1. PRODUCT CONCEPTION & DESIGN

2. PRODUCT MANUFACTURE & PROCUREMENT

3. PRODUCT MARKETING

4. PRODUCT DISTRIBUTION

5. POST PRODUCT SALE

1. PRODUCT CONCEPTION & DESIGN

All manufacturing companies start with an idea.  An idea of a particular product they want to manufacture and sell because there is market-driven need for that product.  Successful companies not only discern how to manufacture and sell such products, but also how to protect their ideas from other companies similarly situated.  Whether they are manufacturing a simple toaster oven or the heat shield that protects a Space Shuttle from disintegrating in space, manufacturers must make full use of the patent and trademark process to secure the rights to their technology or innovation and protect their branding against infringement or misappropriation by outsiders.  Prudent manufacturers will also protect themselves from the inside as well, by adopting procedures to induce their most vital assets, their people, to remain loyal both during and after their employment.

Patent Clearance & Prosecution

When considering the introduction of a new product it is of paramount importance to know the patent landscape confronting your effort.  For example, knowing whether or not one or more of your competitors already claims the patent rights to some of the fundamental features of your product or its core technology should be a factor in deciding how, or even whether, to enter the market.  It is frequently the case that your competitors have also recognized the opportunity and are also working hard to develop technologies in the same or related space as your own. 

Thus, the prudent manager will want to evaluate the risk of having an investment in the introduction of a new technology or a new product derailed by a competitor’s patent infringement suit.  Toward that end, management should conduct a product clearance study, so that it can determine: (i) whether anyone else has moved to lock up the patent rights – in which case the innovator should move quickly to patent the new features; or (ii) whether the company is wading into a “patent thicket” in which many others may already have established priority rights to the technology.

In either case, if the company decides to move forward with introducing the new product into the marketplace, a well-considered patent procurement strategy can contribute mightily to the ultimate success of the venture.  For example, the early innovator can move quickly to acquire the patent rights to core features or at least to particular features which provide competitive advantage in the market.  Even late-comers can protect themselves by patenting their particular variations of the product, thus building a defensive war chest of patents they can assert in a counterclaim to an infringement allegation, if necessary.

The recently-enacted America Invents Act now applies the principle of awarding patent rights to the first inventor to file a patent application for a given invention, rather than the historic principle in the U.S. of awarding such rights to the first to invent.  The AIA also creates new procedures for challenging the validity of issued patents, which can be important when a manufacturer is facing an infringement allegation or in attempting to clear out a competitor’s patent. 

Branding

Before expending substantial funds to build brand awareness in the market, a manufacturer should investigate whether or not the proposed brand name has already been taken by another.  If a competitor or another entity has already been using the same name (or a similar-looking or sounding name) in selling similar goods and services, the later use can result in a trademark infringement action.  Such legal actions are often accompanied by various additional claims under state laws or even federal Lanham Act claims of deceptive trade practices, under the theory that the later user is seeking to hijack the brand-awareness investment made by the earlier user.

It is important, therefore, for manufacturers to conduct a product name and trade name clearance investigation prior to undertaking expensive branding and marketing operations.  Otherwise, the later user can unknowingly stumble into a situation in which the company is forced to compensate the earlier user, or is forced to change a brand name at great expense.   It can often be advantageous to register a trade name or brand name with the U.S. Patent and Trademark Office.  Registration has several advantages, not the least of which is to discourage competitors from adopting misleadingly similar branding.

Safety Analysis

Safety analysis is a critical aspect of product conception and design.  Failure to conduct a proper safety analysis can lead to both product liability litigation and regulatory action.  In order to conduct a proper safety analysis, a manufacturer must maintain a process for ensuring that it has the expertise to evaluate product concepts for safety.  Once a concept is approved, a manufacturer must have detailed procedures for analyzing a product and ensuring that it has a safe design, based both on compliance with voluntary standards and the company’s history with the product.  Safety analysis also includes the creation of a product test plan and conducting the tests called for by the plan.  Finally, a manufacturer must develop document and data retention policies to ensure that the safety analysis is preserved and available for use in the future.

Trade Secrets & Confidentiality Agreements With Key Employees

It has been said that the most important assets of any company walk out of the building at the end of each work day.  This is increasingly true as intellectual assets make up more and more of the valuation of any company, with some studies claiming that as much as 80% of the total valuation consists of intangible assets as compared to the physical plant, property, and equipment.

Accordingly, a manufacturer must be certain that its intellectual assets are maintained securely and safely.  All states have laws designed to provide legal remedies against improper disclosure of trade secrets.  The list of information that a company can protect under trade secret law is broad and includes not only formulas and manufacturing processes, but can also include customer lists and any other proprietary information that would be damaging to the company’s market position if exposed.  One common element of all trade secret laws is that the owner of the trade secrets has a duty to take certain affirmative steps to protect the proprietary information.  Otherwise, the information may not be accorded trade secret status under the law and competitors may then be able to freely use the supposedly secret information. 

In addition to organizational safeguards, individual employees should be required to securely maintain the confidential information of the company and reminded of their obligations.  A well-drafted confidentiality agreement can serve as a deterrent to inadvertent and intentional disclosure of valuable company information.  Confidentiality provisions are often incorporated into an employment agreement; however, a separate confidentiality agreement can be equally as useful to this purpose. The confidentiality agreement should set forth the employee’s obligations, and should specify the duration of the employee’s duty to preserve the employer’s confidences.

It is also important to use a non-disclosure agreement when discussing possible joint operations with any other person or entity outside of the company.  It should be made clear that the company values its intellectual property, including proprietary technology and trade secrets, and will take action to protect it rights in these assets.

Embedded Software Clearance, including Open Source Software

Many new products include a software component, and almost all contemporary software projects include varying degrees of re-useable code.  Such re-useable code components, known as “open source,” are often taken from the public domain.  Although this code is free for the taking, it is not always free from use obligations, especially when the open source code is being used for commercial profit.  The user of the “free” code is subject to an open source license which typically requires, among other things, a requirement that the code provider be given clear source attribution in the user’s software documentation.  In addition, any improvements or modifications to the open source code made by the user may have to be made available to the open source code provider at no cost.  Violations of the open source policies can result in harmful publicity and legal consequences.  Thus, a manufacturer should audit the sources of the software components in a new product, so that the company can be fully aware of its open source user obligations.

2. PRODUCT MANUFACTURE & PROCUREMENT

A sound and efficient process for the procurement of its own requirements is vital to the success of every manufacturer because a manufacturer cannot sell what it cannot purchase or make.   The procurement needs of each manufacturer are unique, but common needs include contracting for sourced products, component parts and/or raw materials, developing the capacity for in-house manufacturing and/or assembly, and commissioning independent product testing and certification.  Regulatory compliance needs of manufacturers typically include import and/or export licensing, product safety compliance and avoidance of improper payments. Finance and credit issues that must occasionally be addressed by manufacturers include trade finance and supplier insolvency and bankruptcy.  Addressing supplier insolvency and bankruptcy is not only a credit concern, but can be vital to maintaining a manufacturer’s supply chain continuity and product availability. Reliable product procurement can also be achieved through acquisitions to enable product line and geographic expansion.

Contracts for Sourced Products/Components/Raw Materials

A cornerstone of a manufacturer’s product procurement function is contracting for sourced products, component parts and/or raw materials. In addition to product identification and pricing, the vital business issues to be addressed in procurement contracts include defining the nature of the supply relationship, such as scoping the commitment by reference to forecasting requirements and consequences, product requirements or output, entitlement to consignment of inventory and whether the parties are in an exclusive or non-exclusive arrangement.  Procurement contracts often address the ownership of intellectual property and the ownership of, maintenance of and access to tooling.  In addition, procurement agreements address important issues of risk allocation, through the inclusion of representations, warranties and indemnification provisions, insurance requirements and rules regarding the application of governing law and venue and forum selection, which can be especially important in contracts between parties from different countries.  Increasingly, procurement agreements are vital to manufacturers’ corporate social responsibility programs, addressing issues such as working conditions and environmental impact, and the manufacturer’s audit rights.

In-house Manufacturing/Assembly

A manufacturer that manufactures or assembles products at its own plants will be faced with a variety of operational issues related to its plants, beginning with the procurement of the plant by acquisition and/or construction, and attendant financing needs.  Operating a plant will involve the management of the manufacturer’s work force, including compliance with the many federal and state laws regulating the relationship between employer and employee, such as the laws regarding discrimination, wages, labor relations and safety.  Plant operations will ordinarily also require compliance with laws regulating environmental impacts.  A manufacturer will enter into numerous contracts related to the operation of a plant, ranging from utility supply agreements to waste disposal to maintenance agreements.  Operating a plant also impacts a manufacturer’s risk profile and should be considered in developing the manufacturer’s insurance and risk management programs.

Independent Product Testing & Certification

Many products (both consumer and industrial) are covered by voluntary industry standards, such as Underwriters Laboratories (UL), ASTM, or IEC.  These consensus standards establish the baseline for safety and performance, and are critical to a personal injury and property damage liability management strategy.  Compliance is demonstrated through testing and certification by independent outside laboratories.  Most retailers and purchasers insist on compliance with these standards in their purchase and sale contracts.  In addition, governments increasingly are adopting these standards as mandatory legal obligations.

Improper Payments

Improper payments in connection with sales activities outside of the US may constitute violations of the bribery section of the FCPA. The FCPA prohibits payments to foreign officials to obtain or retain business or secure an improper business advantage. The meaning of "foreign official" and what constitutes an instrumentality of a foreign government remains the subject of a fact-specific analysis.  The FCPA statute defines a foreign official as "any officer or employee of a foreign government" and to those acting on the foreign government's behalf.  Accordingly, there is no distinction within the FCPA for improper payments to low-level employees or high-level governmental officials.

FCPA liability also extends to agents, representatives, and distributors of a US based company.  Some US manufacturing companies have argued that, for purposes of FCPA liability, distributors are different from other types of representatives such as sales representatives, agents, resellers or even joint venture partners.  However, the DOJ has rejected that argument and has taken the position that a US company’s FCPA responsibilities extend to the conduct of a wide range of third parties, including the aforementioned company sales representatives, agents, resellers, joint venture partners, and also to its distributors.

Hospitality, gifts, and travel: The government maintains that “corrupt intent” is the focus of FCPA prosecution for hospitality, gifts and travel.  While the government has stated that an organization must have "clear and easily accessible guidelines and processes" for gift giving and hospitality, the DOJ and SEC only seek to prosecute payments that are truly bribes disguised as gifts.

The government has asserted that under normal circumstances, the FCPA is not violated by providing prospective government customers at a trade show with refreshments or promotional items such as logo t-shirts or hats.  Again, corrupt intent is the focus of prosecution.  Expenditures that are modest, in line with local custom, or similar to what company employees are entitled to in similar circumstances are likely to be permissible.  Moreover, it would also be permissible for a company to invite these same customers or potential customers for drinks or a moderate meal at the end of the day.  The key is avoiding situations that exceed normal business meetings and dinners, and create the appearance of rewarding a foreign official for business.

Companies are often faced with the challenges of foreign environments that encourage gift giving as part of the business culture.  The government has determined that this is not necessarily prohibited.  For example, the government says that no law is violated where a moderately priced crystal vase is presented to a general manager of a foreign government-owned entity as a wedding gift.  "Tokens of esteem or gratitude" are permissible where they are appropriate under local law, customary where given, reasonable for the occasion, and properly recorded in the company's records. 

Many companies bring foreign officials to the United States for contract negotiations, site visits, or training.  The guide makes clear that such travel is appropriate where there is a legitimate purpose such as training or a performance review.  Indeed, even business class airfare, an item often prohibited without exception, is permissible for foreign officials where appropriate to the length of the trip and provided on the same terms as to the company's own employees.  Meals and moderate entertainment that make up a small part of total costs are likewise permissible.  In contrast, as would be expected, the government suggests enforcement proceedings would result from trips to cities where there is no tie to a business contract or company office, trips involving spouses or family members, or where the purpose is to provide an incentive for the official to misuse his or her position or influence.

In sum, a US company doing business overseas should maintain the following principle: a company should pay for services only when there is adequate documentation, justification and verification of the payment.  To avoid these pitfalls, a company should establish and implement comprehensive corporate compliance programs that meet the requirements delineated by the DOJ.  A company should also develop and implement compliance training programs and develop and maintain a culture of compliance that promotes transparency and risk minimization.  A company should periodically review and monitor its third-party relationships and outside vendors, perform background checks and request certifications from third-parties, and perform periodic global risk assessments.

Books and Records Violations

FCPA liability can also arise from books and records and internal control violations.  The FCPA's books and records rules are not limited to payments made to government officials.  Rather, commercial bribes, embezzlements, and proceeds of fraud or export control violations can create liability for issuers subject to these provisions.  The DOJ and SEC have brought cases where both government bribes and commercial bribes occurred, but the government has stated that either a books and records violation or an internal controls violation can be a stand-alone case based solely on a commercial bribe.

Recently, the SEC’s settlement with Oracle over alleged FCPA violations represents a broad interpretation of the FCPA statute.  In this case, Oracle agreed to pay a $2 million penalty for violation of the books and records and internal controls requirements by its subsidiary in India, Oracle India Private limited (Oracle India). In sum, Oracle India employees created a scheme where they misappropriated funds from certain sales to the Indian government and concealed the existence of those funds.  This scheme resulted in the misappropriated funds not being properly booked by Oracle.  The total amount of the misappropriated funds was approximately $2 million. These funds were ultimately used to pay ”storefronts”, or  phony vendors, in India based on fake invoices.  None of the storefronts were on Oracle’s approved vendor list.

There is no question a company should keep accurate books and records to find errors in its internal controls. Unfortunately, no company is perfect and weaknesses in internal controls are a continuing problem auditors face.  However, in this FCPA investigation, one important component of FCPA liability was missing: there was no evidence of a bribe being paid to any Indian government official. The government’s investigation was based on the “risk” of bribery or embezzlement, not evidence of payments made to government officials.

Import/Export Licensing

In a global economy, many materials, parts, and components are sourced from abroad.  Also, international markets are a large part of many business plans.  Importing and exporting, however, involve many issues that have the potential to create unanticipated costs.  Thus, it is important for companies to consider import and export costs, restrictions, and logistics as early in the product development, sales, and distribution process as possible.  These considerations include import tariffs and restrictions/licensing requirements (for some goods), refunds of duty for imported goods to be consumed or exported again in “drawback” filings, and licensing requirements for exports of certain goods, services, information, and technologies.  In addition, U.S. trade sanctions laws and the Foreign Corrupt Practices Act (and similar anti-bribery laws focused at the private and public sector) often affect the way companies do business internationally.  Depending on a company’s distribution arrangements, it may also be necessary to consider import restrictions, tariffs, and similar cost factors in other countries.

Product Seizure for Non-Compliance with Safety Regulations

The increased use of low-cost-country sourcing and the concern about health and safety risks from Chinese and other Far East manufactured goods has resulted in an increased scrutiny of imported products.  The United States and the European Union, in particular, have beefed up their customs and import regulators with product safety inspectors and have used the Draconian seizure and destruction remedies for products suspected of noncompliance with product safety regulations.

It is essential that manufacturers or retailers importing regulated products understand both product safety regulations and customs requirements, and know how to navigate in both worlds. 

Supplier Insolvency & Buyer Remedies

The insolvency of a supplier, even short of bankruptcy or receivership, presents a myriad of issues to be considered from the perspective of both the supplier and the buyer.  Suppliers, as well as buyers, have certain rights and remedies in addition to those rights and remedies that may be included in any formal contract between the parties to the extent one may exist.  A buyer confronted with a seller’s insolvency must carefully consider the financial condition of the supplier and its immediate, as well as long term, product requirements.  A well-thought-out strategy, both short and long term, requires that a buyer consider the immediate rights that may be available including the potential right to adequate assurance of future performance and substitute goods.  Other immediate considerations may focus on alternative sourcing of product and timing related thereto, including defensive and offensive measures, to minimize any disruption in the supply of the product to the buyer and the buyer’s end user.

Supplier Bankruptcy & Buyer Remedies

The bankruptcy of a supplier presents many issues to be considered from the perspective of both the supplier and the buyer.  Suppliers, as well as buyers, have certain rights and remedies in addition to those rights and remedies that may be included in any formal contract between the parties, to the extent one may exist.  In addition to matters that must be considered pre-bankruptcy when the supplier may be insolvent, the Bankruptcy Code requires further considerations for a buyer.  The nature of the contract between the parties may dictate certain rights going forward, including the ability (or inability) of the parties to terminate the supply relationship.  A buyer confronted with a seller’s bankruptcy proceeding also must take affirmative action in the bankruptcy case to protect its pre-petition and post-petition claims both through the claim reconciliation process and through any plan confirmation process.  Failure to protect such rights may result in a waiver of such rights.

Trade Finance

Trade finance tools, such as letters of credit, are typically associated with security for payment of receivables resulting from product sales; however, they can be effectively employed in the context of procurement of raw materials and production of equipment required for the manufacturing process.  Although US banks are prohibited from issuing performance guarantees, standby letters of credit can be constructed to achieve a similar result by giving the beneficiary the right to demand payment from the issuing bank in the event that one of its suppliers does not provide the specified commodities/raw materials on a timely basis.  If a manufacturer requires additional equipment or machine tooling for the fabrication of its products, standby letters of credit can be used to secure the payment of deposits and progress payments, as well as timely delivery and warranties.  A standby letter of credit can be confirmed by the manufacturer’s own bank, offering the convenience of presenting the required draw documents to its own bank and converting the credit risk to one with which it is already comfortable.  Bank guarantees can be issued by foreign banks to accomplish essentially the same result; however, guarantees can be subject to legal defenses not applicable to demands for payment under letters of credit, making the latter a safer choice.

Acquisitions to Enable Product Line and Geographic Expansion

Manufacturers may seek to grow their product line offerings through the acquisition of businesses that are engaged in manufacturing products that are closely related to its own.  Similarly, distributors may pursue geographic growth through the acquisition of similar distributors who operate in different and, sometimes, contiguous or overlapping geographic territories.  Such acquisitions can offer great opportunities for growth and the realization of synergistic revenue enhancement and cost reduction.  Because such transactions involve businesses that compete, or easily could compete, with each other; however, great care is warranted.  It is important that the parties recognize the possibility that a potential transaction ultimately will not be consummated and take steps to limit the adverse consequences.  For instance, having in place comprehensive agreements limiting the use and disclosure of confidential information provided by one party to the other, limiting access to such information and prohibiting unilateral public disclosure of the potential transaction can ameliorate the risks associated with a failed transaction. An even better approach is not to pursue transactions that are not likely to be consummated.  The likelihood of consummation can be increased by assuring that the parties are in agreement with the important deal terms through the negotiation of letters of intent, term sheets and similar preliminary agreements and by avoiding transactions that implicate likely deal killers, such as the inability to obtain antitrust clearance, financing or necessary third party consents.

3. PRODUCT MARKETING

A critical aspect of any business is the interaction between the company and its customer. Whether through traditional advertising, social media or the design of a product and its packaging, companies spend a lot of time and money trying to leave an impression with their customers. The right impression is priceless, while the wrong impression can be costly.

Packaging & Labeling

The packaging and labeling of a product is a critical component of the success of the product and companies should spend substantial time and money on this aspect. Sometimes overlooked in the design process are the legal components of packaging and labeling. There are a number of federal and state laws that dictate what needs to be included on packaging and labeling and in some instances where it must be located.  Product packaging and labeling must or can include items such as: the name and address of the manufacturer, importer or distributor of the product; the identity and quantity of the product; the country of origin of the product; warranty information; product safety warnings; claims about the products, and various other things. A prudent manufacturer will evaluate compliance with these rules early in the product and labeling design process in order to avoid costly and time consuming re-designs.

Advertising

Advertising takes many forms and occurs in numerous and varied outlets from television commercials to print ads to viral internet campaigns. What a company says and how the company says it is subject to numerous federal and state laws and regulations. Whether it is a claim about a product, a celebrity endorsement or a comparison to a competitor’s product, the pitfalls are many. Appropriately considering applicable requirements will allow a company to clearly deliver its advertising message without undue risk.

Environmental/"Green" Claims

The ever-increasing consumer demand for environmentally conscious products requires effective communication of a product’s environmental and health benefits.  Like the products themselves, the regulatory framework governing green marketing claims continues to evolve and there are various federal and state laws that could apply depending on the type of claim being made.  Manufacturers must ensure that claims made about the environmental attributes of a product are fair and non-deceptive.  To do this, all reasonable interpretations of a claim must be truthful, not misleading, and supported by a reasonable basis.  Manufacturers must be aware of who their customers are, who the ultimate users of their products are, and how those customers and users will interpret claims.  Further, a reasonable basis in the environmental context requires sufficient competent and reliable scientific evidence to substantiate the claim.  Prudent manufacturers will begin thinking about environmental marketing claims early in product development so that the necessary requirements can be met for environmental claims to be included on packaging, labels and advertisements.

4. PRODUCT DISTRIBUTION

Effective distribution of a manufacturer’s products requires coordination of its operations, marketing, sales, and logistics resources and raises contractual and legal concerns.  Having appropriate transportation, manufacturer’s representative, distributor, and customer contracts in place can assure that all counterparties to the distribution process are committed to the manufacturer’s distribution plan.  These contracts must be coordinated with the manufacturer’s distribution policies such as its Minimum Advertised Price Policy, Authorized Reseller Policy and Co-op Advertising Policy.  Additionally, the contracts and policies must comply with a variety of state and federal laws, including antitrust laws that limit a manufacture’s ability to sell at different prices, engage in resale price maintenance or otherwise restrict the sale of its products by its distribution channel counterparties.  Manufacturers must also be mindful of a plethora of other laws, including statutes that limit its ability to terminate distribution channel counterparties.

Transportation/Logistics/Warehousing Contracts

Transportation logistics and warehousing involve a multitude of contractual and compliance issues.  The effective and efficient distribution of products from the point of manufacture to the point of consumption often requires coordination among manufacturers, carriers, third-party intermediaries, retailers, and distributors across diverse transport modalities.  Manufacturers must navigate regulatory compliance issues, including hazardous materials transportation, safety, security and customs requirements, and must also implement appropriate transportation and warehousing contracts to account for risk of loss associated with casualty, freight loss and freight damage claims.

Contracts With Customers

The relationship of manufacturers and distributors with the purchasers of their products implicates many legal concerns.  The documentation of the contractual relationship between those parties should address all of the relevant aspects of the relationship, be consistent and comply with various federal and state laws.  Too often, contracts between the vendor and the customer do not satisfy these requirements.  When contracts are not in place or are incomplete, governance of the legal relationship defaults to state law, such as Article 2 of the Uniform Commercial Code, which may or may not reflect the understanding of both parties.  When the parties issue conflicting documentation, such as purchase orders and order acknowledgement forms, or fail to integrate their policies, a “battle of the forms” results with a great risk of disputes between the parties and uncertain results.  Contracts that are inconsistent with relevant law are not enforceable.  In such cases, one of the parties can be surprised at the disparity between the contractual provisions and those that actually apply.  For instance, a manufacturer who fails to realize that it is subject to state distributor termination statutes can be unpleasantly surprised when it learns that the contractual provisions allowing it to terminate a distributor at will is not enforceable, especially if it has based other business decisions on its erroneous reliance on such contractual provisions.  Finally, certain contractual provisions, such as those contemplating exclusive relationships or providing similarly situated customers with disparate pricing or promotional benefits may implicate the antitrust laws.

Distribution Policies and Programs

One of the challenges that a manufacturer often faces is aligning its distribution network to its broader strategic goals and marketing aims.  Without proper policies and guidelines, a manufacturer can find that its products are being marketed and sold in a manner that is inconsistent with its business interests and detrimental to its brand.  Developing resale policies and programs that guide and incentivize resellers to adhere to desired resale practices can be essential to success in the marketplace.

  • Discounts, Rebates and other Promotional Programs offered to distributors often raise issues of price discrimination under the Robinson-Patman Act.  This risk can be avoided by structuring such programs to conform with certain statutory and judicially created defenses and justifications, including practical availability, cost-justification, functional discounting and meeting competition.
  • Resale Pricing Issues:  Steep discounting of a manufacturer’s product below suggested resale prices (especially on the Internet) is a problem that manufacturers frequently confront. Evolving legal standards and inconsistencies between current federal law and the laws of certain states make dealing with this problem more challenging today than ever before.  In evaluating these complex issues, manufacturers must weigh the risks and benefits of various options, including Unilateral Pricing (or “Colgate”) Policies, Minimum Advertised Pricing (“MAP”) Policies, and, if advisable, Resale Price Maintenance (“RPM”) Agreements.  
  • Authorized Reseller Policies: Careful selection of qualified distributors and retailers is essential to ensuring that a manufacturer’s products are properly represented and positioned in the marketplace.  An Authorized Reseller Policy (“ARP”) that requires resellers to meet certain minimum criteria and to comply with certain rules (i.e. - “non-price vertical restraints”) in order to serve as an authorized reseller is the cornerstone of a selective distribution strategy.
  • Promotional Allowances; Co-op Advertising:  To assist in the promotion of their products, manufacturers frequently offer resellers promotional allowances and cooperative advertising funds.  Such programs can be part of a MAP Policy that offers funding to Resellers as an incentive to advertise a manufacturer’s product at or above suggested pricing.  Although often effective in promoting one’s brand, such programs can give rise to antitrust issues under the Sherman Act and under the Robinson-Patman Act, as interpreted by the FTC’s “Fred Meyer Guidelines.”

Customer Insolvency and Seller Remedies

The insolvency of a customer presents many issues to be considered from the perspective of both the supplier and the buyer.  Suppliers, as well as buyers, have certain rights and remedies in addition to those rights and remedies that may be included in any formal contract between the parties to the extent one may exist.  A customer confronted with insolvency creates great concern for its seller.  A seller should assess its rights and remedies immediately upon detecting the signs of insolvency, as many of such rights are time sensitive and will be lost if not timely exercised.  For example, a seller seeking to stop goods in transit may exercise such remedies in a very limited timeframe.  Likewise, a seller’s ability to preserve its rights to reclaim goods is limited in time.  Not only must the seller consider immediate matters, but it should consider a longer term approach to maximize its recovery from its financially troubled customer.  Collection actions also should be carefully considered, not only from the perspective of the likelihood of collection, but with careful consideration of any potential counterclaims that may be asserted.

Customer Bankruptcy and Seller Remedies

The bankruptcy of a customer presents a myriad of issues to be considered from the perspective of both the customer and the seller of goods.  Customers, as well as suppliers, have certain rights and remedies in addition to those rights and remedies that may be included in any formal contract between the parties to the extent one may exist.  In addition to matters that must be considered pre-bankruptcy when a customer has become insolvent, the Bankruptcy Code adds further considerations for a customer’s seller.  The nature of the contract between the parties may dictate certain rights going forward, including the ability (or inability) of the parties to terminate the supply relationship.  A seller should quickly assess the bankrupt customer’s need for product (i.e., is the product fungible).  A single sourced customer will likely seek to maintain the supply relationship, presenting an opportunity for the seller to negotiate favorable terms in a bankruptcy proceeding. All sellers confronted with a customer’s bankruptcy proceeding must take affirmative action in the bankruptcy case to protect its pre-petition and post-petition claim both through the claim reconciliation process and through the plan confirmation process.  Failure to protect such rights may result in a waiver.  Sellers receiving payment from the customer prior to the bankruptcy filing must also beware of potential preferential transfer exposure.  In that regard, taking a proactive approach to minimize such exposure prior to a customer’s bankruptcy may be prudent.

5. POST PRODUCT SALE

Once the product is fully designed, manufactured, marketed and ultimately sold, product issues for manufacturers remain.  In the consumer product context, manufacturers must focus on product safety issues to ensure that they are complying with the Consumer Product Safety Improvement Act (“CPSIA”).  Specifically, manufacturers must track, analyze and report product liability judgments or settlements involving specific models of consumer products pursuant to Section 37 of the CPSIA.  Failure to heed to its regulatory compliance responsibilities could subject a manufacturer to product recalls, both voluntary and at the request of the Consumer Product Safety Commission.  These recalls have the potential to cause a manufacturer to incur substantial penalties.

Aside from product safety issues, manufacturers also must evaluate and develop a strategy regarding generic product warranty claims and customer returns, including developing a program for providing product service and replacement parts to its customers that experience performance issues or failure of the products.  In that regard, manufacturers also must determine whether and to what extent they are comfortable pursuing recovery of costs from product and component part suppliers, most of which can be valued business partners of the manufacturer.  Creating an environment with your business partners where recovery of these costs are common-place and not viewed as adversarial may be critical to the long term viability of a product line.  When negotiating their contracts, manufacturers are wise to require business partners to carry liability insurance to cover these types of claims. 

Product Sale

Once the product is fully designed, manufactured, marketed and ultimately sold, product issues for manufacturers remain.  In the consumer product context, manufacturers must focus on Product Safety issues to ensure that they are complying with the Consumer Product Safety Improvement Act (“CPSIA”).  Specifically, manufacturers must track, analyze and Report product liability judgments or settlements involving specific models of consumer products pursuant to Section 37 of the CPSIA.  Failure to heed to its Regulatory Compliance responsibilities could subject a manufacturer to product Recalls, both voluntary and at the request of the Consumer Product Safety Commission.  These recalls have the potential to cause a manufacturer to incur substantial Penalties.

Aside from Product Safety issues, manufacturers also must evaluate and develop a strategy regarding generic Product Warranty Claims and Customer Returns, including developing a program for providing Product Service and Replacement Parts to its customers that experience performance issues or failure of the products.  In that regard, manufacturers also must determine whether and to what extent they are comfortable pursuing Recovery of Costs From Product and Component Part Suppliers, most of which can be valued business partners of the manufacturer.  Creating an environment with your business partners where recovery of these costs are common-place and not viewed as adversarial may be critical to the long term viability of a product line.  When negotiating their contracts, manufacturers are wise to require business partners to carry Liability Insurance to cover these types of claims.

Product Safety

Once a product enters the marketplace, it is vital that a manufacturer monitor the product for safety issues.  Post-sale monitoring requires the development of systems for identifying and monitoring data related to product safety.  Those systems need to identify issues that require regulatory reporting, for example to the U.S. Consumer Product Safety Commission, or recalls. Companies also need to analyze and respond to consumer complaints to regulatory agencies or the CPSC Internet database.

Post sale product safety also involves preparing for and defending both individual product safety lawsuits, multi-plaintiff toxic exposure claims and class actions.

Warranty Service & Disposal

Manufacturers may elect (and in some circumstances may be required) to provide warranties to direct and “downstream” purchasers of their products, and in doing so should also address available remedies and procedures in the event of breach of the warranty.  Ensuring that the warranty provided and remedies afforded are limited to those intended by the manufacturer requires applying the laws applicable to the creation of express warranties, and the limitation of express and implied warranties and remedies.

Recovery of Costs from Product and Component Part Suppliers

Often the product liability claims and product safety issues implicating the Consumer Product Safety Improvement Act that manufacturers face result from defects in component parts, materials, or even complete products the manufacturer purchased or SOURCED from separate suppliers. Such circumstances place these manufacturers in two separate, but related, roles – defendants in claims by their customers and potential plaintiffs in a “cost recovery claim” against the component part supplier. In nearly every such instance, the manufacturer and supplier have entered into a contract that, among other things, is designed to permit the manufacturer to recover such costs, but manufactures must balance their right of recovery against the threat of souring the future business relationship.  A prudent manufacturer will consider the nature and extent of the contractual relationship between it and the supplier, whether the supplier has insurance coverage, the personal injury or property damage claims asserted, the frequency with which such claims are received by the manufacturer, the overall financial wherewithal of the supplier, the feasibility of instituting litigation as a last resort, and the client’s claims-handling procedures with respect to the collection and retention of evidence.

Liability Insurance

Almost all manufacturers utilize various forms of liability insurance to mitigate post-product sale risks. Manufacturers, in order to acquire and maintain appropriate insurance coverage, must frequently re-evaluate the nature of their products, the volume of their sales, and the markets in which they deal. Only then can informed decisions be made regarding the various types and amounts of liability insurance that are available. Some manufacturers may be adequately protected by standard commercial general liability coverage, while others should consider additional coverages, such as product recall insurance.

The insurance maintained by key business partners (e.g., retailers) should also be considered and diligently monitored. Manufacturers commonly require their business partners to maintain certain types and amounts of liability insurance. To provide meaningful protection, these requirements should be evaluated on a relationship-by-relationship basis, not simply reiterated in every standard-form contract. Once the appropriate coverage for each business partner is agreed upon, steps must be taken to verify that the coverage is actually obtained and maintained during the course of the business relationship.

IP Infringement Enforcement and Indemnification

Successful products are particularly prone to intellectual property issues and offensive and defensive infringement actions.  Competitors often try to capitalize on the manufacturer’s success by copying product designs, trademarks, and packaging or trade dress. Depending upon what actions the manufacturer has taken to protect its intellectual property rights, a manufacturer may combat copycats through court action for design patent, device patent, method patent, trademark, trade dress or copyright infringement and unfair competition which, if successful, can lead to an injunction barring sales and seizing inventories, a judgment for damages and an award of attorneys’ fees. Because many counterfeit or copied products are manufactured overseas, a manufacturer may also seek assistance through the Department of Homeland Security and the International Trade Commission in stopping the copies at the U.S. border.

Successful products frequently draw the attention of holders of patents in related technologies, whether companies that manufacture a competing product or so-called “non-practicing entities” or “patent trolls” that own patents, but do not make any products. Either may bring an action for patent infringement against the manufacturer. If a patent infringement claim is brought against a manufacturer on the basis of an allegedly infringing component part, the manufacturer may be entitled to indemnification from the component supplier for damages and, depending upon the terms of the manufacturer and the component supplier, the costs of defending the infringement action.

Trade Secret --- Confidentiality Agreement Enforcement

A product may be produced through a manufacturing process that employs trade secrets belonging to the manufacturer. Under some circumstances the identities of manufacturer’s component and raw material suppliers or the manufacturer’s customers may qualify as trade secrets. If a product involving such trade secrets is successful, the value of those trade secrets increases to both the manufacturer and would-be competitors.  Competitors might try to learn those secrets through unauthorized access to the manufacturer’s computers, but frequently seek to acquire trade secrets by luring away employees who have or can acquire knowledge of the trade secrets. Manufacturers can combat attempts to steal trade secrets through court action against such competitors and/or employees for trade secret misappropriation, breach of confidentiality or non-disclosure agreements they may have with their employees, and potentially several other claims, which, if successful, can lead to an injunction barring disclosure and use of the trade secrets, a judgment for damages and an award of attorneys’ fees. As is the case with copied or counterfeit products, if a competitor uses misappropriated trade secrets to manufacture a product overseas, a manufacturer may also seek assistance through the Department of Homeland Security and the International Trade Commission in stopping the product at the U.S. border. The value of a trade secret can plummet if it becomes public, so manufacturers are wise to take action quickly if they suspect that trade secret misappropriation has occurred or is about to occur.