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Royalty payment

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Not to be confused with Royal family.

A royalty is an ongoing stream of money payable to the owner of an asset for use of that asset. Most typically, it is an ongoing fee paid to a licensor for the use of intellectual property (IP) rights. A Royalty Interest is the name given to the ownership of a stream of future royalty payments, and Royalties (its singular form, 'royalty,' sometimes substituting), is the term for the payment.

License agreements

Royalties are common in arrangements involving the licensing of technology comprising of one or more proprietary rights which are sought for commercial use by its user. The principal proprietory rights are those of the patent, trademark, copyright, industrial design and know-how/procedural knowledge, each of which is distinctive. Royalty may be made applicable by the licensor to each, any or to a combination of them. The patent, trademark, copyright and industrial design are the subjects of both national statutes and international conventions which govern what can be held proprietary (have claims of ownership), in which territory and for what length of time. 'Know-how' and 'procedural knowledge' are governed by the trade secrets legislation but do not have the strong specific legal protection of the first set.

The express proprietory rights granted to the licensee and the amounts to be paid to the licensor in lieu of their use are set out in the license agreement[1]. The latter specifies the objective of the agreement, the substance underlying the license, the particular rights granted to the licensee in its respect, the limitations placed on the exercise of the rights, other obligations of the parties, and, importantly, the mode of calculating royalties and the time period over which payments are due for the use of the right(s). Normally, the agreement is for a specific period, but it may be renewable for a further period; equally, it may be a fixed-term license, subsequent to the termination of which the licensee cannot continue to derive benefits from the rights originally granted. In the typical case, however, agreements are renewed until the licensee and the licensor consent to terminate the agreement. It is to be noted that unless the license is exclusive, the licensor may have a number of co-existing licensees who may pay the same or different royalties for the licensed IP depending on the circumstances prevailing at the time such agreements are negotiated.

The royalty amount is calculated by a formula specified in the license agreement which defines the royalty amount or rate and the unit base on which it is to be calculated. For instance, the royalty rate (sometimes also simplified to royalty) may be stated to be 3% of the 'annual sales value' of the product sold by the licensee in a territory. The 'sales value' is then the 'unit base' for the calculation. Or, equally, the base may be x cents per kilogram of the licensed product manufactured, used or sold (the context being important)[2], [3], [4]. Or the royalty could be just stated as $ XXX per year without any elaboration of the base (seldom done).

The royalty rate applied is, generally, not an arbitrary determination of the licensor (See Royalty rate assessment).

Patent royalties

The substance of a patent (see patent for greater amplification), say, for a gear configuration, and the claims made in relation to its novelties and utility are revealed when it is first published by the Patent Office in the territory of its filing. Thus, any competent person in the field should, theoretically, be able to reproduce the assembly and use it, or market it, for gain. However, the owner of the patent (the patentee) has the important right to sue the infringer for infringement if use is made of a granted patent without express permission (i.e. licence) from the owner. It is to be noted that the make, use and sell rights are inherent to many patents, each of which is a separate right under most patent laws and can have great value for a licensee when properly negotiated. The right to import a patented product into a territory where the patent is protected may also be a right (in that patent territory). It must be added that in certain fields, such as pharmaceuticals and chemicals, the "process" by which a product is made is also patentable. In some legislations, however, a chemical process patent may be patentable but not its products (importantly, drugs).

Where there is transfer of technology, patent royalties are, thus, payments made to the patentee (or to a corporation to which the patent has been assigned) to guard against claims of infringement by the patentee. Royalties are paid either for the specific duration period of obligations or to the date the patent expires (if later). The term may get limited through challenge in courts from third parties resulting in its invalidation. Licensees, however, require the patentee to defend the patent if it faces a suit of infringement from a third party.

In many cases, improvements on products or processes are patented, and if the product/process was already outside of any patent claims, then only the improved element is negotiated for license.

In certain fields such as advanced materials, pharmaceuticals, nuclear energy, etcetera, corporates will not generally license out the basic technology but they may license-in technologies which serve to improve process/material capabilities, enhance efficiencies and the like, paying a royalty to the owner of the improvement.

Where, in certain legislations (e.g. the United States) a firm has been able to proceed independently of a license covering the patent, the patentee is legally entitled to no less than a "reasonable" royalty from firm infringing it. If the patent owner has lost profits due to infringement and if said lost profits are more than what a reasonable royalty could have compensated, then the patent owner could be entitled to a royalty up to the amount of lost profits. Should a user willfully infringe on a patent, then the owner may be able to sue to collect punitive damages up to the level of lost profits.

Royalties in Know-how Agreements

Obtaining a 'bare-bones' patent license is typically insufficient for a firm to undertake the manufacture of a product or to practice a process, particularly so in less-advanced countries. It needs to be accompanied by know-how, a significant body of technical information which would place the enterprise competitively in the market-place, improve its efficiencies or enhance the quality of plant performance or its product.

In mature economies know-how is developed in-house by enterprises based on knowledge in the public domain, some owned knowledge, and that underlying an issued patent,independent of any assistance from the patent-holder (that is,the patentee).

Patent licenses, in these cases, are negotiated so as to prevent any practice of the know-how from being challenged in courts as infringing on the exclusive rights of the existing patent-holder. Thus, patent royalties have to be paid to the patentee. The know-how that the firm has developed will, expectedly, be held in secret for competitive advantage. Several firms in a common marketing environment may license-in the same patent. An exclusive patent license that would allow only one firm of the firms to practice would be very expensive, although it is not an unusual situation.

In the less-advanced countries, enterprises do not,typically, have the capability of developing know-how themselves and which would be competitive with those of the advanced countries engaged in the same market-place. Consequently, such enterprises are dependent on licensing-in both a patent and a know-how license, normally from the same licensor.

When there is no expectation of conflict with an existing patent, then only the know-how license is negotiated, with the assurance of the licensor that the know-how does not conflict with patents of third parties, or if found so conflicting, will be defended by it (at sole or shared costs, depending on the negotiating strengths of the parties).

Very often, the value of the know-how is much higher than that of the patent and determines the overall cost of the license.

Book authors may sell their copyright to the publisher. Some photographers and musicians may choose to publish their works for a one-time payment. This is known as a royalty-free license.

Copyright law extends protection to each public performance of a copyrighted work. In the United States, performance royalty rates are set by the Library of Congress' Copyright Royalty Board. Mechanical rights to recordings of a performance are usually managed by one of several performance rights organizations. Payments from these organizations to performing artists are known as residuals. Royalty free music provides more direct compensation to the artists. In 1999, recording artists formed the Recording Artists' Coalition to repeal supposedly "technical revisions" to American copyright statutes which would have classified all "sound recordings" as "works for hire," effectively assigning artists copyrights to record labels.[5] [6]

Other royalty arrangements

The term 'royalty' also covers areas outside of IP and technology licensing, such as oil, gas, and mineral royalties paid to the owner of a property by a resources development company in exchange for the right to exploit the resource. In a business project the promoter, financier, or other parties who arranged for or otherwise enabled the transaction but are no longer actively interested may have a royalty right to a portion of the income, or profits, of the business. This sort of royalty is often expressed as a contract right to receive money based on a royalty formula, rather than an actual ownership interest in the business. In some businesses this sort of royalty is sometimes called an override.

See also

References

by Joseph D. Schleimer, Esq., UCLA Entertainment Law Symposium, 1996

Steven Sills, C.P.A. and William Adelmann, C.P.A., UCLA Entertainment Law Symposium, 1996

  1. ^ Manual on Technology Transfer Negotiation (A reference for policy-makers and practitioners on Technology Transfer), United Nations Industrial Development Organization, Vienna, 1990, ISBN 92-1-106302-7
  2. ^ Guidelines for Evaluation of Transfer of Technology Agreements, United Nations, New York, 1979
  3. ^ Licensing Guide for Developing Countries, World Intellectual Property Organization (WIPO), Geneva, 1977, ISBN 92-805-0395-2
  4. ^ UNIDO International Workshop on Technology Transfer Negotiation and Plant Level Technology Needs Assessment), 7-8 December 1999, New Delhi)
  5. ^ "Four little words". Retrieved 2007-03-15.
  6. ^ "Don Henley Speaks on Behalf of Recording Artists". Retrieved 2007-03-15.
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