Contractual Joint Ventures – Drafting and Negotiating Joint Marketing Agreements

Posted on 06-07-2017

 

By: Candice Choh and Kari Krusmark, GIBSON, DUNN & CRUTCHER LLP

A joint marketing agreement is a contract pursuant to which one or both of the parties will collaborate in order to promote the sale of product and service offerings of the other party. Such a contractual joint venture agreement may also be known as an alliance agreement, strategic alliance agreement, or co-marketing agreement, depending upon the client’s preference and the specific nature of the relationship.

THIS ARTICLE ADDRESSES THE KEY ISSUES THAT THE PARTIES should consider before and during the negotiation and drafting of a joint marketing agreement. The scope of this article includes those relationships where one party will independently promote the other party’s products to its customers and potential customers, as well as collaborative efforts by the parties, such as joint solicitations and bidding on requests for proposals (RFPs) from potential customers. This article does not address the terms and conditions of sale of products and services to customers.

Purpose

A joint marketing agreement can arise from a variety of circumstances. Companies typically enter into such an arrangement in order to take advantage of synergies between their respective products and services. In most cases, each party wants to sell the other party’s complementary products and services alongside its own products and services, or combine its products and services with the products and services of the other party in a bid to a customer in order to provide a comprehensive solution and make its proposal more competitive. Many such arrangements arise in the context of a divestiture of a company or business unit where the parties to the transaction desire to continue an intercompany arrangement that existed prior to the divestiture. A joint marketing agreement or similar agreement is necessary in order to set forth the rules of the road for the parties’ relationship.

Complexity of Terms and Conditions

Joint marketing agreements vary in their degree of complexity and specificity of terms. The purpose and nature of the alliance will determine the rigor of the terms and conditions that are included in the particular agreement. In some cases, the agreement might simply serve as a way for the companies to work together if and when they engage in joint marketing activities, with no firm commitments or obligations. In other cases, the success of the alliance might be vital to the ongoing success of one or both parties. For example, in the context of a divestiture, an acquirer’s commitment to continue to work with the divesting party and promote the divesting party’s remaining products and services may be part of the consideration for the transaction. In such circumstances, more extensive terms and detailed obligations, such as commitments to actively promote the products and services of the divesting party, quotas and remedies for failure to meet them, and governance and dispute resolution procedures, will be necessary in order to ensure compliance with the terms of the agreement and achievement of the objectives of the arrangement. Another factor that will determine the complexity and stringency of the terms and conditions is whether the parties will have mutual obligations to promote the products and services of the other party or whether the obligations will be unilateral. If the terms and conditions are mutually enforceable, then the drafter should carefully consider the strictness of terms and severity of remedies since the other party will likely expect the drafting party to be held to the same standards.

Structure

A joint marketing agreement can be structured as a standalone agreement that includes all of the terms and conditions that will govern the parties’ relationship. However, if the scope of the arrangement includes joint bidding on RFPs from potential customers or otherwise preparing joint customer solutions, then it would be best to structure it as a framework or master agreement. The master agreement would include each party’s general obligations in support of the alliance as well as the terms and conditions that apply to all collaborations. The parties would then enter into a separate agreement under the master agreement, such as a statement of work or teaming agreement, for each customer specific alliance, which would set forth detailed terms and conditions with respect to the particular opportunity. For the purposes of this article, such agreements are referred to as teaming agreements.

Each teaming agreement would, among other things:

  • Identify the target customer
  • Describe the solution and the components of the solution to be contributed by each party
  • Provide the pricing that will be offered to the customer
  • Set forth the responsibilities and timing for development of the proposal
  • Identify whether the bid and ultimate relationship with the customer will be led by one party (i.e., as a prime contractor) with support from the other party (i.e., as a subcontractor) or whether the parties will approach the target jointly but hold separate contracts if the bid is successful Ideally, a form of teaming agreement would be included as an attachment to the master agreement so as to provide for consistency of structure and terms and conditions across all customer engagements.

Term

The term of a joint marketing agreement varies depending on the purpose of the arrangement and the ease with which the parties can exit the agreement. In some cases, the agreement may continue until it is terminated. In other cases, the term may be specified and the agreement will set forth a process for renewal.

If the agreement includes a defined term, it is important to consider whether the agreement should provide for automatic renewal unless either party provides notice of non-renewal within a specified notice period, or whether renewal should require the affirmative advance agreement of the parties. The renewal structure will depend on the commitments that are made within the agreement and whether one or both parties might be disadvantaged if they were to extend the agreement on the then-existing terms and conditions. For example, if the agreement includes preferred pricing terms or a lucrative referral fee, the party extending those terms may not be agreeable to an extension without an opportunity for adjustment of the terms and conditions. An automatic renewal provision does not foreclose this possibility; however, if such party does not track the expiration date and notice windows, it will be committed to an extension of such terms if the other party elects to renew the agreement.

If the structure of the agreement is not mutual, the party receiving the most benefit from the agreement will likely prefer a structure whereby such party has the unilateral right to renew the agreement at its option for a specified number of renewal periods. However, the other party will likely be opposed to renewal without its consent and will attempt to condition renewal on mutual agreement or limit the number of unilateral renewal options.

Exclusivity

The parties to the agreement should consider whether any aspects of their relationship will be exclusive and whether there will be any carve-outs to exclusivity. In some cases, it may be appropriate for the parties to have a right of first refusal with respect to participation in any opportunities identified by either party for which the other party would be a suitable partner (e.g., due to such party’s product and service offerings and fit with the target customer’s needs). In such an arrangement, the party holding the right of first refusal should have a reasonable period of time to evaluate the opportunity and determine whether it wishes to participate. If that party declines the opportunity, or does not respond within the agreed time period, then the other party should be free to approach another potential partner with the opportunity.

In some cases, the scope of exclusivity might be narrower or there may be carve-outs to a broad exclusivity provision. For example, exclusivity might be limited to particular product and service lines or to a particular geographic area.

Even in relationships where the parties are not obligated to provide their counterparty a right of first refusal to participate in a joint bid, it would be practical for the parties to work together on an exclusive basis once they have decided to collaborate with respect to a particular opportunity. In such case, the parties should document their agreement with respect to the particular engagement in a teaming agreement in order to avoid situations where one or both parties has made investments in pursuit of the opportunity only to have the other party partner with another company. However, this obligation should be subject to certain exceptions—for example, if the applicable customer determines that the other party is not a good fit or if the parties are not able to come to an agreement with the customer on the price of the components of the solution that are to be provided by a party, then the other party should be permitted to seek support from another partner in order to meet the needs of the target customer.

Restrictions on Authorization

The parties should consider whether there will be any restrictions on a party’s authorization to promote products on behalf of the other party. For example, the authorization may be limited to a subset of the other party’s products and services or may be restricted to certain geographical markets or customer industries. This is an important consideration if a party wishes to preserve relationships, or comply with exclusive arrangements, with other partners with respect to particular products, industries, or markets, or if a party has concerns about controlling its brand and marketing efforts in particular areas.

Management and Governance

Regardless of the complexity of the agreement, all joint marketing agreements should include a management and governance structure to ensure regular communication and escalation of issues through the appropriate channels. The number of governance levels and frequency of contact will vary depending on the purpose of the relationship. If the sales that are triggered through the other party’s efforts are a material portion of revenue for one or both of the parties, then the agreement should establish a more rigorous governance structure, with more frequent meeting and reporting requirements. A more detailed structure may also be appropriate if one or both parties is promoting a new product or is entering new markets through the alliance since the other party will be an important channel for feedback and sales information. However, if the relationship is not key to either party’s success inthe marketplace, then a less structured governance framework is probably more appropriate. The following are governance components that the parties should consider when establishing the governance structure for their relationship:

  • Alliance managers. Each party should designate an individual to serve as its alliance manager, the person who will be the primary point of contact for communications from the other party with respect to the alliance and be responsible for compliance with its obligations under the agreement. If one or more of the parties’ success is tied to the success of the alliance, or if there will be frequent contacts between the parties, it will be important to have ease of communication, continuity of personnel, and a strong working relationship. Therefore, the parties should consider whether a party’s designated point of contact (or any other representatives) will be subject to the other party’s approval, whether the individual(s) should be assigned to the alliance for a minimum duration, and whether one party will have the right to direct the other party to replace its alliance manager or other representatives in the event that issues arise. At a minimum, a party should provide notice within a specified period in the event of a change in the identity of its designee.
  • Steering committee. For alliances that are particularly important to one or both parties, the parties may also want to establish a steering committee of more senior executives who will meet on a periodic basis defined in the agreement (which is often quarterly or annually). The number of representatives of each party and the roles of such individuals should be defined in the agreement. The steering committee is a forum for the parties to discuss strategic objectives, current and planned initiatives, market expansions, new products and services and changes to existing products and services, and opportunities for improvement.
  • Reports and meetings. The agreement should outline periodic reporting and meeting requirements. As with other elements of the agreement, the frequency and nature of the meetings (e.g., in person, telephonic) will depend on the importance of the alliance to the parties. In addition to meetings resulting from the periodic planning process defined below, the parties should meet monthly or quarterly to review progress against alliance objectives and metrics, discuss status of proposals under development or under review by potential customers, and any issues affecting the alliance.
  • Non-solicitation. Joint marketing agreements often prohibit the solicitation for employment of the other party’s employees and contractors, subject to an exception for solicitation through general advertising during the term of the agreement and for a specified period of time thereafter. The parties should consider whether such a prohibition is appropriate given the particular circumstances. Such solicitation is of particular concern if the parties operate within the same industry such that the skills of the parties’ employees are readily transferable to the other party’s business and operations, or if a party has a successful sales organization and is concerned about losing talent to the other party. If such a provision is included, the parties will need to determine whether a specific remedy for hiring a party’s personnel in violation of the provision will be specified. In many cases, the party that breaches the non-solicitation provision must pay as liquidated damages an amount equivalent to the solicited individual’s salary or a multiplier thereof.

Alliance Activities

Following are areas that the joint marketing agreement should address to the extent applicable to the relationship.

General Cooperation Activities

The agreement should address any cooperation activities that the parties plan to undertake. General cooperation activities include:

  • Exchanging information about, and providing demonstrations of, the parties’ products and services
  • Providing the standard terms and conditions of sale
  • Informing each other’s personnel about the arrangement
  • Providing information and training on products and services to the other party’s personnel
  • Providing assistance to develop appropriate promotional materials that may be used for the purposes of the agreement
  • Participating in conferences, trade shows, and seminars
  • Sponsoring industry events
  • Conducting joint sales calls to existing and prospective customers

Financial Contributions

The agreement should address whether the parties are required to make any financial contributions to support alliance activities. Each party’s specific contribution for each year (or other time period) should be agreed in the applicable alliance plan.

Planning and Management

The joint marketing agreement should provide for a joint planning process for the conduct of alliance activities. It would be best practice for the agreement to require the parties to develop and agree to a business plan for each year or shorter time period during the term. If the time period is annual, the parties may wish to align the planning process with their fiscal year if each party has the same fiscal year. The plan would identify, among other things:

  • The potential customers that the parties will target during such year
  • The plan for carrying out alliance activities, including timing
  • Revenue and sales mix targets
  • The objectives and other goals that will be used to evaluate the success of the alliance for such year

The plan would then be reviewed and adjusted as necessary on a periodic basis throughout the year. The parties should also jointly develop and review a periodic (e.g., monthly or quarterly) report that tracks the parties’ progress against the objectives established in the plan.

Additional Opportunities

In addition to the identification of targets through the mutual planning process described above, the agreement should address the process for submitting opportunities that are identified by a party independently. Each party should designate a contact for receipt of such sales leads from the other party. Following receipt of notice of a potential target, the receiving party should have a specified number of days to consider the opportunity and determine whether it desires to pursue the opportunity. If the parties decide to pursue the target, they would then determine each party’s roles and responsibilities with respect to the proposal and ideally enter into a customer-specific teaming agreement as described above.

Registration of Sales Leads and Targets

If the scope of the agreement permits each party to independently promote the other party’s products to its customers and potential customers, and there is a risk that the parties might be competing for the same customer, it would be wise to include a process for registration of sales leads. If a party identifies a particular target, that party would notify the other party through the agreed mechanism, and the other party would then be restricted from approaching that target for a specified period of time. The other party should be permitted to reject the registration, within a specified time period, if the target is an existing customer of such party or if such party is already in active discussions with the target. If the registration is not rejected within the specified time period, the parties may wish to deem the registration accepted. Following registration of a sales lead, the registering party should be obligated to use reasonable efforts to close a sale with the target within a specified time period; if there is no sale within such time period, and the non-registering party does not agree to extend the time period, then the registration would be cancelled and the non registering party would no longer be prohibited from engaging in a transaction with the target. However, if a party is continuing to use reasonable efforts to complete a sale at the time of expiration of the permitted time period, the parties may want to agree that such party will have an additional period of time to complete the sale.

The agreement should specify whether a party will be permitted to sell the other party’s products and services directly to its customers (and identify which party’s terms and conditions will apply to the sale), or whether the selling party will act as an intermediary, with the party whose products and services are being purchased entering into the agreement with the customer.

Sales Targets and Quotas

If the scope of the agreement permits each party to independently promote the other party’s products to its customers and potential customers, the parties should consider including sales targets or firm quotas. This is particularly advisable where the parties have an exclusive relationship in order to ensure that a party’s sales partner is using its best efforts to promote the sale of the other party’s products and services. If sales targets and quotas are included in the agreement, then the parties should include specific remedies in the event that a party’s sales partner is not performing in accordance with such targets or quotas for a specified duration of time, such as termination of exclusivity or termination of the agreement. The parties should also consider whether any product and service mix restrictions or requirements should be included in order to protect a party’s profit margins.

Product and Service Availability

The parties should consider whether the agreement should include an obligation to maintain sufficient availability of the products and services that will be promoted by the other party. Subject to confidentiality restraints, it would be good practice to include an obligation for the parties to provide reasonable notice of discontinuations of, and changes to, products and services, as well as notice of new products and services.

Intellectual Property; Development of Promotional Materials

The agreement should address each party’s responsibility for the development of, and rights in, promotional materials used in furtherance of the alliance. In many cases, each party will provide to the other party the standard marketing materials that it has produced for its products and services, and the parties will also collaborate on the development of materials to be used in support of the alliance.

Pre-existing materials. With respect to a party’s preexisting materials, the joint marketing agreement should provide that the originating party will retain all rights in and to such materials and grant the other party the right to use such materials for the term of the agreement, provided that such use should only be in the manner approved by the originating party and only for the purposes outlined in the agreement. The agreement should also address whether a party has the right to modify or create derivative works of the preexisting materials of the other party and, if permitted, which party will own such derivative works.

  • Independently developed materials. In addition, the agreement should address each party’s rights in materials developed independently by one of the parties, including whether the other party will receive a license to use such materials in furtherance of the alliance.
  • Jointly created materials. If the parties anticipate that they will jointly create marketing or other materials in furtherance of the alliance, then it is important to address ownership of such materials in the agreement. The parties should consider whether it is appropriate for the parties to jointly own such materials, or whether one party (e.g., the party that primarily contributed to the development of the material) should own the materials and the other party should be granted a license to use such materials for a specified duration.
  • Intellectual property. The agreement should also address each party’s right to use the name, trademarks, service marks, and other intellectual property of the other party, and restrictions and conditions on such use. Compensation and Payment Terms
  • Referral fees and commissions. The parties should determine whether each party will pay referral fees or commissions to the other party as an incentive for the promotion of the first party’s products and services. If the agreement does provide for such payments, then the agreement should specify the frequency of such payments and include the payment terms.
  • Expenses. The agreement should address the parties’ responsibilities with respect to expenses incurred by a party in the conduct of the alliance activities. Typically, each party bears its own costs and expenses arising from the alliance.
  • Disputed amounts; set-off. Many agreements permit a party to withhold payment of amounts claimed by the other party that the first party disputes in good faith, pending resolution of the dispute. If both parties have the ability to earn fees and commissions under the agreement, then the parties should consider also including a set-off right in the agreement.
  • Taxes. Each party is typically responsible for the payment of taxes payable by such party in connection with its activities under the joint marketing agreement, in addition to taxes on its income and property. Audits and Records Retention The parties should consider whether each party will have the right to audit the other party’s books and records relating to the agreement and, if such a right is included, the minimum required notice period and any assistance required from the audited party. If audit rights are included in the agreement, then the parties should also be obligated to retain records of the transactions under the agreement for a minimum period of time. The parties should also consider whether the costs of an audit should be borne by the audited party if the audit uncovers underpayments by the audited party. Confidentiality The joint marketing agreement should include a confidentiality provision that is substantially similar to the confidentiality provisions typically included in any other commercial agreement. The definition of confidential information should include, at a minimum, the terms and conditions of the agreement; the business plans developed pursuant to the agreement; trade secrets; and information regarding each party’s business, customers, employees, service providers, strategies, and finances. Representations and Warranties The agreement should include standard representations and warranties by each party, including representations and warranties that:
  • Each party has the power and authority to execute and deliver the agreement and perform its obligations there under. Each party’s execution, delivery, and performance under the agreement does not and will not conflict with or constitute a default under any other agreement to which a party is bound.
  • Neither party will make any commitments or agreements, or incur any liabilities, on behalf of the other party except as may be authorized by the other party in writing. The agreement should include a disclaimer of all other warranties, whether express or implied, including the implied warranties of merchant ability and fitness for a particular purpose with respect to the products and services of each party. Insurance The parties should consider whether each party should be obligated to obtain and maintain minimum insurance coverages. The types of insurance that would typically be required in this type of agreement include statutory workers’ compensation, employer’s liability, commercial general liability, automobile liability, and professional liability (errors and omissions) insurance. Additional coverages may be appropriate depending on the scope of the parties’ activities under the agreement. The amounts of coverage vary by transaction, and each party should consult their respective risk management personnel for guidance. The agreement should also include standard conditions with respect to the applicable insurance policies, such as a requirement that the other party be named as an additional insured on the policies (where applicable), waivers of insured versus insured exclusions, and minimum credit ratings for the insurer. Indemnification The parties should give careful thought to the indemnification provisions in order to ensure that the indemnities are appropriately tailored to the activities that will be conducted by the parties under the agreement. Such provisions may provide for defense against and indemnification from losses relating to the following types of third-party claims:
  • Claims alleging that any materials provided by a party to use in connection with the alliance infringe upon or misappropriate the intellectual property rights of a third party, with exceptions where the infringement is caused by unauthorized acts by the party seeking indemnification
  • Claims arising from personal injury and property damage resulting from a party’s acts or omissions (in some cases, this indemnity is limited to claims arising from a party’s gross negligence or willful misconduct)
  • Claims by customers and potential customers resulting from the other party’s acts or omissions
  • Claims arising from unauthorized representations made by a party on the other party’s behalf and unauthorized liabilities incurred and agreements made on the other party’s behalf The agreement should also include the procedures that will be followed by the parties in the event that a party seeks indemnification under the agreement. Limitations on Liability The parties should consider whether it is appropriate to include a limit on monetary damages for which each party may be liable under the agreement. Joint marketing agreements typically include a waiver of indirect, incidental, consequential, special, and punitive damages. However, the parties should consider whether there should be any exceptions to the limit on monetary damages (if included) and the damages waiver. Examples of damages that might be excluded from the limit on monetary damages and, in some cases, the damages waiver include damages arising from a party’s breach of its confidentiality obligations, losses resulting from indemnified claims, amounts owed by one party to the other under the agreement, and damages arising from a party’s infringement or misappropriation of the other party’s intellectual property. Dispute Resolution Careful consideration should be given to the process that will be followed in order to resolve disputes between the parties. Many agreements include an informal dispute resolution process that will be followed before the matter is escalated to a formal mechanism such as mediation, arbitration, or litigation. In such cases, the parties’ designated contacts will attempt to resolve the dispute for a specified period of time prior to escalation to a more senior level of representatives or formal dispute resolution. With respect to formal dispute resolution mechanisms, in many cases alternative dispute resolution is preferred to litigation in order to provide for more expedient resolution of disputes. Regardless of the dispute resolution procedures outlined in the agreement, the agreement should specify that each party will be entitled to seek immediate injunctive relief, without the need to comply with the dispute resolution procedures, in the event that the other party breaches its confidentiality obligations, or the other party infringes or misappropriates intellectual property of the first party. Termination Termination of the joint marketing agreement. The potential grounds for a party’s termination of a joint marketing agreement are similar to those that might be found in other commercial agreements and include the following:
  • The other party’s material breach that is not cured within a specified period of time
  • If applicable, the other party’s failure to meet quotas for a successive number of months or other time period
  • Convenience
  • The other party’s insolvency or a material adverse change in the other party’s condition
  • Change of control of the other party Post-termination and expiration obligations. The agreement should address the parties’ obligations upon termination and expiration of the agreement, including the obligation to cease all marketing, promotion, and sales activities; return or destroy materials and confidential information of the other party; and pay to the other party any outstanding amounts owed to such party. Effect of termination on teaming agreements. The agreement should indicate whether termination of the joint marketing agreement will result in the termination of all teaming agreements in effect at the time of termination. The parties should carefully consider whether termination of the agreement should invalidate any proposals that are under consideration by a customer at the time of termination given the potential impact that such a decision might have on the parties’ reputation in the marketplace. Standard Contract Provisions The joint marketing agreement should include the same standard terms and conditions that would be included in any commercial agreement, including the following:
  • Entire agreement (i.e., integration clause)
  • Amendment
  • Assignment
  • Waiver
  • Governing law, jurisdiction, and venue
  • Relationship of the parties
  • Third-party beneficiaries
  • Force majeure
  • Compliance with law
  • Severability
  • Notices
  • Survival
  • Counterparts

Candice Choh is a partner in the Corporate Transactions practice group at Gibson, Dunn & Crutcher, Los Angeles. Kari Krusmark is an associate in the Corporate Transactions, Fashion, Retail and Consumer Products, and Strategic Sourcing and Commercial Transactions practice groups at Gibson, Dunn & Crutcher, Los Angeles.

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