What is in a name? The terms agent, reseller and
distributor are sometimes used interchangeably in the business world. However
in the legal world they usually have distinct definitions. An agent can be
generally defined as is a person who is authorized to act on behalf of another
to create a legal relationship with a Third Party. An agent can also be a
person who makes introductions and generally facilitates relationships between
the seller of goods or services and end-using buyer. Such an agent usually
receives some type of percentage of the final sale as his commission. An
in-country national agent is often required in most Middle East and Far East
countries. A reseller can be generally defined as a company or individual that
sells goods to an end-using buyer. A reseller does not take title and thereby
own the goods; the reseller is usually a conduit from the seller to the end-using
buyer. A reseller usually receives a flat commission for his services, usually
between 5-10% of the final purchase price. This format is often used in the
software and hardware industries. A distributor can be generally defined as a
company or individual which purchases a product from an original equipment
manufacturer (OEM) and then independently sells that product to an end user. A
distributor takes title, physical possession and owns the products. The
distributor then sells the product again to an end-using purchaser. The
distributor usually receives the product at some discount from the OEM and then
is free to set his price at any amount above what he paid for the product. A
distributor is often used by the US manufacturing industry to act as a sales force
outside the US.
The landscape of the Foreign Corrupt Practices Act (FCPA)
is littered with cases involving both agents and resellers are they are the
most clearly acting as representatives of the companies whose goods or services
they sell for in foreign countries. However many US businesses believe that the
legal differences between agents/resellers and distributors insulate them from
FCPA liability should the conduct of the distributor violate the Act. They
believe that as the distributor takes title and physical possession of the
product, the legal risk of ownership has shifted to the distributor. If the
goods are damaged or destroyed, the loss will be the distributor's not the US
business which manufactured the product. Under this same analysis, many US
companies believe that the FCPA risk has also shifted from the US company to
the foreign distributor. However such belief is sorely miss-placed.
As almost everyone knows, the FCPA prohibits payments to
foreign officials to obtain or retain business or secure an improper business
advantage. But many US companies view distributors as different from other
types of sales representatives such as company sales representatives, agents,
resellers or even joint venture partners, for the purposes of FCPA liability.
However the Department of Justice (DOJ) takes 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 but also distributors. No U.S. company can ignore signs
that its distributors may be violating the FCPA. Company management cannot
engage in conscious avoidance to the activities of a distributor that
the company has put into a business position favorable to engaging in FCPA
violations. Court interpretation of the FCPA has held that it is applicable
where conduct violative of the Act is used to "to obtain or retain business or
secure an improper business advantage" which can cover almost any kind of
advantage, including indirect monetary advantage even as nebulous as
reputational advantage.
This scenario played out in China from 1997 to 2005
through AGA Medical Corporation. The Minnesota-based firm manufactured products
used to treat congenital heart defects. To boost is China sales, AGA worked
through its Chinese distributor. AGA sold products at a discounted rate to its
Chinese distributor. This distributor then took some of the difference between
his price from the equipment manufacturer AGA and the price he sold the
equipment to Chinese hospitals to and paid corrupt payments to Chinese doctors
to have them direct their government-owned hospitals to purchase AGA's
products. Its sales in China for the period were about $13.5 million. The
Chinese distributor was found to have paid bribes in China of at least $460,000
to doctors in government-owned hospitals and patent-office officials. In 2008,
AGA agreed to pay a $2 million criminal penalty and enter into a deferred
prosecution agreement with the Department of Justice to settle Foreign Corrupt
Practices Act violations.
The same game was played by a Volvo subsidiary, Volvo
Construction Equipment International ("VCEI") when it used a Tunisian
distributor to facilitate additional sales of its products to Iraq. VCEI
reduced its prices to enable the distributor to make the illegal payments based
on bogus after-sales service fees. Volvo's 2008 settlement with the SEC
included an agreement permanently enjoining it from future violations of
Sections, ordering it to disgorge $7,299,208 in profits plus $1,303,441 in
pre-judgment interest, and to pay a civil penalty of $4,000,000. In addition to
this fine imposed by the SEC, Volvo also paid a $7,000,000 penalty pursuant to
a deferred prosecution agreement with the DOJ.
So what is in a name? Do we simply look to Shakespeare
and his immortal words, ""What's in a name? That which we call a rose; By any
other name would smell as sweet." Unfortunately I do not think the answer is
quite so ethereal. It is more down to earth. If it walks like a duck and quacks
like a duck, it probably is a duck. If you have a distributor, it must be
subjected to the same FCPA scrutiny and management as an agent, reseller or
joint venture partner.
Visit the FCPA Compliance and Ethics Blog, hosted by Thomas Fox, for more commentary on FCPA
compliance, indemnities and other forms of risk management for a worldwide
energy practice, tax issues faced by multi-national US companies, insurance
coverage issues and protection of trade secrets.
This publication contains general information
only and is based on the experiences and research of the author. The author is
not, by means of this publication, rendering business, legal advice, or other
professional advice or services. This publication is not a substitute for such
legal advice or services, nor should it be used as a basis for any decision or
action that may affect your business. Before making any decision or taking any
action that may affect your business, you should consult a qualified legal
advisor. The author, his affiliates, and related entities shall not be
responsible for any loss sustained by any person or entity that relies on this
publication. The author can be reached at tfox@tfoxlaw.com.
© Thomas R. Fox, 2010