distributor and an agent is legally significant: a distributor buys and resells products as a principal, while an agent facilitates sales on behalf of the manufacturer without taking ownership. This distinction affects tax liability (sales tax nexus), product liability exposure, and the applicability of state agent protection statutes.

Antitrust considerations are paramount in distribution agreements. Under the Sherman Act (15 U.S.C. Sections 1-2), vertical restraints such as exclusive territories, resale price restrictions, and tying arrangements are analyzed under the rule of reason. The Supreme Court's decisions in Leegin Creative Leather Products v. PSKS (2007) and Ohio v. American Express Co. (2018) define the current legal framework for permissible vertical distribution restraints. State antitrust laws may impose additional restrictions. A distribution agreement that violates antitrust law is void and unenforceable, and can expose both parties to treble damages under the Clayton Act (15 U.S.C. Section 15).

A Distribution Agreement is needed in the following situations: when a manufacturer wants to expand into new geographic markets through established local distributors rather than building a direct sales force; when a food or beverage company engages distributors to deliver products to retail outlets, restaurants, and institutions; when a technology company appoints a value-added reseller (VAR) to sell, install, and support its products; when a pharmaceutical manufacturer distributes products through wholesalers subject to FDA and DEA regulations; and when an international supplier enters the US market through a domestic distribution partner.

Additional scenarios include consumer goods manufacturers engaging distributors for big-box retail channels, industrial equipment manufacturers appointing regional distributors for sales and service, publishing companies distributing books through wholesale distributors, and automotive parts manufacturers distributing through aftermarket distribution networks.

Operating without a written distribution agreement exposes both parties to significant risk. The manufacturer may lose control over how its products are marketed, priced, and serviced. The distributor may invest substantially in building a market only to have the manufacturer terminate the relationship without compensation. Without clear territory definitions, multiple distributors may compete with each other, destroying margins. Product liability claims may be unclear as to which party is responsible. And without written exclusivity terms, the manufacturer may appoint competing distributors or begin selling directly, undermining the distributor's business.

A comprehensive Distribution Agreement must include the following elements:

Territory and exclusivity -- the geographic area, market segment, or customer channel in which the distributor is authorized to sell. Specify whether the appointment is exclusive (the manufacturer will not appoint other distributors or sell directly in the territory), sole (the manufacturer retains the right to sell directly but will not appoint other distributors), or non-exclusive.

Products covered -- a specific list or description of the products the distributor is authorized to sell, including any restrictions on selling competing products.

Pricing and payment -- wholesale pricing, volume discounts, payment terms (typically net 30-60 days), currency, and the process for price changes. Under antitrust law, the manufacturer may suggest retail prices but generally cannot mandate minimum resale prices in some jurisdictions.

Minimum purchase requirements -- the minimum quantities the distributor must purchase per period to maintain their appointment, with consequences for failure to meet minimums (territory reduction, loss of exclusivity, or termination).

Marketing and promotion -- the distributor's obligations to actively market the products, maintain adequate inventory, participate in trade shows, and comply with the manufacturer's brand guidelines and marketing standards.

Ordering and delivery -- the process for placing orders, lead times, shipping terms (FOB origin, FOB destination, or Incoterms for international agreements), and who bears the risk of loss during transit.

Warranty and returns -- the manufacturer's warranty terms, the distributor's role in handling warranty claims, the return and exchange policy, and who bears the cost of defective product returns.

Intellectual property -- the distributor's limited license to use the manufacturer's trademarks, trade names, and marketing materials, with restrictions on modification and requirements for brand compliance.

Term and termination -- the initial term, renewal provisions, grounds for termination (including failure to meet minimums, breach, insolvency, and change of control), and the required notice period. State distributor protection laws in states like Wisconsin (Fair Dealership Law), Puerto Rico (Law 75), and New Jersey may restrict the manufacturer's ability to terminate without good cause.

Post-termination obligations -- the distributor's obligation to return marketing materials and cease using trademarks, the manufacturer's obligation to repurchase unsold inventory, and the survival of confidentiality and non-compete obligations.