Royalty

A percentage of sales revenue paid in arrears periodically by a licensee or franchisee to a licensor or franchisor for the right to use or exploit intellectual property rights and related rights under a licence. Usually, a royalty payment is calculated as a percentage of net sales revenue on the sale of a licensed product. Where the intellectual property (IP) is incorporated in a component of a product, the base for calculating the royalty can be the sale price of the component physically implementing the IP rather than the end user product.

Net sales revenue is usually calculated, depending on the terms and conditions of the licence, as:

Examples of deductions commonly accepted in a licence arrangement can include:

Where the licensed IP concerns a patented process, royalty payment rates are usually structured on a calculation based on the gross sales price of the product manufactured using the licensed process.

Royalty periods are generally quarterly, semi-annually or annually. Where an agreement is entered into mid-way through a royalty period, the royalty payable will be calculated pro-rata for that part period.

For an example of a royalty payment provision see Standard document, Patent and know-how licence agreement: clause 8.