المساعد الشخصي الرقمي

مشاهدة النسخة كاملة : Distribution Contracts: Publisher's Protection Of Their Inventory



Hosam Hawamdeh
09-01-2010, 01:41 AM
Distribution Contracts: Publisher's Protection Of Their Inventory
© Copyright 2002 Lloyd L. Rich

Introduction
Entering into an agreement with a distributor, or a publisher acting as a distributor, can be a very effective means of increasing sales for the small or mid-size publisher. A distribution agreement permits a publisher to entrust a distributor with the day-to-day business of getting published books into bookstores and other sales locations while the publisher concentrates on the acquisition and publication of new manuscripts and promotional activities.
However, once a publisher begins to work through a distributor a portion of the publisher's book inventory is placed at risk because it moves outside the direct control of the publisher. A significant danger occurs for the publisher if the distributor declares bankruptcy. In such an event the publisher risks losing ownership of that portion of its inventory that is under the distributor's control.
Title and Control of the Publisher's Inventory
Many distribution agreements provide that the publisher's inventory under the distributor's control is being held on a consignment basis. Consignment means that the publisher's inventory has been deposited with the distributor "to be sold" to a third party, whereby title (ownership) to the publisher's inventory does not pass until there is an action of the distributor indicating the sale of the publisher's inventory. In the event the distributor fails to sell all or part of the publisher's inventory to third parties then the distributor simply returns the unsold inventory to the publisher. The distributor has no obligation to pay the publisher for the unsold portion of the inventory.
Any time a distributor holds inventory on consignment, the inventory becomes subject to claims by creditors of the distributor under a legal principle known as the "ostensible ownership doctrine". This doctrine means that a creditor may rely on the possession of goods by his debtor as an indication of the debtor's ownership of those goods. What this means to a publisher is that a distributor's creditor may assume that the inventory the distributor has in its possession belongs to the distributor unless the publisher has taken specific steps to secure a claim to its inventory.
The law distinguishes between "true consignments" and "secured transactions". In a true consignment, the title to the publisher's inventory remains with the publisher; therefore no interest in the publisher's inventory would be given to the distributor's creditors. For the publisher, this means that if a publisher's relationship with a distributor could be characterized as a true consignment, the publisher would retain absolute ownership rights over its inventory irrespective of any claims of the distributor's creditors.
On the other hand, if the relationship were deemed to be a secured transaction, and not a consignment, then Article 9 of the Uniform Commercial Code ("UCC") would govern the arrangement. A secured transaction is based upon a security agreement that provides the party consigning goods, such as a publisher consigning its inventory to a distributor, with a security interest in those goods. In this case if the publisher failed to attach and perfect a security interest in its inventory it could lose its inventory to the distributor's creditors under the rules of priority that determine who has first claim on the distributor's assets, which would include the publisher's inventory.
Unfortunately, it is usually extremely difficult to determine whether the transaction between the publisher and distributor is a true consignment or a secured transaction. In the event of a bankruptcy proceeding both secured and unsecured creditors will argue that the consignor (publisher) should not receive back its goods being held by the distributor before creditors, but that the consignor should only obtain back its goods according to the creditor priority rules of the Bankruptcy Code and Article 9 of the UCC.
States that have adopted the UCC typically require that the owner of the goods, such as a publisher, must prove that the agreement with the distributor is a true consignment rather than a security transaction. Proving a true consignment will be difficult because the UCC does not provide a definition of the term "true consignment". Furthermore, the common law regarding consignment, which frequently favored the consignor, has significantly changed under the UCC so that unless the consignor strictly adheres to the security interest rules enumerated in Article 9 or possibly the consignment notice rules under Article 2 the consignor is highly unlikely to prevail against secured creditors.
Under subsection 2-326 (3) of the UCC which is strictly interpreted by the courts, a publisher's inventory would not be subject to the claim of a distributor's creditors if one of the following conditions applies: 1) the publisher's interest in its inventory is evidenced by a "sign"; 2) the publisher establishes that the distributor is generally known by its creditors to be substantially engaged in selling the goods of others; or 3) the publisher complies with the security interest provisions of Article 9 of the UCC.
The first exception provides that a sign must conspicuously inform third parties that the distributor does not own the inventory. This exception offers little protection for the publisher, as only a few states actually permit this exception. The second exception, knowledge that creditors are aware that the distributor sells goods that are not owned by the distributor, does not usually offer much protection for the publisher either, as it is difficult to prove what most of a distributor's creditors "actually know". The third exception, perfecting a security interest in the inventory and therefore complying with the provisions of Article 9 of the UCC, provides the most protection to the publisher who wishes to protect ownership title to its inventory from the distributor's creditors.
Preventive Measures by the Publisher
Although most courts have interpreted UCC 2-326 strictly there have been some instances where the court has construed the statute liberally in order to favor the consignor of the goods. However, in a bankruptcy the publisher does not want to depend upon a liberal interpretation of the UCC laws to save its inventory from creditors since that is the exception and not the norm. Therefore, the prudent publisher would be wise to take preventive measures when entering into a distribution agreement so as to provide some degree of protection for itself from potential claim disputes regarding their inventory. This however may be easier said then done as it will depend upon how flexible the distributor is when it comes to negotiating and including "protection of inventory" terms in the distributor's standard distribution agreement.
There are two things a publisher could do to avoid a potential claim dispute over its inventory that is stored with a distributor. First, the publisher should insist that the distribution agreement explicitly provides that ownership title to the publisher's inventory remains with the publisher until the distributor sells the inventory to third party customers and/or the inventory is fully paid for by the distributor. This type of contract clause may help prevent the bankruptcy trustee or creditor from claiming title to the publisher's books.
Second, and most importantly the publisher should include a contract clause that permits the publisher to file a security interest agreement that perfects the publisher's interest in its inventory and assures the publisher of priority over the distributor's creditors. This is accomplished by having the distributor sign a standard form commonly known as UCC-1 that is then filed with the Secretary of State or in County Clerk's office in the county in which the inventory located. If a security interest has not been "perfected" by the filing of the UCC-1 form, then other creditors of the distributor could have priority over the publisher's inventory that is held by the distributor.
Sometimes a publisher will also attempt to include a bankruptcy clause in the distribution agreement. The purpose of this clause is to permit the publisher to reclaim its inventory in the event that the distributor files a petition for bankruptcy or reorganization. In reality, this clause may not be very effective since bankruptcy law will ultimately determine the fate of the publisher's inventory and the priority of the publisher as a creditor for any of the distributor's assets including the publisher's inventory. Furthermore, Section 365(e) of the federal Bankruptcy Reform Act has invalidated bankruptcy clauses under certain circumstances.
Conclusion
The advantages for a publisher in using a distributor may be significant but the publisher must also be aware of the risks involved in entering into a distribution agreement. One of the most significant risks may be that of the distributor declaring bankruptcy. Therefore, it is essential that the publisher recognizes the possibility of the distributor's creditors claims on its inventory and take as much precaution as possible to limit such risk