What is a Non-Exclusivity Agreement?
A non-exclusivity agreement is an agreement in which two or more parties do not grant any party exclusivity. In other words, a non-exclusivity agreement allows for one or more other parties to use the same or similar rights or resources as the parties granting the non-exclusive rights to avoid monopoly practices.
For example, a license agreement determines the rights of the parties. This can include a licensee’s right to use a trademark. As such, a non-exclusivity license agreement would be made if the licensee deserves the right to use a trademark and have other licensees use the same or similar trademarks in the same territory.
A non-exclusivity agreement differs from an exclusivity agreement in that only one party has exclusive rights. A non-exclusivity agreement does not force one party into a contract with another that denies the first party to engage in business practices with other parties and vice versa. On the other hand, an exclusivity agreement denies a party the ability to work or conduct business with any other parties, forcing one party into a contract with another .
A business may use a non-exclusivity agreement for a number of reasons. For example, a non-exclusivity agreement can promote fairness between two or more licensing parties. Another reason for implementing a non-exclusivity agreement is it can allow a party the ability to explore multiple options. For example, a non-exclusivity agreement allows an employee the ability to work for other businesses while they are working for their current business. This is useful in preventing monopolies.
Industries, examples, and/or scenarios in which a non-exclusivity agreement is commonly found include licensing agreements and employment agreements. In a licensing agreement, a non-exclusivity agreement may allow a licensee to use the grantor’s trademarks and/or patents but would then allow other licensees to use the same or similar rights. In an employment agreement, a non-exclusivity agreement can provide multiple employers the ability to advertise that they are a non-exclusivity workplace, as opposed to an employer that is exclusive.
Benefits of Non-Exclusivity Agreement
The strategic use of non-exclusivity provisions can yield a wide range of benefits for parties and can make any agreement more flexible, better suited for the parties’ needs, and more strategic. A few examples of where such provisions may be advantageous are detailed below.
Flexibility in methods and timing of performance Although an exclusivity provision may appear to benefit both parties, it can easily work to one or both parties’ detriment. Take for example a common negotiated provision that restricts one party from using third parties for certain specified tasks or activities (for example, a restriction on using third parties for the development and/or procurement of key materials, components, services, or technologies). This type of exclusivity provision can be limiting to a party’s strategic use of third parties. Many companies rely on several contractors for various parts of a project – or as "backup" in case the primary contractor falters for any reason – so if a party’s ability to contract with third parties is limited, that party may not be able to move forward with its plans, exposing the other party to the possibility of delays. Simply permitting a party to use a supplier or contractor, such as through a limited carve-out exception, can provide necessary flexibility.
Moreover, exclusivity may limit the ability of the parties (and/or others) to engage in strategic business moves. For example, an exclusive relationship may prevent a party from requiring both parties to run competitive bidding processes for key components (to drive down prices), while also precluding either party from licensing or acquiring competitive technology for use in other products and/or markets. However, with a carefully drafted non-exclusivity provision, a party can encourage, rather than impede, the parties and their affiliates to pursue such opportunities.
Openness and collaboration Fostering open collaboration between parties can be accomplished with the use of non-exclusivity provisions. By encouraging open discussions, for example, and sharing information with other parties working in related areas, such as suppliers and customers, parties may be more likely to reach agreements in a timely manner. Similarly, permitting parties to share certain work with others on a case-by-case basis (such as third party consultants or experienced in-house employees), may encourage increased productivity.
As an example, in addition to the willingness to share key developments with suppliers, many companies will use overlapping, or redundant, suppliers for certain key components for many reasons (in addition to price). One such reason may be to increase flexibility, as a redundant supplier could be particularly helpful if the primary supplier fails to deliver during the development process, or delivers only half of what was requested. By using more than one supplier, businesses are encouraged to pursue full transparency with each supplier regarding the overall business strategy and critical timeframe, which can encourage cooperation and undermines the need to ‘disguise’ the ultimate intended use of a product or service to an unhelpful/more costly mouse supplier.
This also applies to other parties, such as joint venture partners, who may need to pursue internal approvals. In return for full transparency, the joint venture parties may encourage each other to move decisions through the internal approval processes more quickly, or agree to support other initiatives outside of the joint venture.
Strategic approaches to pricing As with a flexible non-exclusivity provision, a non-exclusivity provision can be used to enhance competition in pricing. For example, such a provision can permit a party to be transparent with suppliers and/or customers regarding the pricing proposals offered by other suppliers/customers, permitting the interested party to evaluate better pricing options. Thus, in the case of suppliers, a company could use competitive bids to inform internal pricing decisions, maximize profitability, and provide the most price competitive product to the customer.
Essential Terms for a Non-Exclusivity Agreement
Specific terms will vary based on the type of relationship formed by the non-exclusivity agreement (for example, whether the parties are conducting a joint venture, a limited partnership, or another type of relationship), but most non-exclusivity agreements will include clauses detailing the duration of the agreement, conditions for its termination, and the rights and obligations of the parties involved.
The specific terms of a non-exclusivity agreement will be influenced by the type of relationship the parties intend to develop, but some common considerations will include:
Duration of the agreement
Termination conditions
Rights and obligations of the parties
Governing law, or the applicable states whose laws will regulate the agreement and its enforcement
Mode of dispute resolution and any governing body charged with interpreting the agreement.
Drawbacks and Potential Downsides
The potential drawbacks and risks of non-exclusivity agreements:
Despite the many benefits of non-exclusivity agreements, there are also drawbacks and risks to consider. A non-exclusivity agreement may limit potential collaboration between parties in certain situations. It can hinder further partnerships if one party is already reaching an agreement with the other party’s competitors. This can be the case in any situation where multiple parties will benefit from an arrangement and therefore might want a similar agreement. Another problem could be that a non-exclusivity agreement increases the risk of conflicts of interest. With a non-exclusivity agreement in place, even if it is well written, it is possible that it will not be draft broad enough to prevent every potential conflict of interest from coming into play. If this happens, a case could arise against the breaching party on the grounds that it violated the non-exclusivity agreement. In any case, a court will not order specific performance to deliver money damages for unprofitable projects and revenue losses.
Uses for Non-Exclusivity Agreement?
When Should a Non-Exclusivity Agreement Be Used?
There are a number of scenarios when it may be better for a business to go with non-exclusivity over exclusivity. Some examples of this are:
- Strategic Move or Weighing Other Options. Just because a particular partner has a desirable characteristic or might be a great addition to the team, if there are other partners that can fit that certain value, a non-exclusivity agreement may work best. When first starting out, for instance, it can be extremely difficult to know exactly what you want in an agreement or what will work. Signing a non-exclusivity agreement is a good way to feel out who you work well with and are the ideal fit for your business.
- Minority or Committed Interest . Similarly, if you have a minority or committed interest in a company, this would call for a non-exclusivity agreement. It allows you to see what impact your idea could have on the start-up and what your role will be without asking for full commitment at the present moment. Non-exclusivity is also a way to avoid showing too much commitment to one idea, while still moving forward quickly with an agreement.
- Seed or Capital Investment. Investing in a start-up or small business can often times be risky. As an investor, you want to get the most out of your investment, however there are a number of factors that can interfere with a return on investment. Sign a non-exclusivity agreement to align with the values of the business (compared to an investor) to decide whether or not to commit one-hundred percent.
How to Draft a Non-Exclusive Agreement
When drafting a non-exclusivity or non-exclusive agreement, it is important to clearly define the parameters of the relationship between the parties to avoid future potential for litigation. Although the use of precise, clear terms is essential in all contracts, it is especially so for non-exclusive agreements because it is vital that the parties to a non-exclusive contract are both aware and agree on the terms of the relationship so that no party feels they are at a competitive disadvantage or is being taken advantage of.
It is also important when defining the applicable laws to include the state in which your business is located. Different states may have different laws that apply to certain situations, and without clear definitions, you could be putting yourself at unnecessary risk.
Having legal counsel draft or review your non-exclusive agreement will ensure that your company’s interests are protected and that there are not any obvious or hidden pitfalls that could cause the arrangement not to be performed in accordance with the letter of the parties’ understanding and/or the spirit of their intent.
Common Legal Considerations and Pitfalls
Of course, like any other contract, the language used in the non-exclusivity agreement is essential to ensuring that it does what the parties intend and fulfills their business needs. It’s also important to bear in mind, as with any agreement, that matters of both state and federal law may be implicated depending on the nature of the relationship of the parties, so it’s wise to have the agreement reviewed by counsel with experience in this area before finalizing it to avoid common pitfalls that can doom the contract or result in litigation.
One mistake legal counsel often sees in these agreements is a failure to tailor the agreement to the particular relationship of the parties. In many cases , the parties may view them as "throwaway agreements" that need not be scrutinized as they are standard form documents that are used for every transaction or relationship. This can result in significant pitfalls if the terms of the non-exclusivity agreement do not line up with the business needs of the parties. Another source of several mistakes is a failure to carefully craft the definitions used in the agreement. Careful definitions are key to reaching a mutual understanding of the rights and obligations of the parties.