A business pursuing legal recourse against an unauthorized seller will likely find itself negotiating with him or her.
Settlement agreements should be fact-specific. Thus, a business should not recycle a standard agreement and use it in every case. However, there are several things businesses should always consider when negotiating with unauthorized sellers.
Most settlement agreements include some form of cash payment. The money serves as consideration for the business not filing suit against the unauthorized seller.
Before choosing an arbitrary dollar amount, businesses must ask questions such as:
- How much profit did we lose?
- How much product did the unauthorized seller move?
- How much money did the unauthorized seller make?
- How much can the unauthorized seller realistically pay?
In some cases, unauthorized sellers can afford to make large cash settlement payments. In other instances, sellers might not.
Or the unauthorized sellers might not have sold enough product to justify a large cash payment.
But they could provide compensation in other forms. For example: returning unsold products or agreeing to identify other unauthorized sellers, as discussed below.
Businesses might include liquidated damages clauses in contracts where it is might be difficult to determine the costs of damages for a breach of those contracts. Similarly, it can be difficult to quantify the damages suffered by the breach of a settlement agreement.
Therefore, it is always helpful to include a liquidated damages clause in any negotiated settlement agreement. This clause both serves to deter the unauthorized seller from breaching the settlement agreement and provides the company protection in cases where such a breach might occur.
Return of Products Purchased
Oftentimes, the unauthorized seller is still in possession of a large number of products during the negotiation period. It is important not to overlook the return of the product as a critical component in executing the settlement agreement.
In some cases, the amount of product in the diverter’s possession can reach into the tens of thousands of dollars. Thus, negotiating the return of the product is paramount.
If getting the product out of the hands of the product diverter is the business’s top goal, the return of product can also be used in lieu of a cash payment.
Agreement to Help Identify Other Unauthorized Sellers
There is often good reason to include a clause through which the unauthorized seller agrees to help identify other product diverters.
Access to this information can occur through either networking with other unauthorized sellers or by offering up services to these unauthorized sellers, such as finding them potential buyers or connecting them with other distributors.
Often the assistance from these unauthorized sellers is more valuable than any monetary compensation. And it can help unravel major product diversion schemes.
Choice of Jurisdiction
Another factor that businesses do not want to overlook is the state whose law will govern the settlement agreement. This is critical because some states are more lenient than others in terms of certain legal claims. These might include trademark infringement, tortious interference, and/or unfair competition or business practices claims.
In addition, businesses will want to be sure to choose a forum that: a) is convenient for them, and b) prevents them from having to litigate in the jurisdiction where the diverter lives.
Businesses that keep in mind each of these five considerations will be better suited for negotiating a settlement agreement that is both beneficial to them and agreeable to the unauthorized seller.
Further, by considering options other than large cash payments in exchange for not filing lawsuits, businesses may recoup more in lost product than they would have gained in monetary damages. Moreover, they might be able to bust even larger product diversion schemes.
In short, being open-minded will be most beneficial in the long run for businesses.
For more information, contact Vorys’ Illegal Online Seller Enforcement team at (513) 723-4823.