APPLES AND ORANGES:

An Analysis And Comparison

Of Distribution Agreements

IVAN HOFFMAN, B.A., J.D.


I have had an opportunity to review the contracts of a number of the important distributors of books in the United States. Each contract contains many similarities and some important differences. The independent publisher is well advised to review the agreement presented with great care for there are significant legal issues and costs involved in the process of having the publisher's book or books distributed.

There is no simple way to present this data because each contract stands on its own. Comparing one company's distribution fee with another is unproductive standing alone since there are often other costs that must be factored into the equation for the publisher, costs such as participation in advertising and marketing programs, fees for listing in catalogs or data banks, insurance costs and/or risk factors and the like.

Therefore, rather than go through each provision in each contract and attempt to compare them, an approach I felt could be more confusing than productive, I have chosen to discuss the "key" issues that face the publisher, the so-called "money" issues, along with some of the other substantive points even if they do not directly involve money.

A Word About The Power To Change

What is or is not negotiable within the four corners of any agreement, whether it be for book distribution, publishing or any other contract, depends entirely upon the relative bargaining positions of the parties. It always comes down to who wants the other more? Or perhaps who needs the other more? The ability of one or the other party to say "No" may make the difference as to whether or not a deal can be bettered. Knowing the potentially troublesome and negotiable areas of any contract is the role of an attorney or other knowledgeable negotiator. But having that knowledge is only half of the equation. The publisher must be in the position of having some marketing clout before substantial changes can be made to some of these clauses. It is a relationship in which knowledge is useless without clout and clout potentially subject to being dissipated without knowledge.

Given the narrowing of choices in the distribution field due to some distributors going out of business, those remaining may find themselves having to be even more cautious than before. Policies are often more restrictive out of self-preservation. Therefore, negotiating substantial changes in these "boilerplate" agreements may be even more difficult than that might have been at an earlier time.

These then are some of the issues to which the publisher should pay attention in examining any distribution agreement.

F.O.B. "Free On Board." This term refers to who pays the cost of shipping. It means that it is "free on board" for the person or entity designated. If it says "F.O.B. Distributor," it means that the publisher pays the cost of getting the books to and from the distributor. However, whether or not the actual term "FOB" is used, nearly all the agreements provide that, except in some unusual circumstances, as between publisher and distributor it is the publisher that pays shipping costs both to and from the distributor. And while there may be heightened excitement and thus a lack of concern about the costs when sending the books to the distributor, there is generally no joy in paying to have the books roll back to the publisher, often to find them damaged, unwanted, and unsaleable.

Additionally, while retail stores usually pay the freight to get the books from the distributor, in some instances where those stores or chains are on a "free freight" basis, the distributor charges the publisher for the freight. So the publisher should be aware that it may incur shipping costs to the distributor as well as to the stores in these circumstances.

RISK OF LOSS. A very important and often not well-considered issue. If the title to the books remains with the publisher until they are sold, then the publisher often must bear the risk of loss in the event the books are lost or damaged, either in shipment or at the warehouse of the distributor. Some of the contracts provide that the distributor will insure the goods once they arrive at its shipping dock but generally only in a small percentage of their actual value, i.e. perhaps 15%-20% of the cover price or the publisher's cost of manufacture.Given that the publisher's income from these books if they were sold amounts to sums in excess of these figures, the publisher is in a position to lose money in such an instance.

California Commercial Code § 7204 (which may be the same in every state that has adopted the Uniform Commercial Code), provides:

(1) A warehouseman is liable for damages for loss of or injury to the goods caused by his failure to exercise such care in regard to them as a reasonably careful man would exercise under like circumstances but unless otherwise agreed he is not liable for damages which could not have been avoided by the exercise of such care.
(2) Damages may be limited by a term in the warehouse receipt or storage agreement limiting the amount of liability in case of loss or damage, and setting forth a specific liability per article or item, or value per unit of weight, beyond which the warehouseman shall not be liable;.
What this means is that if the books are either not insured by the publisher or not insured for a greater amount than these fractions just mentioned, the publisher stands to lose a great deal even if the distributor is insured. If the distributor is not negligent and/or has not agreed to pay for damages irrespective of its negligence, there may be no coverage for any of the loss or the excess loss unless it is the publisher that carries insurance. When considering a distribution agreement, the publisher is well advised to pay careful heed to this provision so that it may be "costed out" when considering the risks to inventory. This should be discussed with a qualified insurance agent or broker. It is a cost of doing business.

RETAIL VS. DISTRIBUTOR PRICE. The contracts often use the terms "retail" or "cover" price in one place and "wholesale" or "distributor" price in another. In some agreements the term "list" price is used. "List" can sometimes mean either "suggested retail list price" or "wholesale list price." The publisher must be aware of these differences for they may make a sizable difference in costs and revenues to the publisher. These differences are important because the discounts to the distributor are most often based upon a percentage off the retail or cover price, though not always.

DISCOUNTS AND FEES. This is one of those areas that does not lend itself to side by side analysis since the fees vary considerably and one contract may look like a better deal in this clause but there are other costs that come into play in other clauses. However, the discount that the publisher gives to the distributor can vary from between 55% of the cover price to 68%, or more or less. Some of the reasons that these factors differ is the speed of payment that the publisher would like. The quicker the payment requested, the higher the discount required. It's about the cost of money.

But here too not only must the publisher be aware of the language differences between "retail" and "wholesale," but the differences between "gross" and "net." The publisher may find that some fees and commissions to the distributor are based upon "net sales," which is defined as total invoiced amounts after deduction of allowances, discounts and other items, and others are based upon "gross sales" meaning invoices before those deductions just mentioned.

Yet another reason for a seemingly reduced discount is because a distributor may charge the publisher a fee in a percentage of the net value of all returns, a larger fee for the inclusion in the catalog of the publisher or a variety of other such fees. The cost of including the publisher's titles in the distributor's catalogs during the book selling seasons is passed along to the publisher. Another reason for the difference may be in terms of the insurance factor above, or whether or not the publisher is required to participate in any sort of mandatory advertising program.

These fees are often printed in the contract itself leading the publisher to believe that they are non-negotiable. They may or may not be and the power to change the terms depends upon the factors I mentioned. But this is one of the areas that can possibly be negotiated.

Additionally, some distributors' agreements provide that the distributor can reduce the amount of books on which payment is due by "promotional copies," ostensibly to be given to reps and the like. While this may seem innocuous, it may reduce the amount available for sale beyond what the publisher has invoiced. In this regard then, it is an additional "discount" or "fee" the publisher is paying even though it is not expressed in that manner.

"SALES" VS. "CONSIGNMENTS." In some version of reality, there are no sales to distributors in the book business. All sales are really consignments in the true sense of the word because any books the publisher "sells" are fully returnable, in any condition, by the distributor. This is because the industry has an open return policy. In this regard, the distributors all have more or less "open return" clauses allowing them to return the publisher's books at any time and more importantly, providing for a more or less open-ended "reserve against return" clause. This clause says that even if they do sell some of the books, they can establish a reserve, a hold back, in a "reasonable" amount in order to cover anticipated returns at a future time. Often these reserves can be quite high, a large percentage of the amount shown due, and frequently these reserve clauses have no finite period stated as to how long the distributor can hold the money. There is, in other words, no liquidation period stated.

And here is a nasty thing about which the publisher should be concerned. Some of the provisions state that, in the event the publisher's account in a negative position after factoring in the reserve amount, the publisher must pay the distributor by check the amount of that red balance.

EXCLUSIVE/NON-EXCLUSIVE. Contracts may provide for exclusive distribution rights to all titles not expressly excluded in the contract. These rights may extend to the United States and Canada as well as certain if not all foreign countries. Additionally, the distributor may require exclusivity in all areas of the book trade including bookstores, libraries and book wholesalers as well as specialty markets such as mass market and non-bookstore retail stores. The publisher should be advised to examine these provisions carefully and inquire as to whether or not the distributor has reps that actively service the particular area. If the distributor does not currently have significant entree into those areas, all the publisher accomplishes is giving up its right to make a separate, more specialized deal with some distributor who may be stronger in those fields.

The contract may also provide that some areas, including marketing areas as well as territories, is non-exclusive. On the face, this may seem acceptable but if the publisher later wishes to make a specialized deal for these areas, that deal is likely to be an exclusive one and the publisher must be aware of the existence of the non-exclusive grant to this distributor. For example, if the publisher makes a foreign export or reprint deal, it is likely to be exclusive for a given territory and this non-exclusive grant to the distributor could be a breach of that exclusive grant. Most often, the foreign aspect of the representation in the distribution agreement appears to be limited to selling the book as an export item. In other words, the distributor becomes the publisher's export agent, under the same terms as the domestic distribution deal. This may foreclose the publisher's ability to make a separate and perhaps better export deal on its own. And even if no translation rights are granted the distributor, having an English language book available in the market may interfere with the publisher's ability to make a translation deal. And if the publisher has a non-exclusive distributor exporting its English language books to a given territory, the publisher may be losing the ability to make a reprint deal.

To the same effect would be granting non-exclusive rights to the specialty market since at some point the publisher may be in a position to make such a specialty deal which, if it were exclusive, would require a renegotiation of the distribution agreement.

Reality Check

Unfortunately, for the small and independent publisher, it appears to be a distributor's market. There are fewer of them than there are publishers, meaning that, according to the formula I presented in the beginning of this article, the publisher needs them more than they need the publisher.

While the collective mass of small publishers may represent approximately 20% or so of total bookstore titles, these publishers do not in all likelihood represent 20% of total sales and sales are that which makes the book selling world go around. Moreover still, these publishers do not bargain collectively and so do not represent, on an individual basis, anything even remotely like the 20% figure.

As a result, it is, unfortunately, each publisher for itself. Self-reliance is the key.

That-and a hot title!

As a result, knowing the potential problem areas of the agreement is even more vital since no comfort can be derived from any sort of collective clout.

Conclusion

This article is not intended to be a damnation of the distributor's contracts. They are in business as is the publisher and have the complete right to present whatever contracts they choose. As I mentioned, it is a distributor's market. Simply because these terms are "tough" does not mean they are not totally valid in the distributor's mind. In a free market, in a capitalist structure, which all of us want, it is up to the individual publisher to take care of itself as the distributor's do for themselves.

Finally, I have not attempted to be exhaustive of every contract nor every clause in every contract. That I can do on a case by case basis since there is then no need to make inapt comparisons. I have only attempted to sweep broadly to point out some of the more important issues that all these agreements present to the publisher. At the time the publisher contemplates entering into a distribution deal, that particular contract should be thoroughly reviewed.

© 1996 Ivan Hoffman

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This article is not legal advice and is not intended as legal advice.  This article is intended to provide only general, non-specific legal information.  This article is not intended to cover all the issues related to the topic discussed.  The specific facts that apply to your matter may make the outcome different than would be anticipated by you.  This article is based on United States law.  You should consult with an attorney familiar with the issues and the laws of your country.  This article does not create any attorney client relationship and is not a solicitation.

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No portion of this article may be copied, retransmitted, reposted, duplicated or otherwise used without the express written approval of the author.
 

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