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A Better Partnership


Nov 2012
November 12, 2012

You Risk Liability When You Terminate a Dealer or Distributor

If you regularly sell your products to a business that resells them to others, then that business may be considered to be your "dealer" or "distributor." Depending upon the nature of your relationship with the dealer, the law may impose certain rules.

Most importantly, the law may limit the manner in which you may terminate a dealer relationship.

  • The courts in a number of states have adopted the so-called "Missouri rule," under which a seller may not stop selling to a dealer until the dealer has had a reasonable opportunity to recover its investment in the relationship.
  • Some states have special termination rules for dealer relationships that involve certain types of goods, such as motor vehicles or farm implements.
  • Under certain state franchise laws, including Michigan's, a dealer relationship may be considered to be a "franchise" even if neither the seller nor the dealer intended that. If there is such an "inadvertent franchise," then the dealer may be entitled to special protections that significantly limit the seller's ability to terminate the relationship. These may include, for example, a minimum notice period before termination, a requirement that the seller repurchase the dealer's inventory or even a prohibition on termination altogether unless the seller can prove "good cause" for termination.

A seller that terminates a dealer without complying with applicable legal requirements can incur substantial liability to the dealer. Dealer termination litigation occurs regularly and sometimes results in a large judgment against the seller -- typically for the dealer's lost profits.

A well-prepared dealer agreement can help reduce the risk of dealer termination liability. For example, it can include an agreement by the dealer that essentially waives the "Missouri rule," and it may define what is "good cause" for termination. It may also specify how much notice of termination the seller has to give the dealer.

A good dealer agreement also addresses other important matters, such as:

  • The basic terms of sale, including limitations on the seller's warranty and on the buyer's remedies.
  • Limitations on the dealer's sale of competitive products or on the territory in which the dealer may sell.
  • Obligations of the dealer to promote the seller's products.
  • The seller's credit policies.
  • Limitations on the dealer's right to use the seller's trademarks or trade names.
  • The dealer's confidentiality obligations.
  • Agreements on dispute resolution, such as a jury waiver or an agreement to arbitrate disputes.

If you regularly sell to someone who resells your products, then you should have a well-designed agreement with the dealer and proper procedures for terminating the relationship. Warner Norcross & Judd LLP has extensive experience in analyzing dealer relationships and preparing dealer agreements. We can help you decide whether you need an agreement and if you do, we can provide an agreement that fits your needs. If you need assistance, contact Jim Breay, chair of the Commercial Transactions Group, at 616.752.2114 or

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