A Simple Guide To Royalty Contracts

When it comes to intellectual property, it’s the creation of an innovator. Whether it’s a song, a book or a design idea for real estate development or investment, these unique and original creations are your own and if required, can be protected under intellectual property law.

Licensing or royalty contracts help protect the creation from potential exploitation and other parties financially benefiting from it without prior permission under the terms of intellectual property law. Therefore, it is essential to understand the types of contracts and agreements you can use to protect your work.

Royalty contracts play a role in allowing your creation to benefit from monetary compensation. For example, a residential or commercial home design that another individual or commercial entity wants for their own use or use in a business. The royalty contract can provide the terms that make this possible and mutually beneficial.

The Basics Of A Royalty Contract

For many innovators and creators of original ideas, the knowledge of royalty contracts or how to fully exploit the commercial market is likely limited.

A royalty contract is usually drafted and signed by the licensor (the creator) who may want to license the intellectual property rights to others interested. It might be that no interests have arisen, but there’s an expected interest to come further down the line.

The contract once signed by all parties is legally binding and gives those who are licensing it from the licensor, all the rights disclaimed in the agreement, to use the licensor’s intellectual property.

The specific terms of this contract can differ, i.e. not all deals have the same conditions. The licensor determines the limitations or the contract requirements; however, they may be negotiable and too royalties or fees.

Proof Of Agreement

With a contract, it’s providing the evidential proof of an agreement in the terms and conditions. Unless it was proven otherwise, it shows anyone outside the contract, the evidence, that both parties agreed to the terms and conditions laid out. The signatures and often the date of the signatures solidify the agreement.

A Trusting Relationship

Whether you’re the licensor or licensee, a royalty contract involves your desires and obligations, set out in writing. A business deal of any kind requires an understanding between the parties, which can hopefully build the foundations of a good and trusting relationship.

Consequences

As part of the contract, both parties will be terms regarding the consequences of a breach. For both parties, the benefit of a royalty contract is that you’re less likely to be left high and dry if the other were to breach your agreement.

There have been plenty of occasions where IP theft has occurred. One example is the Chinese tech giant Huawei, stealing trade secrets from U.S. cellphone company T-Mobile. When no contracts are in place, it can place risk for both parties, the licensor and the party or parties who’ve stolen the IP.

Confidentiality

For some intellectual property, it might be something that the licensor wants to keep confidential. Perhaps it’s a creation that could be worth a lot of money and therefore if leaked in any way, could prove detrimental to the licensor’s potential benefits.

Like many contracts, a royalty contract can guarantee confidentiality if needed, and non-disclosures can be put in place to protect that sensitive information.

Standard Contents Of A Royalty Contract

Now that you understand the basics and benefits that a royalty or licensor contract brings, you now need to understand how to get it right.

There are a few standard terms and contractual obligations that are usually found in a royalty contract.

The Parties Involved

In this section, it’s essential to define who the parties are. That should be their names and any contact information that is deemed necessary, including their addresses. Making sure these are up to date is essential when finalizing the contract with a signature.

Purpose

Outline the purpose of the contract, the specifics and a statement that confirms that both parties are willing to enter this contract of their own free will.

Term and Conditions

Again, another critical part of the contract and one that might need a bit of back and forth between two parties to agree on. This is likely the section that will take the most time and detail. After all, both parties want to make sure that the other party understands what they want, their intentions, and how they’ll benefit.

These terms of conditions should also have clauses included. These can be the licensor’s rights being granted to the licensee. It may also dictate how long the licensee has to the rights of the intellectual property.

Royalties, Royalty Payments & Profits

At the heart of this contract is the royalties the licensor receives for sharing the rights to their work.

There is a need for transparency in disclosing the profits, total revenue and the details of the royalty payments which may be payable in regular payments or a lump sum.

Terminations & Disputes

Contracts are never everlasting. With intellectual property rights laws determine how long the originator has got, i.e. their rights may last 70 years. Is it a trademark, or copyright or a patent? Do your due diligence and seek assistance from your legal experts.

Contracts have a termination clause so either party can terminate the agreement.

The royalty contract may also state the repercussions of an agreement terminating or being broken should there be any loss or claim for damages under the contract.

As well as detailing how to resolve any disputes, there will also be a miscellaneous section for other specifics unique to your requirements.  View a royalty contract template to get more detail on what’s in a standard agreement.

Summing Up

There are many different contracts, especially in Real Estate.  The royalty contract is often underutilized for protecting IP that’s not in obvious sectors.  Therefore if you’re in the real estate sector and you’ve got an idea that you’re likely to commercialize at some time or another party may want to use it – the royalty contract can provide the terms that make it work for the owner of the IP (Licensor) and the licensee.

With anything to do with the law, always seek professional advice from the experts.