Information AboutRoyalties |
| CATEGORIES ABOUT ROYALTIES | |
| intellectual property law | |
| patent law | |
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A royalty is a stream of payments for use of a certain type of asset, most typically an Intellectual Property (IP) right. A '''royalty interest''' is an ownership of a stream of future royalty payments. LICENSE AGREEMENTS Royalties are a common form of payment in agreements to license technology or other assets. Intellectual property rights such as Patent , Trademark , and Copyright may each be licensed separately and under a separate royalty structure, and the rights themselves may be subject to further restriction or limitation. The terms of these licenses are set out in License Agreement s. 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 . The license agreement typically provides a formula for calculating the royalties that are due to the licensor. It is a composite of the rate, the unit-base on which the amount is to be computed and the time interval (quarterly, half-yearly, etc.) after which the royalty is due. One common arrangement is to charge a fixed percentage of gross sales volume for products made under the license. Guidelines for Evaluation of Transfer of Technology Agreements, United Nations, New York, 1979 , Licensing Guide for Developing Countries, World Intellectual Property Organization (WIPO), Geneva, 1977, ISBN 92-805-0395-2 , UNIDO International Workshop on Technology Transfer Negotiation and Plant Level Technology Needs Assessment), 7-8 December 1999, New Delhi). The royalties may also be a composite of lumpsum (front-end) and 'running' royalties, or where there is absence of a lumpsum royalty, there may be a provision of minimum royalties. License agreements are normally for a definite term, but may be renewable on demand or automatically. They may also be restricted by territory. PATENT ROYALTIES A Patent gives the owner an exclusive right to prevent others from practicing patented invention in the country issuing the patent for the term of the patent in exchange for disclosing the invention to the public. The right may be enforced in a lawsuit for damages and/or injunctive relief (which may include among other things, a prohibition from further actions and in extreme cases destroying the infringing product). Patent rights may be divided and licensed out to parties by the patent holder in various ways. The four basic patent rights of manufacture, use, sale, and advertising, may be licensed separately or further divided (e.g. by geographic territory or field of business). Alternately, all of the rights to a patent may be licensed on an exclusive or nonexclusive basis. Further, a license may encompass an entire technology or it may be to a mere component or improvement on a technology. In a patent license, royalties are paid to the patent owner in exchange for the license. The term of the license may be fixed and does not go beyond the termination of the patent due to expiration or for other reasons (e.g. the patent is declared invalid as a result of litigation). The negotiation of royalty rates is influenced by the importance of the patent and its value to a product. Some fields of business have conventions regarding royalty rates and other license terms. Royalties are often computed as a percentage of the value of the finished product made by using the patent. To illustrate, the following are prevalent rates within the United States pharmaceutical industry: 1:
Royalty rates may also be affected by whether a patent is strong (i.e. broadly written, seemingly valid) or weak; whether it is a fundamental patent or merely a slight improvement on a known technology; whether substitute technologies are available or an ability to work around the patent; the extent of the contribution of the patented technology to the value of the final product and whether there are other patents that must also be licensed (in which case there is a practical limit on how much royalty can be paid to license each). In the United States, "reasonable" royalties may be imposed, both after-the-fact and prospectively, by a court as a remedy for infringement. KNOW-HOW AGREEMENTS Patents alone are not always enough to teach a company how to manufacture a product, work a system or practice a process. Where additional support is required, it generally becomes available through the Know-how license. It should be noted, however, that such a license may exist on its own right, unassociated with a patent. Know-how is Trade Secret information in combination with data, techniques, or human and intellectual expertise that may help a company improve its operational efficiencies, manufacturing productivities and product/system quality. Know-how royalties may be negotiated distinct from patent royalties where they are jointly licensed. Know-how royalties vary widely and, for specific information, the reader is referred to the sources listed under 'External Links' (see below). TRADEMARK ROYALTIES Trademarks are words, logos, slogans, sounds, or other distinctive expressions used to distinguish the source, origin, or sponsorship of a good or service (in which they are generally known as Service Mark s. Generally, within any given market territory only a single party may apply a given trademark to a given category of good or service, so a trademark right is an exclusive right to sell or market under that mark. To the public trademarks are a means of identifying and assuring themselves of the quality of the good or service. Trademarks also bring the consumer a sense of security, integrity, belonging, and a variety of intangible appeals in the minds of consumers. The value that inures to a trademark in terms of public recognition and acceptance is known as goodwill. Trademarks may be licensed to companies to allow them to sell goods or services under brands developed by other companies. A company may seek a trademark license to reduce its cost and risk of entering the market on its own. Even if it's product or service is of suitable quality, the public does not necessarily know or accept it. Licensing a trademark allows the company to take advantage of already-established goodwill and brand identification. Like patent royalties, trademark royalties may be assessed and divided in a variety of different ways, and are often expressed as a percentage of sales. One way of valuing a trademark is the additional profit that a company might make if the trademark is applied to its products in terms of increased sales and higher prices obtained (popularly known as the 'relief from royalty' method. In a long-running dispute involving the valuation of the DHL trademark of DHL Corporation 2 it was reported that experts employed by the IRS surveyed a wide range of businesses and found a broad range of royalties for trademark use from a low of 0.7% to a high of 15%. Trademark rights and royalties are often tied up in a variety of other arrangements. Trademarks are often applied to an entire Brand of products and not just a single one. Because trademark law has as a public interest goal the protection of a consumer, in terms of getting what they are paying for, trademark licenses are only effective if the company owning the trademark also obtains some assurance in return that the goods will meet its quality standards. When the rights of trademark are licensed along with a know-how, supplies, pooled advertising, etc., the result is often a Franchise relationship. Franchise relationships may not specifically assign royalty payments to the trademark license, but may involve monthly fees and percentages of sales, among other payments. COPYRIGHT ROYALTIES Copyright law gives the owner the right to prevent others from copying, creating derivative works, or publicly performing their works. Copyrights, like patent rights, can be divided in many different ways, by the right implicated, by specific geographic or market territories, or by more specific criteria. Each may be the subject of a separate license and royalty arrangements. Copyright royalties are often very specific to the nature of work and field of endeavor. With respect to music, royalties for Performance Right s are set by the Library Of Congress ' Copyright Royalty Board . Mechanical Rights to Recording s of a performance are usually managed by one of several Performance Rights Organization s. Payments from these organizations to performing Artist s 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 Label s.3 4 Book Author s may sell their Copyright to the Publisher . Alternately, they might receive as a royalty a certain amount per book sold. Some Photographer s and Musician s may choose to publish their works for a one-time payment. This is known as a Royalty-free license. 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 EXTERNAL LINKS REFERENCES |
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