Distribution Agreements - Part 1: Overview of Distribution Models

A software manufacturer has a variety of options for distributing its products. They can either distribute their software directly to their end customers or indirectly via third parties. In the first part of our four-part series on the distribution of software, we will give an overview of the common indirect distribution channels and present the rights and obligations arising from these constellations.

When selling via a third party, a legal distinction must be made between the legally regulated commercial agent model and the legally unregulated authorised dealer model. These are the two most common distribution models in practice. Depending on the interests involved, the manufacturer will either opt for the more conservative and more controllable commercial agent model or the more flexible authorised dealer model, which grants him more freedom from liability. Mixed forms are also common.

Distribution via sales representatives

The classic commercial agent in the sense of §§ 84 ff. HGB distributes software or hardware products in the name and for the account of a third party. The commercial agent is a self-employed tradesman in distinction to the employee. He is the prototype of the distributor who concentrates on market development, market observation and customer acquisition.

The business risk remains with the manufacturer: The contract for the provision of software or hardware products or the provision of services is concluded directly between the manufacturer and the respective end customer. The sales agent model is particularly suitable if the manufacturer is interested in close customer loyalty and does not want to leave control of the end customer relationship to the sales partner.

Distribution via authorized dealers

When the software is distributed by an authorized dealer (also referred to as a "reseller" or "distributor"), the reseller acts vis-à-vis the end customer in his own name and for his own account. He concludes contracts directly with the end customer for the provision of the software. The authorized dealer is a partner with an independent sales organization. By means of a contract with the manufacturer or an intermediary appointed by the latter, he assumes the task of distributing the contract products in the contract territory and promoting their sale. He or she aligns the functions and risks of his or her activities with this and can highlight the manufacturer's logo in addition to his or her own company name in business dealings.

The authorized dealer is an extended arm of the manufacturer, but independent. The authorized dealer has a continuing obligation with the manufacturer to distribute the software and acquires the rights of use and distribution required for the distribution. These are usually non-exclusive rights, limited in time and space to a certain contractual territory, which he can pass on to the end customer to a specified extent.

If a maintenance or support contract is concluded directly with the manufacturer, the contract between the manufacturer and the authorised dealer then also has the elements of a commercial agent, which is a challenge for contract drafting, particularly in the case of standardised contract terms, and which must comply with the transparency requirement of Section 307 of the German Civil Code.

Contractual constellations

The possibilities of direct and indirect distribution result in a number of constellations for a software manufacturer that can be encountered in practice:

• Distribution via a direct contract between the manufacturer who developed the software and the end customer,
• Distribution via a direct contract between the manufacturer who developed the software and the end customer, whereby the conclusion of the contract was mediated via a third party as a commercial agent,
• Distribution via a contract between the manufacturer and an independent third party who, as an authorized distributor of the externally developed software, is entitled to provide it to the end customer in his own name,
• Distribution through a so-called OEM (Original Equipment Manufacturer) reseller: As an OEM reseller, the reseller is also required to distribute the software only in conjunction with another application,
• Distribution via an independent third party who converts the software together with his own software (and possibly hardware) into a system and then provides this to the end customer (similar to the VAR - Value-Added Reseller),
• Distribution via an independent third party who integrates the software together with his own software and third-party hardware into machines he has developed or manufactured himself and hands over these machines, e.g. as a production machine, to the end customer together with the software product as a so-called embedded system - see also our article on the use of open source software in embedded systems.
• Joint distribution strategy of manufacturer and distributor, but separate contracts with the common end customer (SHAP contract).

Under the authorized dealer model, it is customary for the authorized dealer to receive the right to grant his end customers a - more precisely defined - right of use in perpetuity for a one-time fee for the duration of the contract. The software is provided to the distributor either as a ready-for-sale copy or as a master copy with the right to make copies. Increasingly, the distributor is also granted the right to offer rental licensing models (SaaS and ASP), which then also has an effect on the rights to defects in the relationship between the distributor and the manufacturer.

It is often envisaged that a maintenance and support contract will be concluded directly between the end customer and the manufacturer and that the authorised distributor will only act as an intermediary. Some manufacturers oblige the sales partner to conclude a maintenance contract with the manufacturer when concluding a software transfer contract with the end customer. If the conclusion of a maintenance and support contract is only brokered by the distributor, the distribution contract also has elements of an agency agreement.

Arrange rights and duties

The contractual constellations result in very different rights and obligations for manufacturers and sales partners. Therefore, manufacturers and distribution partners should clarify at the beginning of their cooperation which constellation best accommodates the distribution of their software. We advise manufacturers and distribution partners of software products on the drafting of contracts and help them to identify and contractually regulate the relevant issues.

Michaela Witzel, LL.M. (Fordham University School of Law), Certified Expert for IT Law