Key Takeaways

  • An exclusivity agreement restricts one party from engaging with competitors for a specific time, geography, or product category.
  • These agreements help businesses build trust, secure competitive advantages, and protect investments.
  • There are several types of exclusivity agreements, including purchase, distribution, and employment-related clauses.
  • Key risks include lack of flexibility, potential legal disputes, and limiting access to better partnerships.
  • Clear definitions, timelines, exceptions, and remedies are essential for a valid and enforceable clause.
  • Exclusivity terms can be mutual or one-sided, depending on the negotiation power of the parties involved.
  • Businesses should consult legal professionals before entering exclusivity agreements to ensure fair and enforceable terms.

What Is an Exclusivity Clause?

An exclusivity clause is part of a bigger legal document that restricts the signer from buying, selling, or promoting any goods or services from any person or company other than the issuing company associated with the contract. In other words, the company or individual works exclusively with the issuer of the contract. Many company owners who are excited and eager to get started in business may overlook the clause. It may also be included as part of another legal document or contract.

However, an agreement of this nature should be taken seriously. Make sure you understand the terms and potential risks involved before you sign. Violating an exclusivity clause can come with stiff penalties and fines. It is also very difficult to break this clause of a contract without being held responsible for the penalties listed. The clause is also referred to as an exclusivity agreement form and an exclusivity contract.

An exclusivity clause is an agreement between at least two parties where one party will purchase goods exclusively from another. This ensures that the seller is the only party providing the other with the goods outlined in the agreement. A violation of an exclusivity clause may result in a cancellation of the contract, leaving the signer responsible for any goods or services purchased. But this scenario is likely the best scenario since the contract issuer can take more extreme legal action. In some cases, violators of exclusivity agreements have been restricted from buying other goods or services from competitors.

An exclusivity clause mandates that the parties who have signed are legally restricted to sell or purchase goods to or from a single party. The buyer is restricted from promoting, buying, or using similar products from any other vendor or provider. This clause could apply in several situations, including franchises, distributorships, and business opportunities.

If a business broker or investment banker represents one of the parties, the exclusivity clause would refer to the exclusive engagement between the banker/broker and the seller. But if the broker no longer represents the seller and the company is sold within a specific period of time, this can violate the terms of the exclusivity agreement.

A seller might say it is too hard to determine whether a buyer was involved in the deal when a business broker is involved. But the overall purpose of an exclusivity agreement is to protect the broker from working with a seller who breaks the deal as soon as the seller meets the buyer, thus eliminating the need to pay the broker for their services.

An exclusivity clause will typically state that the seller cannot pursue or consider offers made by other potential buyers once the Letter of Intent (LOI) has been signed. Exclusivity clauses tend to be complex and may lead to issues between the two parties. Some investors believe that companies should never offer or take exclusive deals. But in some cases, an exclusivity agreement can help protect both parties.

Types of Exclusivity Agreements

Exclusivity agreements vary depending on the relationship and the nature of the business. Some of the most common types include:

  • Exclusive Supply Agreement: One party agrees to purchase goods solely from the supplier.
  • Exclusive Distribution Agreement: A distributor is granted exclusive rights to sell a product within a specific region.
  • Exclusive License Agreement: A licensee is given sole rights to use certain intellectual property, such as a patent or trademark.
  • Exclusive Services Agreement: One party agrees to provide or receive services from a single source.
  • Employment-Based Exclusivity: Contracts may prohibit employees from working with competitors or freelancing in similar fields during or after employment.

These variations allow businesses to tailor exclusivity to their unique operational and legal needs.

Example of an Exclusivity Agreement

One example of a successful exclusivity agreement is one of the top-selling electronics across the globe: the Apple iPhone. When Apple launched the iPhone in 2007, it formed an exclusive partnership with AT&T to sell the phone. It took two years of negotiation to come to this agreement. Prior to 2007, wireless carriers were extremely cautious about the software on mobile phones and had to be able to control the software to maintain a relationship with their customers.

Apple broke the mold in terms of wireless carrier-controlled software by controlling exactly what software was installed on its product. AT&T took a big risk by taking this exclusivity agreement since it lost lots of control over the device's functionality and operation. But the wireless company saw the success of the iPod and decided to give control of the customer experience to Apple. AT&T benefited because any customer who wanted an iPhone would have to sign a two-year service agreement with AT&T.

The original exclusivity clause between Apple and AT&T was rumored to last for five years, but exceptions and "out" clauses allowed Apple to begin selling through other carriers a few years after the release of the first iPhone. The wording and execution of the clause with AT&T also helped Apple create a template for agreements in other countries, where AT&T didn't offer service.

Startup and smaller companies may not have as many opportunities for exclusivity clauses since their buyers aren't often concerned with beating out the competition. However, as the deal gets larger, more executives will push for exclusivity to help their companies win in the market. Winning against competitors may include offering services or products at lower costs and growing revenue faster. Offering an exclusive product or service is one quick way to achieve both goals.

Why Is an Exclusivity Clause Important?

An exclusivity clause can protect both parties involved with a contract. Without the clause, a buyer could opt out of selling or promoting a business partner's goods or services, making it harder for that company to succeed. The exclusivity clause also benefits the buyer because it restricts the seller from making the goods or services available to anyone who is willing to sell or promote them. Limiting exposure is a marketing tool that can increase excitement and anticipation among consumers.

Exclusivity clauses are commonly seen in commercial lease agreements. An "anchor tenant" in an office building, shopping center, or other commercial building, whose presence helps attract customers and other tenants, may bring up this type of clause. An exclusivity clause, in this case, might prevent the commercial building owner or management from leasing to the anchor tenant's competitors at the same site.

Common Provisions in an Exclusivity Agreement

A well-drafted exclusivity agreement typically includes several important provisions:

  • Term and Duration: Specifies how long the exclusivity lasts and whether it automatically renews.
  • Scope: Defines what products, services, or territories are covered.
  • Performance Requirements: May include minimum purchase thresholds or sales targets to maintain exclusivity.
  • Termination Clause: Outlines conditions under which the agreement can be terminated early.
  • Remedies for Breach: Details legal remedies such as damages, injunctive relief, or termination.
  • Exceptions or Carve-outs: Specifies any exclusions, like existing relationships or preapproved third parties.

These terms ensure clarity and reduce the likelihood of legal disputes later on.

Reasons to Consider Not Using an Exclusivity Clause

Using an exclusivity clause within a business contract can put the signer under financial strain. If major opportunities come up that would directly violate the clause, the signer cannot take advantage of the compensation and other benefits that may have come from that opportunity. If you are worried about losing out on better opportunities, it is often best not to sign a contract with an exclusivity clause or negotiate the terms so that you have more flexibility.

For example, many bloggers work with companies to promote their goods or services. These agreements might include exclusivity clauses to prevent the blogger from writing about similar products or services within a short time, which may cause confusion among readers and potential customers. Bloggers might negotiate for shorter periods in which they must exclusively promote the brand and then have the freedom to move on to other opportunities.

Potential drawbacks of an exclusivity clause include:

  • Limited flexibility and creativity.
  • Prolonged time without the option to take other opportunities.
  • Financial strain due to losing out on other business opportunities and partnerships.

In the past, exclusivity agreements were sometimes problematic in so-called "zero-hours contracts." A zero-hours contract does not obligate an employer to provide a set number of working hours to a worker, and it does not obligate the worker to accept any offered work. An exclusivity clause in a zero-hours contract could result in a worker missing income-earning opportunities from other companies even if no work is available from the original employer. The Small Business, Enterprise, and Employment Act of 2015 made exclusivity agreements in zero-hours contracts unenforceable.

If an employer tried to take action against a worker under an exclusivity agreement with a zero-hours contract, that employer could be liable for compensation to the employee.

Reasons to Consider Using an Exclusivity Clause

Choosing to use an exclusivity clause can come with a number of benefits. When negotiating this clause, both parties should make sure that it works on both sides. You may want to negotiate for increased compensation because you are limiting future work or opportunities. Some of the reasons to consider using this type of agreement include:

  • Limiting who your partners work with to create a competitive advantage.
  • Becoming an exclusive provider of services or goods to a business.
  • Receiving services or goods exclusively from another party.

Before signing any contract that includes an exclusivity clause, make sure you clearly understand the terms. You can always request to negotiate terms of the clause if you are unhappy with the restrictions. The worst that can happen is the contract issuer can say no. Prior to signing, make sure you fully understand the worst-case scenarios, such as if you break the clause, the company goes out of business, or other issues that could arise. If you understand those and still feel comfortable with the terms, go ahead and sign.

Benefits of an exclusivity clause might include:

  • Increased income.
  • More brand loyalty.

Strategic Advantages of Exclusivity Agreements

Exclusivity agreements can offer more than just operational control. They can serve as a strategic business tool by:

  • Securing Market Share: Locking in key customers or distributors before competitors can.
  • Building Stronger Partnerships: Reinforcing long-term collaboration through guaranteed business.
  • Encouraging Investment: Assuring a party that their marketing or operational investments will not benefit competitors.
  • Improving Supply Chain Reliability: Creating stable, predictable demand and delivery arrangements.
  • Strengthening Brand Identity: Allowing businesses to maintain control over how their product or service is presented and sold.

For startups, exclusivity can also be used to attract larger partners who demand assurance they’ll remain the sole provider or promoter in a category or region.

Deadline

An exclusivity agreement is rarely unlimited; this term will just about always have an end date. So, while there is no firm deadline, it is important to establish an immediate need for the product or service before offering to a seller. In the iPhone example, Apple did not begin selling the iPhone to other carriers or customers before arranging the exclusivity deal with AT&T. The excitement of the new product in the mobile device industry pushed customers to AT&T, making the deal work for both parties.

What Could Happen When You Use an Exclusivity Clause?

With an exclusivity clause in place, the seller is obligated to only promote, solicit, and sell the agreed-upon products or services. The clause restricts the seller from making agreements with other companies that would be considered as competitors. With this agreement in place, the buying party agrees not to solicit the goods provided by the selling party from anyone else as long as it is in effect. Whether you are the seller or the buyer, you can create a competitive advantage for yourself in this case since no one else will have access to the same goods.

What Could Happen When You Do Not Use an Exclusivity Clause?

Without an exclusivity clause in place, the seller may not see the benefit of selling or promoting only the products or services from one company. In the blogging example used above, it might look inauthentic if the blogger posts about similar products and/or services within a short period, causing potential customers to ignore the suggestions. Without an exclusivity clause, the company cannot guarantee loyalty from its partners.

One example in recent legal history was a case between JPL Livery Services, Inc. and the Rhode Island Department of Administration. The state of Rhode Island negotiated a contract with JPL Livery Services, Inc. to transport dead bodies to the medical examiner's office. When the medical examiner's office was seeking to cut costs, it assigned some of its employees to pick up the bodies. JPL Livery Services, Inc. filed a suit against the medical examiner's office, claiming that the contract was exclusive. But without the clause in place, the state Supreme Court ruled against JPL Livery Services, Inc.

Risks of a Poorly Drafted Exclusivity Agreement

Even when a contract includes an exclusivity clause, poor drafting can lead to:

  • Ambiguous Terms: Vague definitions of scope or duration can make enforcement difficult.
  • Unreasonable Restrictions: Courts may find overly broad terms (e.g., indefinite duration or excessive geographic scope) unenforceable.
  • Disputes Over Breach: Without clear breach remedies, parties may disagree on consequences.
  • Unbalanced Obligations: One-sided benefits may be challenged, especially if there's no consideration provided in return.

To avoid these pitfalls, exclusivity clauses should be tailored, specific, and balanced between parties.

Breaking an Exclusivity Clause

If you break the terms of an exclusivity clause and sell for or purchase goods from another vendor, the penalties could be extremely harsh. At best, the company you have signed the agreement with could cancel the terms and require that you pay for the products you have agreed to purchase. The other party also has the legal right to sue you. This could result in limitations around purchasing products from any other source. Often, parties will choose this course of action to prevent the other party from buying goods from a competitor.

You could also be limited from purchasing or selling goods for a period of time, depending on the terms of the agreement. The exclusivity agreements between franchisors and franchisees are often more stringent than those between other parties. Before you sign anything, negotiate the terms until you feel comfortable with what you will be getting yourself into by signing the agreement.

Legal Considerations and Enforceability

The enforceability of an exclusivity agreement depends on several legal factors:

  • Reasonableness: Courts often assess whether the restriction is necessary to protect a legitimate business interest.
  • Consideration: There must be something of value exchanged for the exclusivity to be enforceable.
  • Public Policy: Agreements that unduly restrain trade or competition may be invalid under antitrust laws.
  • Jurisdiction: Laws vary by state and country; some courts may limit or refuse to enforce restrictive covenants.

In certain industries—especially technology, employment, and franchise settings—jurisdictions may apply stricter scrutiny. Consulting an attorney can help ensure the agreement is both enforceable and aligned with business goals.

Steps to File

When crafting an exclusivity clause, the contract issuer should focus on:

  • The amount of time the exclusivity clause will be in effect.
  • Whether the company wants to name competitors to narrow down the playing field.
  • Whether the company wants to name an industry (or industries) to narrow down the playing field.
  • Whether the company wants to limit the geography to narrow down the playing field.

In exchange for an exclusivity agreement, the company should seek:

  • Long-term and larger contracts.
  • An agreement from the signer that the company will be committed to the success of the product or service. Commitments might include case studies, press releases, or reference calls to boost sales and raise awareness.

Make sure the clause is specific about exclusivity. Leaving the terminology too broad could cause confusion and upset both parties involved.

Sample Exclusivity Clause

An exclusivity agreement can include a variety of details, depending on the terms and conditions needed by each party. However, most will follow a similar outline. Include the first and last names of each involved party as well as the agreement creation date. Clearly state that both parties have elected to enter into the agreement based on their interest and free will. Then, outline the terms upon which both parties agree.

The next section should cover which party will provide goods or services exclusively to the other. Mention that during the period of the agreement, the seller is not allowed to promote, sell, or solicit the product to any other parties. Additionally, outline the fact that the buyer is not allowed to purchase the product from any other vendor.

Go over what goods or services are included within the terms of the agreement. Include the minimum recommended sales price for all goods or services listed in the clause. The buyer must be willing to pay that price for the product during the agreement's term.

Next, the agreement should outline the standards of the products being offered exclusively to one party. The buyer should not be forced to purchase a subpar product just because of an exclusivity clause. If they receive something that does not meet the description outlined in the standards section of the agreement, the seller should have the opportunity to correct the issue by replacing the product or refunding the money paid.

Discuss the payment terms of the agreement, including any discounts, deposits, and taxes required or given. Go over how the seller will provide invoices to the buyer as well as late fees or payment options. You may choose to include a section that covers the required action if one party terminates the agreement. The seller may require the buyer to purchase a set number of units at a set price.

Delivery is an important aspect of an exclusivity clause, so talk about how goods or services will be delivered. Include details about any product delays and how those will be handled. Expedited shipping options may be included if the seller offers them. Outline which party is responsible to pay taxes on the goods, including local, federal, and state taxes.

Most exclusivity clauses will include some type of warranty on the product. If the seller provides a product that is not in the condition outlined, they must either provide a new product or a full refund for any defective items. The buyer in an exclusivity agreement should have the opportunity to inspect all products at the time of receipt.

Duration of an Exclusivity Clause

The length of an exclusivity clause is determined by the specific terms outlined in the agreement. These clauses can last anywhere from a few months to several years, depending on the nature of the relationship and the goals of the parties involved. While some agreements may be short-term to cover a limited engagement or product launch, others can span 5–10 years in more complex partnerships. It's essential for both parties to clearly define the duration in writing to avoid ambiguity and potential disputes.

Obligation to Sign an Exclusivity Clause

Signing an exclusivity clause is not mandatory, but choosing not to sign may affect your ability to work with certain companies or secure specific deals. Businesses that offer exclusive arrangements often do so to protect their interests and may view refusal as a risk. However, many companies are willing to negotiate the terms. If you’re concerned about restrictions or long-term commitments, consider proposing alternative terms or narrowing the scope of the clause before deciding whether to move forward.

Frequently Asked Questions

What’s the difference between an exclusivity clause and a non-compete? An exclusivity clause typically applies to a specific transaction or contract, limiting dealings with others during its term. A non-compete restricts an individual or entity from working with or as a competitor after a relationship ends.

Can exclusivity agreements be mutual? Yes, mutual exclusivity agreements bind both parties to deal only with each other, providing equal protection and obligation.

What happens if an exclusivity agreement conflicts with antitrust laws? If an exclusivity agreement is found to unfairly limit competition, it may be deemed unenforceable under federal or state antitrust laws.

Should I include penalties in my exclusivity agreement? Yes, including defined remedies or penalties for breach can help deter violations and clarify legal recourse.

How specific should the scope of the agreement be? Very specific. Clearly define what products, services, markets, and territories are covered to prevent misunderstandings and litigation.

If you need help with an exclusivity clause, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.