For the next few weeks I am breaking down a general Licensing Agreement clause-by-clause: For the beginning of this series of posts, read the first one starting Sept 14, 2009 (scroll down). This is the next clause in a Licensing contract:
3. ROYALTY PROVISION
3.1 Licensee agrees to pay the Licensor a non-refundable Royalty of 10% (ten percent) as stated in the attached Schedule A, based on the Licensee’s Net sales of the Licensed Products using the Property (the ‘Actual Royalty’). The Actual Royalty shall accrue when the Licensed Products are sold, shipped, distributed, billed and/or paid for. Net Sales is described as gross sales less returns.
3.2 Actual Royalty payments shall be made by Licensee to the Licensor on all licensed Products sold, shipped and/or distributed by the Licensee or sub-licensed manufacturers, even if not billed (such as in the case of introductory offers, samples, promotions, and the like, including all sales other than those to the Licensor or Licensor’s associated distribution networks. Those products using the Licensor’s Property sold to the Licensor shall be exempt from any royalty payment(s) from the Licensee.
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Paragraph 3.1 details that the Actual Royalty the Licensee will pay the Licensor is 10 % (ten percent) of the Net Sales price. Every Royalty amount is different – it can be a specific per unit cost or a percentage of sales like this one. Negotiate the best deal you can. This royalty will be paid on all products the Licensee makes using the Licensor’s Property and will need to be paid on any products sold, shipped from the plant,distributed, billed and/or paid for.
In this case, Net Sales are described as the gross sales price minus any returns from customers. This is important, especially if you are in the book industry, where many months after delivering books to retail stores, any unsold books can be returned to the Licensee for a refund. The Licensee will then request a credit for these unsold/returned Licensed Products and try to resell them (without having to pay the royalty twice) or if they are damaged and not able to be resold, the same amount of returned Licensed Products will be credited against new Licensed Products being manufactured. Example: If 1,000 books are returned too damaged to resell they are destroyed and the next 1,000 Licensed Products would not have to have the Actual Royalty paid to the Licensor. All this is taken care of in the Royalty Statement and by accountants.
Paragraph 3.2 is clear that a Royalty must be paid on all Licensed Products the Licensee has sold, shipped and/or distributed directly by the Licensee or by any sub-licensed manufacturers, even if not billed. The better way to write this clause is to have the Actual Royalty paid upon manufacture. This allows you to get the royalty payment when production happens and will be paid faster than waiting for the billing or selling process to start. It also is easier for auditing purposes. However, this will allow the Licensee to justify the Actual Royalty to be a lower amount than if it was based on the higher sales price. It would be a good idea to clarify what is exactly meant by introductory offers, samples, promotions, and the like, including all sales other than those to the Licensor or Licensor’s associated distribution networks. Those products using the Licensor’s Property sold to the Licensor exempt any royalty payment by the Licensee. This benefits the Licensor if they have access to mass distribution but ensure there is an agreeable purchase price the Licensor will pay for products using the Property produced by the Licensee.
The next installment is Licensing Agreement #6 Statement and Payments.
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As most of you know, I am not a lawyer or an accountant and recommend everyone seek their own legal counsel and accounting advice in such contractual matters. I also provide negotiation consulting which are detailed on the ‘services’ page of this website.
Hope this breakdown helps you understand the intricacies of a Licensing Agreement. Should you have any questions contact me at info@Playdigm.com – please put ‘Licensing’ in the subject line of your email.