Royalties

In the royalty provisions of a license agreement it is oftenagreed that the licensee shall pay a minimum amount every quarter, every year, or the like. This is a minimum royalty obligation. Care must be taken when drafting a minimum royalty provision, as it can have extremely unpleasant taxation consequences if it is not done correctly. All license agreements granting the licensee exclusivity of some sort should have adequate minimum royalty provisions in orderto ensure that the licensee is seriously interested in the exploitation of the invention, and will not abuse the exclusivity, with the result that the invention is exploited neither by the licensee, nor by the licensor or any third parties (potential licensees), who, due to the exclusivity agreement, may not exploit it in the licensee’s territory.