Royalty

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Royalties, sometimes simply referred to as 'royalty' is typically the sum of money paid to the proprietor or Licensor of Intellectual Property (IP) Rights for the benefits derived, or sought to be derived, by the user (the Licensee) through the exercise of such rights. Royalties may be paid for the use of copyright, patent, registered design, knowhow or trademark or a combination of them. However, the term has also much wider application and can cover mining royalties, performance of art royalties, etc. The discussion here is limited to IP.

The express rights granted to the licensee, and the amounts to be paid to the Licensor for the exercise thereof, are set out in a documented License Agreement. The agreement specifies the method of calculating the royalties and the period over which the payments become applicable. Normally, the agreement is for a specific period after which it may be renewable for a further period, but equally, it may be a fixed-term licence, 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 to the point of time the licensee and the licensor consent to terminate the agreement. It is to be noted, however, that 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 each agreement was negotiated.

The royalty amount is calculated on a formulation specified in the licence agreement which defines the royalty rate and the base on which it is to be applied. For example, 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 latter identification, the 'annual sales value' is then the 'base' for the calculation. Or,equally, the base may be x cents per kilogram of the licensed product manufactured or sold (the context being important). 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. It is the typical practice for both parties to the agreement to negotiate all factors which apply to the license, one component of which is its cost ie.the royalty. The length of the license period, the benefit to the licensee in the territory (or territories) over which the license rights apply, the 'permanence' of the technology or rights conferred, the size of markets, the reputations of the licensor and licensee, the risk of licensing to the licensor and other related factors are considered (See Royalty assessments).

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