Post Reduction to Practice: Purchasing, Manufacturing and Distribution under Turkish Law

Firms that developed the invention may opt to perform purchase, manufacture and distribution activities if they have the financial technical resources to do so. However, if they lack the resources they would need third parties to perform abovementioned activities. For that reason, inventors would enter into a contractual relationship with third parties.

Manufacturing Agreements

Production of the inventions is the first step to the commercialization of the invention. Inventor would sign a manufacturing agreement with a person who has the expertise and resources to manufacture products in question.  Such arrangement between the parties would be considered as contracts for works and services under the Turkish Law. As a result, manufacturer has a liability against the deficiencies in the products manufactured. Additional warranty provisions may be stipulated however Turkish Law offers liability protection to the products manufactured.

Distribution Agreements

Most often, inventors enter into a contractual relationship with third parties that perform both the manufacturing and distribution of inventions in accordance with a contract signed with the inventor. Manufacturing and distribution relationship can take a number of different forms. The most common distribution relationship is the purchase of the products from the manufacturer by the distributor and subsequent resale of the products in question. In addition to this basic distribution relationship is the original equipment relationship and manufacturing and distribution licensing relationship which combine both manufacturing and distribution arrangements. 

In a basic distribution relationship, distributor only assumes the role of a distributor. Distributor purchases the product from the inventor and resells purchased goods to the customers. The difference between the purchase price from the manufacturer and the resale price make up the distributor’s income from the distribution relationship. The price of the initial sale from investor to the distributor may depend on various such as the scope of activities to be performed by the distributor and product development.  Distributor may be a “stocking” and a “non-stocking” type of distributor: (i) a stocking type of distributor maintains the products purchased from the inventor in its inventory, (ii) a non-stocking distributor on the other hand does not maintain an inventory for the purchased goods and purchase the products from the inventor when an order is received from a customer. Under the Turkish Law, distribution contracts are not specifically stipulated, and they may be considered as sui-generis contracts. It may have the features of sales and purchase contracts or works and services contract as in a typical manufacturing relationship. Furthermore, such contracts may also resemble features of agency contracts regarding loyalty obligations of the agent.  However, such features may change depending on the relationship between the inventor and the distributor.

In original equipment manufacturer relationship, manufacturing and distribution functions are combined. Such contracts include provisions regarding the enhancement of the invention that will add value to the invention. An original equipment manufacturer in this relationship is the inventor whose inventions are used as components in the products of another company usually the distributor, which then sells the finished item to users. The distributor in this relationship is a value-added reseller because distributor augmenting or incorporating features or services, it adds value to the original invention.[1] A distribution contract involving an original equipment manufacturer is more complex and would likely require lengthy and detailed negotiations.

As for the manufacturing and distribution licensing relationship, inventor conveys distributor the right to manufacture and distribute the invention. In return, the inventor would receive a royalty or a similar payment measured in accordance with the performance of the sale of the invention.[2] This relationship may be cost-effective. However, the inventor should carefully stipulate the terms of such relationship as it may receive less royalties than intended due to a prospective sub-licensing and derivative intellectual property.

Substantial Provisions of the Manufacturing and Distribution Contracts

• Sub-distributor clauses: A distributor may appoint a sub-distributor in accordance with the contract. Most contracts require the approval of the supplier (in this case inventor) for an appointment. Contractual or legal penalties that are stipulated under the Turkish Law may be applied for the appointments made without a consent. However, provision in the contract may be stipulated in a way that distributor is entitled to appoint a sub-distributor.
• Exclusivity: If the inventor grants exclusive right to the distributor that means distributor would have the sole legal right to resell the products in the specified territory or market. Non-exclusivity means that the inventor may enter into contractual arrangements with other distributors that may compete with other suppliers. An inventor should diligently evaluate the capabilities of the supplier when granting exclusive resale rights. However, excessive number of suppliers would also result in excessive competition.
• Warranties: Distributors and inventors on behalf of themselves and end user, may require a variety of warranties and guarantees from the manufacturer regarding the state of the invention produced. Even though, Turkish law offers warranty provisions especially regarding product deficiencies, further protection may be granted to distributors and inventors. In addition to deficiency warranties, intellectual property warranties may also be prescribed in the contract. This is especially substantial for inventions that are technically advanced.

Inventors should be meticulous while drawing up manufacturing and distribution contracts. The success of the invention may depend on the financial success thereof and manufacturing and distribution agreements may play a vital role in that success. Inventors should also be vary of the intellectual property rights and the financial benefits of such rights. A thoroughly drafted contract benefits the inventor in many ways specifically financially.

[1] Kagan, Julia. “What You Should Know About Original Equipment Manufacturers (OEMs).” Investopedia, Investopedia, www.investopedia.com/terms/o/oem.asp.

[2] Gutterman, Alan S. Technology-driven Corporate Alliances: A Legal Guide for Executives. Greenwood Publishing Group, 1994.

Author: Batuhan Ecin