How To Make Profits Online, Without Upsetting Uncle Sam (2 in a seris of 3) - Final Version

By Ian Sumter
Posted Tuesday, September 14, 2004

Part 2 - Resale Rights and Licensing

Reseller rights are one of the most common and most popular forms of trading on the internet. Product designers are given a multitude of outlets for their products, and sellers can obtain quality products without paying heavy design costs.

Unfortunately, they are also subject to some of the toughest trading laws in the country. And guess what - even many of the most profitable marketers on the net are simply unaware of this legislation.

You need to make sure you do - as an illegal resale agreement could impact you, just as much as the person who granted it to you. You also risk bringing your affiliates and downline into legal action if you provide them with licensing agreements that break the law.

Now I am no lawyer, just a well-informed freelance internet writer, so by sharing this information with you I am not giving you legal advice or creating a client-attorney relationship.

This article is intended to make you better informed about potential issues which could arise online. If yo have a specific issue on these or any other internet legal matter, you should consult a qualified solicitor.

Most internet resale agreements though will fall within the restraint of trade or price fixing laws. The US economy is founded on the principles of free trade, so consequently the government will look very harshly at agreements which seem to prohibit this.

Penalties for failing to comply with these laws can bring government prosecution, civil law suits from individuals and criminal prosecution. Again, single owner or family businesses are just as much at risk as the big internet players.

Quite simply, it is illegal in a license agreement to set a price that a reseller must charge when they attempt to sell that product. When someone acquires the right to sell a product, they are also entitled to charge whatever price they want.

Now clearly a designer or master rights holder has an interest in protecting the value of a product - so they can advise a recommended price, but this price cannot be fixed.

It is also illegal to design a contract in such a way that the reseller is punished for charging one price, and rewarded for charging a higher price. The following are therefore practices which are illegal with regard to pricing a product:

- Stating directly that a reseller must charge a fixed price when the product is resold

- Paying the reseller a commission if they sell the price at or above a certain level

- Withholding commission if the seller charges too low a price

- Requiring a royalty to be paid by the reseller if too low a price is charged

- Waiving royalty payments if a high price is charged

- Refusing to supply the reseller further goods if a certain price is not charged.

In all of these instances above, the reseller is punished financially if they do not charge a price the licensor desires.

In legal terms, if you are trying to design a contract that circumvents the law, you will be ruled against - as the FTC looks at what you are trying to achieve with your terms and conditions.

There are certain conditions which you can set - as these legitimately protect the value of the product, without restricting the price someone can resell it at:

- You can insist that the product is not given away free
- You can state that the product is not bundled with other products to make a new package
- You can insert a term that states the product must not be altered in any way - either by selling in separate parts, or converting it into another format
- You can insist that it is not included as a bonus

In these instances, no price is being fixed - more the nature of the deal in which the product must be sold.

As you may have guessed, with laws this tight and rigid, the penalties for violation are tough. You and your resellers are liable to up to 3 years in jail or a fine of $350,000 per violation.

In a civil suit you are also liable to damages of 3 times the value of losses suffered by the claimant. Note that this is not 3 times the value of your product - a $15 course or a $5 piece of software.

If your reseller invests significant sums of money in the promotion of your product and fails to recoup that - you will be liable for 3 times that investment, plus court costs. That adds up to a serious amount of money for one small product.

If you are a reseller and believe that one of your licenses is illegally setting the price, the best thing to do is contact the person who granted you the license. You are both equally liable under the law - so the quicker you both act to rewrite the agreement the better.

If you have granted someone else a license that is illegal, you should inform them of updated terms again as soon as possible.

In both of these two instances, the advice of a qualified lawyer should be sort to assess each case on its merits. If this article has alerted you to important aspects of your licensing agreements then it has served its purpose.

In the third article of this series, I shall consider some important issues regarding what terms, conditions and disclaimers you should place on your website.

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More on the legal implications of trading online can be found from websites included in Secret Websites for Online Profits at (www.secretwebsiteprofits.com). For more information on this
e-cyclopaedia please contact customer.support@igsmarketing.com
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About the Author
Ian Sumter is the publishing director of IGS Marketing - a company providing high quality information products to people trading on the internet. You are free to publish this article in your ezine or newsletter - but please include the resource box giving our contact details and website - and paragraphs 4 and 5 setting out our legal position on the advice we give.