Issue link: https://htpgraphics.uberflip.com/i/246988
Payment Provisions Section 6 If your IP represents an identifiable product or is required to manufacture a product, it may be appropriate to charge a percentage of the price each product is sold for. If your IP represents a process or a technique, you may instead prefer to charge a fixed amount for each time that process or technique is used, although this may be difficult to monitor. In the case of a patent licence, a percentage of the sales price of any product which falls within a valid claim of the patent may be appropriate. If the licence relates solely to know-how – a percentage of the sales price of products, which incorporate or whose development has made use of the know-how, would be better. With software, royalties can be charged on a 'per user' or 'per machine' basis. However, it is common for an annual fee to be charged or a mix of the two. Colin has developed a chemical formula which can be used to manufacture, amongst other things, long-lasting, chip-proof nail varnish, a product for which there is much demand according to market research carried out by Hi Tech Make Up Limited. Colin has started to negotiate with Hi Tech and is going to grant Hi Tech a licence to use the formula to manufacture nail varnish products. As this is a straightforward case in which the licensed rights will produce a readily saleable product, a suitable royalty base would be an agreed percentage of the net sales value of each bottle of nail varnish which has been made with the formula. The Calculation Once you have worked out the basis on which royalties will be charged, it is advisable to set out the method you are going to use to calculate them. You may ask for a percentage of the "gross" sales price. This means that the percentage will be taken from the full sales price, before any value added tax has been deducted. A licensee is likely to resist this and will want tax deducted before any percentage is calculated. It is therefore more common to see "net sales" referred to in a licence. It is often tempting to define a royalty merely as a percentage of "net sales", however this often requires further definition. Figure 4 illustrates a series of questions you will need to bear in mind when drafting. 37