What is a patent royalty agreement?
A patent royalty agreement is a contract that outlines the terms under which a licensee can use a licensor’s patented product. It is put in place when a licensor licenses the rights to their invention (in full or in part). The patent royalty agreement specifies what is being licensed (e.g. a patented product or technique), how the licensee can use it (to manufacture, use or sell the product), and for how long and under what terms they can use it. It also confirms the remuneration the licensee must pay in exchange for its use. This is usually royalties expressed as a percentage of sales.
What is included in a patent royalty agreement?
A patent license royalty agreement should include the following information:
- The name of the licensor and licensee
- A description of the licensor and licensee’s activities
- What exactly is being licensed (e.g. a license to make, use and apply Company A’s patented block construction system technology for assembling power plants)
- The geographical scope of the license
- The date and duration of the patent agreement
- Details of the license’s exclusivity
- Any restrictions on the license’s use (e.g. Company B has no right to sublicense the patented technology)
- The extent and duration of the patents
- The remuneration the licensee must pay in exchange for the use of the patent (including the royalty rate, royalty base, other payments and payment schedule – see below)
Defining royalties in a patent license agreement
One of the most important parts of any patent license is the compensation section.
Both parties can agree that the licensee pays to the licensor patent royalties for the use of their patented product.
The patent royalty agreement must specify the following:
- The patent royalty rate: This is usually agreed as a percentage of sales.
- The royalty base: This is typically gross/net revenue or sales.
- Minimum patent royalty payments: This ensures that the licensor receives a minimum amount in royalty payments each year, regardless of generated sales.
- Royalty payment schedule: Will the royalties be paid quarterly, annually or as per some other schedule?
- Other payments: Will the licensee pay an upfront fee on top of the regular royalties?
What happens if a patent license is infringed?
Sometimes, a licensee may breach the patent royalty agreement. For example, they might go against the restrictions of the license, or conduct activities outside the agreed field of use.
Patents can also be breached outside of license agreements. This occurs when an individual or organization uses or exploits the patented product without the permission of the inventor.
This is known as infringement, and typically results in court proceedings and compensation.
In the US, reasonable royalties are often used as compensation in infringement cases.
Download a patent license royalty agreement sample
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