Royalties


The Royalties clause is often a sub-clause of the License Fees and Payments and as such clause samples are highly negotiated with highly variable clause language. However, though the language may be highly divergent, the vast majority of Royalties clauses contain the standard clause elements setting forth the royalty rates, a payment schedule and a framework for reporting and auditing records.

Standard Clause

1. Royalties

1.1 Royalty. For each [unit of Licensed Technology] sold by Licensee during and after the term of this Agreement, Licensee will pay to Licensor the royalties specified in the Royalties Schedule [, plus any applicable taxes].

1.2 Payment. All payments hereunder shall be made in U.S. dollars via wire transfer of immediately available funds to an account designated by Licensor within [sixty (60) days] of the end of each calendar quarter.

1.3 Accounting and Audit

(a) Reports. Licensee shall provide Licensor with a [written] statement setting forth [the number of Licensed Technology units sold][and the amount of royalties due] during each quarter within [sixty (60) days] of the end of each calendar quarter.

(b) Records. Licensee shall maintain and keep for a period of at least [three (3) years], complete and accurate records [in accordance with generally accepted accounting principles] in sufficient detail to enable any royalties which shall have accrued hereunder to be determined.

(c) Audits. Upon the request of Licensor, but not exceeding [once in any year], Licensee shall permit [during normal business hours] an independent public accountant, selected by Licensor [and reasonably acceptable to Licensee,] to have access to all such records of Licensee as may be necessary to verify the accuracy of the royalty reports and payments submitted to Licensor hereunder.

(d) Audit Expenses. Any such audit of Licensee's records shall be at the expense of Licensor, except that if any such inspection reveals a deficiency in royalties actually paid to Licensor hereunder in any year of ten percent (10%) or more of the amount of the royalties actually due to Licensor hereunder, then the expense of such audit [plus any shortfall amounts] shall be borne promptly by Licensee.

(e) Surplus. If such audit reveals a surplus in royalties actually paid to Licensor by Licensee, Licensor shall refund to Licensee the surplus amount within [thirty (30) days] after such audit.

Optional Additional Clause Elements

1.4 Forecasts. Beginning in the first quarter that Licensee first commercially ships any Licensed Technology Product, Licensee shall provide Licensor with a [six (6) month] rolling forecast for each Licensed Technology. Licensee shall provide Licensor with an update of such forecast on a quarterly basis thereafter.

1.5 Minimum Royalties. Licensee agrees to guarantee minimum non-refundable Royalty payments to Licensor for Licensed Technology. The minimum royalties will be paid in quarterly installments based on the Licensed Technology minimum amounts set forth on the Royalties Schedule. If in any year the actual number of Licensed Technology units manufactured exceeds the minimum unit amount set forth on the Royalties Schedule for such year, the excess amount will be deducted from the following year's minimum amount.

Discussion

"There are several notable findings of this study. First, royalty rates are highly dependent on the nature of the agreements, with product licenses and distribution agreements exhibiting among the highest royalty rates, and Bare Patent licenses exhibiting among the lowest royalty rates for each industry category. Second, royalty rates for patent licenses that include technology "Know-How" generally have higher royalty rates than licenses that cover only Bare Patent rights. Third, patent licenses in which the licensor is a commercial entity generally have higher royalty rates than patent licenses in which the licensor is an individual, an educational institution, a government agency, or a non-profit organization. Fourth, observed Patent Settlement agreements generally have higher royalty rates than Bare Patent licenses. (I discuss later in this paper a likely bias in the dataset toward findings presented in this paper relate to the relationship between royalty rates and the selection of a royalty base, analysis of agreements with variable or "mixed" royalty rates, and analysis of non-royalty financial provisions.)"

Thomas R. Varner, Technology Royalty Rates in SEC Filings (via lesi.org)