What Is a Non-Exclusive Agreement?
A non-exclusive agreement is a contract that allows one or both parties to enter into similar agreements with third parties, as opposed to an exclusive agreement which is limited to one party. A non-exclusive agreement typically covers a specific subject matter such product manufacturing, sales or service. Non-exclusive agreements are generally favorably viewed, particularly for those who desire the flexibility to engage numerous partners in a particular market .
A non-exclusive agreement may take the form of a non-exclusive licensing agreement, whereby a licensor agrees to grant a license, while permitting the licensee to also obtain licenses from other entities. Another example is that of a non-exclusive servicing agreement where a party may provide services to their clients, but be permitted by contract to offer the services of other providers as well. If a party desires to fully control the rights to a specific design or technology, then they will commonly seek a non-exclusive agreement. Exclusive agreements generally allow a party to protect their business model and methods from outside parties.
Benefits of a Non-Exclusive Agreement
In many cases, the potential value of establishing a non-exclusive agreement far outweighs any perceived extra expense or risk associated with not being granted exclusivity.
An example of the advantages of a non-exclusive agreement can be found in Talent Acquisition. Consider a practice that might have four passes at recruiting a specific specialty a year, and no single pass being successful at finding an individual that fits the practice. If you are successful in recruiting a quality candidate on the first or second pass, then you have met your needs, and achieved your goal. However, if you are not successful on your first or second pass, you may have missed out on a quality candidate because you only had a general agreement with one recruiter. In this case, if you had a non-exclusive agreement with multiple recruiters, any one could have presented you with the same candidate during their own pass. If every candidate you see meets your needs, you may not be seeing enough candidates. Non-exclusive agreements open the door to more possibilities, thereby increasing the likelihood of finding the right individual for the position.
With exclusivity, a practice may feel confident that "nobody else" is working on a specific candidate. This is true, but it is also true that no one else is working on that provider, either. If an organization that typically works on a "non-exclusive" basis has a retention agreement that incentivizes them to keep the candidate "warm", an organization may benefit by having exclusivity in addition to a retention agreement. However, this essentially sets up a situation where the objective is to find a quality candidate, but no one will find it other than the exclusive recruiting organization. This often leads to the situation where nobody finds the quality candidate.
If a general candidate profile is available online, it will be seen by several candidates. Employers often complain the candidates approach them about a position after already committing to another practice. The only way to prevent an employer from recruiting a candidate is to give them an incentive not to approach the candidate until some given time has passed. One such option is a retention agreement, though this approach is not a viable option for all recruiters.
Pitfalls of Non-Exclusive Agreements
The primary potential drawback to a non-exclusive agreement is that the parties are entering into a business arrangement in which you are not the sole focus of the other party’s attention. This could be considered a conflict of interest. If there is a viable alternative elsewhere, the other party is no longer solely dependent on your relationship and may favor another relationship because there is no contractual tie encouraging them to prefer your business. Additionally, the competing entity may offer a more attractive business opportunity that could take time and profit away from the business, which could affect you.
For example, a law firm may have contract attorneys that may work for or assist you. While the attorneys are available solely to that law firm, if they are available to others as well (or have the right to be), the firm has created a conflict of interest for those attorneys as it relates to your relationship with the firm. In the event that you have a choice, you may want to consider how they will divide their time among the opportunities they have.
Key Components of a Non-Exclusive Agreement
A comprehensive non-exclusive agreement should clearly define the scope of work to be undertaken, as well as the duration of the agreement within a set timeframe. The parties to the agreement must be identified in such a way that there is no question as to who is providing which services, and if it is a joint venture, the responsibilities of each party must be made clear. Lastly, a termination clause must be included that sets out the obligations of both parties upon termination (in many circumstances the return of confidential information is a requirement). The benefit of setting this out so clearly is that if the agreement is breached and negotiations are clearly not going to end positive, it is clear what the other party is entitled to for remedy.
Industries that Utilize Non-Exclusive Agreements
Non-Exclusive Agreements are used in a variety of industries and for many different purposes. In the manufacturing industry, for example, non-exclusive agreements may be part of a distribution strategy. A manufacturer may allow multiple distributors or sales representatives to sell the manufacturer’s products in order to maximize its market penetration.
In the travel industry, a non-exclusive agreement is often the basic form of contract between airlines and travel agents. The agent retains the flexibility to add other carriers to its services without any obligation to use the original carrier.
In the pharmaceutical industry , non-exclusive agreements allow drug companies to arm their sales teams with a large number of drugs. Pharmaceutical sales reps visit doctors to praise the efficacy of one or more products in the company’s line. A non-exclusive agreement helps the sales rep break into the large and highly entrenched medical profession. Even the largest pharmaceutical companies have difficulty obtaining the right to be the exclusive supplier for popular drugs such as Lipitor and Procrit. But the companies benefit from the economies of scale that a large and diverse group of physicians offer.
Important features of non-exclusive agreements include: As noted above, partial delivery agreements exist when a supplier agrees to supply goods to a buyer, but only to a certain point – usually a percentage of the buyer’s total business. If, for example, the supplier agrees to provide 30% of the buyer’s total business, the buyer can then arrange for other suppliers to cover their own share of the total business, which in effect diversifies the buyer’s supplier risk.
Bargaining for a Non-Exclusive Agreement
Considerations when negotiating a non-exclusive agreement can be quite different to those that apply when entering into an exclusive arrangement. These include the following:
Downstream licence
In determining the appropriate terms and conditions of a non-exclusive arrangement, it is essential that you consider how the material may be on-sold or integrated into new products. If you are going to permit the customer to sell your product in combination with their products or services, you need to be certain that you want to deal with this. If not, the contract should allow you some control over how your product is used and/or resold. This could be in the form of approval rights over the way in which the customer uses the material, or a restriction on the customer imposing additional charges on any end users to whom they resell the product.
Geographies
A non-exclusive agreement can be expanded to other jurisdictions under the same terms if the same party is a market leader within those territories. Often the non-exclusive contract will permit the licensee to expand into other territories as long as the licensee gives the other party notice.
Industry specific agreements
Many non-exclusive agreements are industry specific and outline specific modules relevant to the industry to which they relate. These modules are often tailored to the applicable industry guards against any disputes as a result of differences between industries.
Support services
The agreement will often clearly outline a plan for ongoing technical and other support services and specify when these services may be withdrawn. This is designed to ensure that the purchaser is able to operate the business if the supplier withdraws its support during the term.
Legal Requirements and Issues for Non-Exclusive Agreements
When drafting or agreeing to a non-exclusive agreement, it is essential to consider legal issues and compliance with local legislation that may impact the scope of the agreement or the ability to enter into such agreements.
From the outset it is important to clarify the general position that the use of non-exclusivity is not restricted at law in most jurisdictions. However, there are a number of legal issues to take into consideration.
Applicable Legislation
Every jurisdiction has its own set of laws and regulations that will impact the negotiation, execution, and enforcement of contracts, including non-exclusive agreements. As with other contractual agreements, if a term of one party’s contract qualifies the actions of another – whether that be an exclusivity or non-exclusivity term – that term must comply with the laws of the applicable jurisdiction.
Competition Law to Consider
Under competition law, some jurisdictions have rules that affect the extent to which non-exclusive agreements restrict free competition. In relation to exclusive dealing, countries such as Australia, Canada, EU member states, Japan and South Africa regulate the use of exclusive dealings arrangements. To ensure compliance with the specific prohibitions and restrictions associated with exclusive dealing in any relevant jurisdictions, it is therefore important to review the actual agreement (such as supply agreements) to ensure it does not fall foul of the regulations. One example of this is that in respect of exclusive dealing arrangements, the prohibitions or restrictions that apply to exclusive arrangements can also apply to non-exclusive arrangements (whether implemented solely or as a part of wider arrangements), where market power is involved.
When to Use a Non-Exclusive Agreement
Choosing the right type of distribution contract is crucial. A contract that will not restrict a distributor’s ability to conduct business with other parties is known as a non-exclusive agreement. The following factors will help determine when a business in England or Wales should use a non-exclusive distribution contract:
Status of distributor – A distributor that holds large market shares, or even a monopoly over market share can demand negotiation of a non-exclusive distribution contract. A distributor in such a position has the power to demand a better deal during negotiations, which encourages suppliers to sign non-exclusive arrangements for their products.
Competition – If a product has heavy competition on the market, an exclusive agreement may cause a supplier to lose market share. As an alternative, implementing a non-exclusive agreement can allow a supplier to drive up profits without risking losing consumers to rival firms.
Durability of relationship – A supplier may wish to use a non-exclusive agreement for a distributor that has enjoyed a long relationship with their firm. Under an exclusive arrangement , a supplier can lose a competitor that is familiar with its product. A long relationship with a producer or manufacturer will be of great benefit to a firm, so switching into an exclusive agreement can prove difficult.
Market control – Like most businesses, a manufacturer is keen to use a distributor that has thorough knowledge of its industry and a strong band of loyal customers. Examples include supermarkets trusting chosen suppliers with their own brand labels.
Control of the product – If a distributor is already undertaking an activity or task, a firm should avoid changing the rules of that activity. For example, a supplier may lease equipment to a rival firm. Under a non-exclusive agreement, a supplier can retain a level of control over a competitor’s product without limiting market access.
Prior knowledge – If your firm already has a non-exclusive agreement with a competitor and you are satisfied with the results, then you can easily enter into the same relationship with a different entity.