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The terms of payment are as significant to the licensor as the license grant and other rights are to the licensee. The following is a discussion of the categories of ways in which licensee are compensated and reimbursed.


"License Payment" vs. "Royalties" vs. "other payments"

Stategic issues in royalties

  • Profitability. Obviously a goal, but sometimes hard to implement, because of the very large ratio of fixed (development) costs to variable (sales and distribution) costs. Pricing at marginal cost may well grossly under price the product in the market. Historically, prices in the software industry have significant downward pressure over time, so mistakes on the low side may be difficult to correct. On the other hand, mistakes on the high side may delay (and accordingly prevent) success of a product. In that connection, assurance that the licensing terms comply with accounting revenue recognition rules is key; as noted above, acceptance periods and provision of services in connection with license can cause deferal of recognition of income under generally accepted accounting principles.
  • Simplicity. Complicated pricing schemes are probably doomed to failure
  • Competition. If your customers don't reject a complicated pricing scheme, your competitors will probably force you to abandon it.
  • Rationality. Even simple pricing scheme which lend themselves to abuse and arbitrage (example: significantly higher prices in Europe, or in particular market segments) are probably not a good idea.

As a subset of "profitability", consider the effect of cash flow and assumed risk. Even if pricing satisfies profitability and rationality criteria, it must also bring cash in to allow growth without excessive reliance on financing. Fronting installation or development costs, especially where there is a risk of rejection, can cause significant financial problems for a developer. In addition, the price must not only cover the "accounting" cost of creating a product, but should have a risk premium to compensate the developer in cases where projects are abandoned or there are indemnification or warranty claims.

Typical arrangements for royalty basis.

  1. Free
    1. ex: some trademarks
  2. Paid-up
    1. Perpetual
    2. Time Period
  3. Per-unit
    1. Per Copy
      1. ex: Computer Software
      2. Server
        1. Unlimited use
        2. Simultaneous use
  4. Percentage of Sales
    1. ex: Books
    2. ex: Patented Articles


  1. Timing
    1. Signature. Example: Prepayment of Royalties ("advance"). For example, a book advance; these are sometimes used as a guaranteed minimum to negotiate a lower per-unit royalty. The prepayment can be credited by the payor against payment of future royalties that would otherwise be due, either in full, or at a specified % rate (i.e. royalty rate is reduced to 50% until prepaid royalty recovered).
    2. Acquisition of property
    3. Receipt of corresponding payment
    4. Periodically
  2. Other financial terms
    1. Treatment of taxes
      1. Foreign Withholding
    2. Foreign Exchange
  3. Effect of non-payment
    1. Penalty Clauses
    2. Audit provision

Most Favored Licensee Clauses

Willemijn Houdstermaatschappij, BV v. Standard Microsystems Corp., 925 F. Supp. 193 (S.D.N.Y. 1996) (effect of settlement agreement on most favored pricing clause)

Studiengesellschaft Kohle M.B.H. v. Hercules Inc., 105 F.3d 629 (Fed. Cir. 1997) (timing, etc issues on most favored license term)

Timing of Royalties, Especially in Patent Cases

Brulotte v. Thys (royalty post-patent)

See also Aronson v. Quick Point Pencil Co. (royalty when patent not issued)

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