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.
Optional Additional Clause Element
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.
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.
“ 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)
Examples of Royalties Clause
Royalties to Monsanto for Monsanto Enabling Technologies. Royalties for Monsanto Enabling Technologies shall be paid as a percent of Ceres Net Revenue as defined below. These royalties are cumulative.
Certain Transactions. If Ceres or Ceres Affiliates sell, license, transfer, provide or otherwise make available to any Third Party any products, services, technology, Patent Rights or any other intellectual property or proprietary rights that are subject to the royalty provisions of this Article 3: (a) in return for non-cash consideration or (b) in a transaction that is not a arm’s length commercial transaction; then the applicable royalties due under this Agreement shall be based on (i) with respect to (a) above, the fair market value of such non-cash consideration and (ii) with respect to (b) above, the list price for such products, services, technology, Patent Rights or any other intellectual property or proprietary rights or, if there is no applicable list price, then the average price normally charged by such party in an arms length transaction to independent Third Parties making similar quantity commitments (if applicable). Notwithstanding the above, it is understood and agreed that if Ceres receives only cash consideration and no non-cash consideration and there is no dispute that the transaction is an arm’s length transaction, then the sufficiency of such consideration may not be an issue subject to arbitration.
Payments of Royalties. Within ninety (90) days after the end of the applicable semi-annual calendar period following the first commercial sale of a Ceres Licensed Product and within ninety (90) days after the end of each six (6) months thereafter, Ceres shall make a written report to Monsanto setting forth the information, including that of Affiliates and licensees or sublicensees, necessary to permit Monsanto to calculate and confirm the royalty payment due Monsanto, even if no royalty payment is due. At the time each report is made, Ceres shall pay to Monsanto the royalties shown by such report to be payable hereunder. Payments due on sales in foreign currency shall be calculated in United States dollars on the basis of the rate of exchange in effect for purchase of dollars at Chase Manhattan Bank, New-York, New York, on the last business day of the last-preceding June or December, whichever shall be later. Payments shall be without set off and free and clear of any taxes, duties, fees or charges other than withholding taxes, if any. Ceres shall promptly notify Monsanto of any requirement under applicable law to withhold an amount on behalf of the Monsanto on account of any tax and, if so required by applicable law, Ceres shall (a) pay to the relevant authorities the full amount required to be withheld promptly upon determination by Ceres that such withholding is required, and (b) promptly forward to Monsanto an official receipt or certificate (or certified copy thereof), or other documentation reasonably acceptable to Monsanto, evidencing such payment to such authorities. To the extent that Monsanto cannot or will not be able to take a full credit against its tax liability for the current or prior taxable years for the full amount of the withholding tax withheld by Ceres and is otherwise unable to reduce or eliminate such withholding tax liability on its own, the parties shall reasonably cooperate with each other and use reasonable efforts to reduce or eliminate such tax liability in a lawful and appropriate manner to the extent such does not result in additional liability to Ceres. All payments under this Agreement shall be made by electronic fund transfer to an account in the United States which the other party may designate from time to time by prior written notice.
Books and Records. Ceres shall keep, and shall cause its Affiliates, licensees and sublicensees to keep, books and records in such reasonable detail as will permit the reports provided for in this Agreement to be made and the royalties and other amounts payable hereunder to be determined. Ceres further agrees to permit Monsanto’s and their Affiliates’ books and records to be inspected and audited from time to time upon reasonable prior written notice (but not more often than once annually) during reasonable business hours by an independent certified public accountant, designated by the holder of such books and records and approved by the other party, which approval will not be unreasonably withheld, to the extent necessary to verify the reports, royalties and other payments due under this Agreement. Such independent certified public accountant shall be bound to hold all information in confidence except as necessary to communicate to the auditing party only whether the reports, royalties and other amounts paid are correct, and if not, the reason why not and the amount and nature of any deficiencies. In the event that such an audit results in additional royalties or other amounts being owed to Monsanto, such royalties and other amounts shall be paid within sixty (60) days from notice of deficiency along with interest calculated as from the date the correct payment was due to the date of actual payment at an annual rate of five (5) percentage points above the prime rate quoted by Chase Manhattan Bank, New York, New York, on the day payment was due, until paid. The fees and expenses of such audit shall be paid by Monsanto; however, if the original payment was more than five percent (5%) less than it should have been, the fees and expenses of the audit shall be paid by Ceres.
Late Payments. If any royalties or other amounts owed under this Agreement are not paid when due, in addition to any other remedies available to Monsanto, the unpaid amount shall bear interest, compounded annually, at an annual rate of five (5) percentage points above the prime rate quoted by Chase Manhattan Bank of New York on the day payment was due, until paid or offset.
Royalty. No Royalty will be owed on Phase I prototype Engines; however, for all prototypes that Licensee creates it shall also provide to CPT duplicate, made-in-China parts to allow CPT to build at least one such prototype engine in the United States using Licensee’s parts.
Royalties for Phase II Production will be determined prior to commencement of Phase II of the License, with the intent to develop a royalty structure that will provide for competitive product pricing within local market conditions. However, royalties will not exceed the following levels:
License Fees and Royalty
2.2 Licensee will pay to Licensor the Royalties at the rate and on the schedules specified in the Specific License Terms, or any Addendums or Amendments. Royalties shall be due quarterly on the 15th day following the end of each fiscal quarter, for sales made in the previous three-month period. All Royalties shall be paid in immediately available U.S. funds.
2.3 If Royalties paid to Licensor in any given fiscal quarter are less than 10% of the total royalty Sales Quota required for that entire year to maintain exclusivity, as will be attached hereto in Addendum or Amendment, Licensor may require Licensee to pay the royalty Sales Quota on a quarterly basis (calculated by the total Sales Quota for that year, divided by 4, and multiplied by the highest applicable Royalty rate).
2.4 If Licensor does not receive from Licensee the full amounts due on or before the day upon which such amounts are due and payable, such outstanding amounts will thereafter bear interest until payment at the maximum rate permissible by applicable law, but in no event to exceed 18% per annum. Amounts received by Licensor will first be credited against any unpaid interest and accrual of such interest will be in addition to and without limitation of any and all additional rights or remedies that Licensor may have under this Agreement or at law or in equity. Licensee agrees to pay all reasonable expenses in connection with the collection of any late payment. Until such time that the Licensee has provided two (2) years of Phase II Royalties to Licensor, or Licensee has over US$1,000,000 in verifiable assets, whichever is sooner, Guarantors will guarantee all payments to Licensor under this Agreement. Such timeframe shall not limit Guarantors’ liability for failure to protect Licensor’s IP due to their negligence or misconduct.
Reports and Audit.
3.2 Licensor (or its authorized representative) may, upon reasonable notice and during Licensee's normal business hours, enter Licensee's premises for the purposes of auditing any and all books of account, documents, records, papers and files relating to Licensee's manufacture and sale/use of the Licensed Products ("Licensee Documents"). Licensee Documents will be made available to Licensor (or its authorized representative) solely for such auditing purpose. Licensor will bear the expense of any such audit unless such audit reveals that royalties and fees paid by Licensee pursuant to this Agreement for any payment period are less than 90% of what should have been paid by Licensee. In such event the costs of the audit, including any required travel, will be borne by Licensee, in addition to and without limitation of any other rights or remedies Licensor may have. Prompt payment of any amounts found due and owing Licensor, including audit fees and expenses due Licensor under this Section, will be made by Licensee.