Technology: 6 keys to drafting the royalty and financial terms for technology licenses

Tips for creating clear, concise royalty obligations

This series addresses the needs the legal community has for licensing technology knowledge by laying out the basic concepts that one should understand, identifies traps for the unwary and offers drafting and negotiating tips. Click here to read parts one and two.

Royalty obligations should provide a clear description of the licensee’s activities for which royalties are to be paid and should be carefully coordinated with the license grant provisions. The royalty obligations can take different forms depending on the nature of the intellectual property, such as whether it is a machine, a process or a composition of matter. They also may vary based on the licensee’s intended use, e.g., use for manufacturing purposes or sales of patented products.

  1. Special Dispositions

In the normal course of its business, a licensee may dispose of royalty-bearing products other than by sale at fair market value. The smart licensor, therefore, will have an agreement that addresses:

  • Demos/samples/internal use
  • Bundling/package sales
  • Payments in kind
  • Related party sales
  • Promotional giveaways
  • Loss leaders

Drafting Tip: Depending on the circumstances, possible ways to address the foregoing special dispositions include:


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Mark Malven

Mark Malven is the leader of the technology transactions practice at Dykema Gossett PLLC and immediate past chair of the IT Law Section of the...

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