Justin R. Muehlmeyer
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How to Get Your Money from a Licensing Arrangement
Here at Peacock Law, one of the questions we receive most often from clients is how they will be paid by a licensing agreement. The short answer to that question of how one will get paid is that it depends. Licensing agreements dictate the terms under which a vendor will be permitted to use a specific piece of intellectual property – how long and for how much money. Payment terms and methods depend on the nature of the IP, the state of the market, the leverage of the parties and the value of the deal.
For example, a licensee might agree to pay an amount, either variable or fixed, to the licensor in the form of royalties. Royalties are payments made in exchange for permission to use a given piece of intellectual property for a specified period of time. Not all license agreements involve royalties, and even if they do, there are likely many other payment terms and licensing obligations that may make or break the deal.
Some of the most common terms associated with payment amounts or methods in such agreements are discussed briefly below to get you going on the lingo. The terms are not necessarily defined clearly by law or understood in the same way by everyone, so the terms should be clearly defined in the licensing agreement.
- Royalty Rates on Net Sales: Royalties are typically a percentage of “Net Sales” of the products covered by the intellectual property. Licensing agreements that pay royalties set forth the percentage that a licensee will pay from each sale of a licensed product calculated based on what counts as a sale, that is, what the definition of “Net Sale” is.
- Royalty Calculations: Licensing agreements should state which products are being licensed, the royalty rate, and how royalty calculations are made. Failing to clearly address how the royalties are calculated can easily cause disputes.
- Returns and Allowances: Licenses involving royalties on “Net Sales” of products should address whether net sales includes products that are returned or damaged during delivery, and which party bears the burden of credits, rebates and discounts on the covered products.
- Minimum Sales Requirements: Licensing agreements often include requirements for minimum sales levels. Such agreements may allow a licensor to revoke a license if a licensee fails to meet certain sales goals. This prevents the licensee from sitting on their rights and incentivizes commercialization and Net Sales.
- Payment Amount: Be careful, this is an ambiguous term and typically refers to all of the payment obligations rather than just a single amount to be paid. For example, the Payment Amount may refer to both the obligation to pay a Licensee Fee and to pay a Royalty.
- Payment Schedule: Some payments may be due on a schedule with either fixed or variable payment amounts. The licensing agreement should also address what happens if the licensee fails to make a scheduled payment.
- Renewal Rules: Renewal rules determine how and whether a licensing agreement will be extended. Many agreements include language extending agreements by default. Some agreements might have a ballooning license renewal fee.
- Guaranteed Payments and Licensing Fees: This is a minimum amount of money that licensees must pay to the licensor regardless of sales figures. Sometimes these payments are flat fees paid on a schedule regardless of whether sales off products are actually made. Such agreements should also indicate how scheduled dates for sales figures are calculated to minimize the risk of adverse legal action.
Failing to address and properly define the payment terms in a licensing agreement is a leading cause of disputes in licensing agreements. Miscalculation or failure to meet one or more required elements of a licensing agreement can be costly, both in time and in potential adverse legal headaches. In a worst-case scenario, a botched licensing agreement could put your entire business at risk.
Experienced licensing attorneys have seen how and why licensing relationships fail and succeed and can help ensure that you understand your rights and duties according to the license agreement. Speak to a Peacock Law attorney before you enter into a licensing agreement.