Earlier this year, we looked at the importance of providing notice of restrictions in distributor agreements and seller agreements. When defendants are unaware of the restrictions of sales to resellers in distributor agreements, the tortious interference claims can fail.
In the second part of the “series,” we take a closer look at distributor agreements. Specifically, here we will briefly discuss the different types of restrictions that a company can put in its agreements that will support claims for tortious interference.
As a recap, the elements of tortious interference are:
- A valid contract;
- knowledge of the contract;
- intent to interfere with the contract;
- actual interference that is improper; and
The point of this post is to explain how a company can create a situation in which someone who buys products from an authorized seller for the purpose of reselling them is inducing a breach of the seller’s agreement with the company. This helps satisfy the “actual interference” element of the claim.
There are a number of different approaches a company take to achieve the same result:
- restricting sellers from selling to resellers;
- requiring sellers to sell only to end users of the product; and
- restricting sellers from selling in quantities greater than usual for personal use.
When companies incorporate one or more of these restrictions into their seller agreements, any time a third-party reseller purchases products from an authorized seller, he or she will have breached the agreement. If, for example, a company prohibits authorized sellers from selling products to resellers, any authorized sellers who sell products to third-party resellers breaches their distribution agreements.
Moreover, a quantity restriction is useful because it is more objective. This is because sales of mass quantities suggest an intent to resell.
Furthermore, it might be worthwhile to include more than one restriction. For example, a seller prohibited from selling to resellers might not know that a purchaser is a reseller. But if the seller is also restricted from selling in large quantities, the seller would knowingly breach the contract if he or she sold the product in large quantities.
A large quantity restriction might not be enough either. This is because some sophisticated unauthorized sellers order products from many sources.
For companies that have tight control over their distribution systems, these provisions will allow them to go after nearly any reseller for tortious interference. This is because the only sources of products are authorized sellers who are contractually prohibited from selling to resellers or selling in large quantities.