China

Selling Your Product Into China Via A Distributor Agreement

There are a lot of ways to sell your product in China. Whichever you choose, make sure you've protected yourself.

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Our China lawyers often get calls from companies that want to get their product into China or increase sales there. These companies often believe that they have two choices: go it alone via a China WFOE or form a joint venture with a Chinese company. Entering into a distributorship relationship with a Chinese company (or companies) is another option. From a strictly legal perspective, distribution (and reseller) relationships between foreign and Chinese companies are fairly straightforward. They certainly are easier and less risky than joint venture deals and typically far less costly and time consuming than going it alone via a WFOE.

From a business perspective, taking most products into China (be they industrial or consumer), marketing it, selling it, and then delivering it, is a massive task for any foreign company. China is a big and diverse country and it should be viewed as many markets, not just one. Using an experienced Chinese distributor or distributors is oftentimes the best way for American companies to sell their product in China.

Distribution contracts with Chinese companies can have much in common with US distribution agreements, but they also almost always also have stark and important differences. The United States provides distributors with all sorts of legal protections. In the United States, it can be difficult or expensive to terminate a distributor and it is not at all unusual for distributors to pursue litigation when their distribution relationship terminates. Chinese law has no special protections for distributors. China has no requirement for payment of any special compensation to a distributor whose distributorship is terminated. For these reasons our China distribution agreements nearly always provide for applying Chinese law in a Chinese court. For these same reasons, we typically do not bother with provisions that try to work around distributor protections.

One big issue in China with nearly all distributor agreements is IP protection. We usually put into our distributor agreements what we call a “no registration” provision to further protect our clients’ China trademarks. In this provision, the distributor agrees that our client has exclusive ownership of all trademarks or other IP that might be at risk, that the distributor gains no rights to those trademarks, and that the distributor will not register any IP in any way related to our client’s IP. We use the words “further protect” because the first line of protection for your trademarks in China is to register them properly in China.

One other difference between a Chinese distribution agreement and that for the United States is that the signature line in a Chinese distribution contract should provide a place for the distributor to affix its company seal as unsealed distribution contracts are arguably not valid under Chinese law.

Since China’s Anti-Monopoly Law prohibits retail price maintenance — which includes requiring a distributor sell the goods at a minimum resale price to third parties — China distribution agreements should not require the distributor sell its goods at a certain price.

Do not forget the option of using a distribution relationship to get your product into China as doing so can be both relatively simple and effective.

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Earlier: The Agony And The Ecstasy Of Forming A China Subsidiary Company (WFOE)
China Joint Ventures: How Not To Get Burned

Dan Harris is a founding member of Harris Moure, an international law firm with lawyers in Seattle, Chicago, Beijing, and Qingdao. He is also a co-editor of the China Law Blog. You can reach him by email at firm@harrismoure.com.

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