How Exclusivity Agreements Can Protect Your Business Interests

Exclusivity agreements can offer your business security and stability. Yet these contracts come with potential drawbacks that a lawyer can spot before you sign. Learn why you might choose an exclusivity agreement and how a contract review attorney can see that it’s drafted to provide you with maximum protection.

What is an Exclusivity Agreement?

An exclusivity agreement limits how two parties can conduct commercial dealings. The exclusivity usually comes with benefits for one or both parties, such as a steady supply of goods or the ability to negotiate a purchase without the fear of being outbid.

Often, other types of contracts include exclusivity clauses that put restrictions on one or both parties. However, an exclusivity agreement can also be a stand-alone contract. Regardless of where it appears, it’s essential to have a contract review attorney look over the document before you sign. 

What Are the Types of Exclusivity Agreements?

The exclusivity agreement can cover a wide range of contracts between parties. They address situations like:

• Exclusive dealings during purchase and sale: Parties negotiating a merger or acquisition might agree that the seller negotiates only with the potential purchaser for a period of time. This allows for due diligence and prevents others from outbidding the buyer.
• Exclusive right to market, distribute, or manufacture: Parties agree that a distributor will only handle certain products and that a manufacturer will only buy from certain suppliers.
• Exclusive licensing: Parties agree that one party will have the exclusive right to produce or sell a good in a certain market. For example, when the holder of a patent or trademark agrees that only one other party can use that patented or trademarked item for commercial purposes. 

These agreements are different from noncompete clauses, which the Federal Trade Commission (FTC) largely banned in early 2024. While exclusivity agreements define the rights of parties during business dealings, noncompete clauses place restrictions on former employees to prevent them from joining competitors or starting a competing business for a period of time after their employment ends. 

What Are the Benefits of Exclusivity Agreements?

Done right, exclusivity agreements can help businesses in many ways:

• Prevent competitors from gaining market access: An exclusivity agreement to sell or market a product prevents competitors from getting access to that product. Consumers then have no choice but to buy from the company with exclusivity rights.
• Mutually beneficial relationship: Both parties generally benefit from an exclusivity agreement. The parties’ activities raise revenue on both sides. A manufacturer can encourage consumers to buy from their exclusive seller, and a seller can promote the sale of a specific product they are getting exclusively from that manufacturer.
• A steady supply of goods or revenue: An exclusivity agreement to sell a product means the manufacturer will continue to provide the product since the seller is the only way to get it to market. The manufacturer gets regular revenue from the seller and the seller has an uninterrupted flow of goods to supply to consumers.
• Protection during acquisition negotiations: In a purchase negotiation, an exclusivity agreement means the buyer has time to investigate the business before the deal is finalized. While those investigations are taking place, there’s no risk that another buyer will undercut them with a low bid. Both parties are free to negotiate terms without the risk that a third party could disrupt the deal.

For an exclusivity agreement to work well for both parties, an airtight legal agreement is essential. A contract review attorney can review the terms to ensure that your business enters into an arrangement with the right protections in place. 

What Are the Possible Drawbacks of Exclusivity Agreements?

Along with the potential benefits, exclusivity agreements present a number of challenges:

• Lack of flexibility: During the term of the exclusivity agreement, parties can’t make certain changes to their business model. This can potentially cause companies to miss out on other opportunities. For example, if the seller in the agreement is unable to meet the market demand, the manufacturer may be unable to work with additional sellers until the exclusivity agreement’s term is complete. 
• Legal restrictions: In some industries and jurisdictions, the law restricts exclusivity agreements. If a lawyer doesn’t review an exclusivity agreement before it is signed, businesses might discover they cannot enforce the agreement.
• Performance metrics: Both parties typically have to meet targets in accordance with the agreement. If those targets are not met, both parties could lose money. However, even if the metrics are not met, the contract might still remain in place, to the detriment of one or both parties. 
• Negotiation details: An exclusivity agreement is a voluntary arrangement to limit some business activities, so it can be challenging to negotiate. It often requires close attention to detail and legal review before the contract is final.

Why a Legal Review is Essential

A contract review lawyer can help you protect your business by assisting with numerous parts of the exclusivity agreement negotiation process, including: 

• Terms of the agreement: A lawyer can help assess whether the terms, performance metrics, and other details of the exclusivity arrangement are reasonable for your business.
• Consequences of breach: A lawyer can recommend the best recourse for a breach, such as contract termination, financial penalty, or other remedy. They can then negotiate this clause into the contract.
• Conflict resolution: A lawyer can recommend a reasonable conflict resolution clause in case disputes arise during the contract’s term. For example, the clause might mandate private arbitration instead of going to court.
• Breaking the agreement: A lawyer can advise on your options if you decide you want to dissolve the agreement before the term ends.
• Jurisdictional issues: A lawyer can advise as to whether any parts of the agreement might be contrary to anti-trust or anti-competition laws and recommend changes to the contract accordingly.

Overall, a contract review lawyer can provide essential insight into the potential consequences of an exclusivity agreement before you sign it. They can also help negotiate changes to make sure your business is protected.

Learn More from Global Legal Law Firm

Global Legal Law Firm is a trusted business law firm for companies nationwide. Talk to us about your exclusivity agreements. Request a consultation today.