This article has been written by Nihar Ranjan, pursuing the Certificate Course in Intellectual Property Law and Prosecution from LawSikho.

What is the Patent Royalty Agreement?

A Patent Royalty Agreement is a contract that specifies the terms and conditions by which a Licensee can use the Licensor’s patented product. These types of contracts put in place only when a Licensor licenses the rights of his invention, either in full or in part to the Licensee. It also specifies the product or the processes which are being licensed, in which way the licensee is permitted to use it (to manufacture, use or to sell the product) and for how many periods they are permitted to use it. It also provides the details regarding the remuneration/consideration which the Licensee must have to pay in exchange for the use of patented product/process. Usually, it is fixed as royalties, which is decided as per the percentage of sales.  

But before that, we must understand the concept behind the Patent Licensing.

Patent Licensing

Patent licensing is a process, by which the owner of a patent (Licensor) provides the right of his patented product/service (invention), either in full or in part to a third party (Licensee). The Licensor by way of patent licensing authorises the third party to manufacture, use, sell and take the full advantage of its patented invention for a fixed price (Royalties) and a fixed period of time (Term) as mutually decided by both the parties. 

There are 2 Types of Patent Licensing

1. Exclusive Licensing: it typically allows the Licensee the sole and exclusive right of the Patented invention to use, makes, sale, practice and anything as granted by the Licensor. The only thing the Licensee is prohibited to do is that it is not possible for someone else to further license the patent. It is only exclusively provided to him and nobody is allowed to license it further. By granting an exclusive license even the Owner of the patent may not be allowed to sell the patented invention in the jurisdiction in which the Licensee has got an exclusive license.
2. Non-Exclusive Licensing: the meaning of non-exclusive licensing is, it allows more than one licensee to use the invented patent. The licensor in such type of licensing shall be allowed to license it to as many licensees as possible to gain more profits.

E.g. one automobile manufacturing company produces a Hybrid engine and comes up with patented innovation. Instead of providing the license to one vehicle manufacturing company, if various automobile companies will manufacture by using such engines for that region, it would obtain more royalties from such businesses.

What shall be included in a Patent Royalty Agreement?

A Patent royalty agreement must include the following information:

1. Identification of the Licensor and the Licensee in a detailed manner;
2. Describing the licensor and licensee’s activities;
3. What exact patented invention is going to be licensed (explaining the details of use, make and applying process);
4. The scope of the license (territorial jurisdiction);
5. Effective date and term (duration) of the license;
6. Describe the details about the exclusivity of the license;
7. Any imposed restriction on any of the Licensee use;
8. The existing duration of the patent;
9. The Licensee shall pay in exchange for the use of the invented patent, which may include the royalty base, royalty price and any other upfront payments or any payment schedule.  

Here are some Essential clauses under a Patent Royalty Agreement

Identification of the Parties: It shall include all the information of both parties which shall be involved in the contract. When the Licensee/Licensor is a person, it shall include the name and address of the household and in case of the Licensee/Licensor is a company, it shall include the registered name of the company.

Recital: it shall describe the purpose and intention behind this license. This clause also describes the principle underlying the agreement. The clause set out clearly the sequence leading to a contract.

License: it shall mention the scope of rights granted to the licensee. It shall describe what the licensee shall be allowed to do by using simple language. This provision shall be carried out with certain restrictions on licenses, such as it shall be an exclusive license or a non-exclusive license. It shall also promptly clarify the details regarding the sale and use of the patented invention in the jurisdiction in which the Licensee has got an exclusive/non-exclusive license.

Patent Royalties: this clause shall mention the royalties, royalty base, minimum patent royalty payments, accruals, accounting statement, interest in case of late payments, books and records and audits, confidentiality, etc. The Patent Royalty Agreement must specify all these details:

• Running Royalties: it means the monetary compensation paid to the licensor on the basis of the amount of unit sold by the Licensee in the shape of a lump sum amount. 
• Royalty base: it typically is a gross/net revenue of sales.
• Minimum patent royalty payments: it ensures that the licensor got paid a minimum amount of royalty payment each year, regardless of any generated sales.
• Royalty payment schedule: it will decide whether the payment shall be paid quarterly, annually or as per mutually decided schedules. 
• Accruals: it means the cost received or accrued that damaged the profits of a business on the income statement. It shall also control the balance sheet as non-cash assets and liabilities involved in the business.
• Confidentiality: it shall include a set of rules and regulations typically enforced by a confidentiality agreement that impose certain restrictions on accessibility to certain forms of information.

Indemnification: it is termed as a safeguard against any loss or damage, particularly in the instances of the promise of a payment or the compensation paid when such damage or loss occurred. Both the parties shall promise to indemnify each other for any costs or losses incurred by the action of the indemnifier or any third party from the breach of any warranty or representation and any rights as set forth in the agreement. Generally, the underlying amount of compensation in the agreement is the change in part or entirety of the obligation from one party to another. 

Termination: this clause defines the arrangement to conclude the relationship between the parties. It shall only take place until the contractual obligations are fulfilled. The provisions mentioned in this clause promptly describe the details regarding the conditions in which both the party can terminate their legal relationship and their contractual obligations. This clause can be stated as follows:

• Each party may terminate this Agreement upon material breach by the other Party of one or more of the provisions of this Agreement and after any such incident the breaching Party is notified in writing (“Termination Notice”) regarding material breach. If such breach is not cured within 30 (Thirty) days (“Cure Period”) after receipt of such notice, the Agreement may be terminated with immediate effect.

• The Agreement may be terminated by the Licensor upon written notice to the Licensee if the Licensee fails to fulfil any prior demand and expectation.

• The Agreement may be terminated by the Licensee upon written notice to the Licensor if, the Licensor fails to provide the invention patent with proper documentation and in the committed timeline;
• In the event of termination of this Agreement before the expiry of its Term:

1. All the Research and Development work shall stop immediately and whatever is created or developed shall be forwarded to the Licensor.
2. All the products or processes in relation to the invention patent shall be returned to the Licensor;

Representation and Warranties: it is a declaration made by both the parties before or while the execution of the contract, which may refer to a historical fact or current condition relevant to the contract. A warranty basically claimed as a promise in relation to the subject matter of the contract and that prevents the receiving party against any losses or damages if the same appears as untrue (also known as implicit compensation). This clause can be stated as follows:

Both the Party represents and warrants that:

1. It is duly registered under the laws of the state of its organisation and has all requisite power and authority to enter into this Agreement;
2. The execution and delivery of this agreement has been duly authorised by all necessary corporate actions;
3. It has no pending litigations or any encumbrances with respect to the provisions of this Agreement.

Dispute Resolution: it is a process by which the parties settle their disputes arising out of any breach of any provision of the agreement. It also covers both contractual disputes and non-contractual disputes. There are different type of dispute resolution available, one or more of them may be laid out in this clause for resolving any dispute. But it must be ensured that the clause is explained in a simple language and easily understandable.  This clause can be stated as follows:

• Any dispute, claim to arise out of this Agreement or any breach, termination or invalidity shall at first instance try to settle the same amicably through mediation carried out in good faith;

• if the negotiation doesn’t work out, then the Parties shall be settled through arbitration in accordance with the Arbitration and Conciliation Act, 1996 and the respective pleadings shall be submitted to a mutually appointed sole Arbitrator, who will resolve the issue in a fast track manner;

• The Arbitrator shall take a decision with a time-bound manner maximum of 6(six) months after considering only the written arguments. The decision awarded by the Arbitrator shall be bound on both the Parties. In case one of the Party deliberately tried to delay and/or obstruct the Arbitration proceeding, the Arbitrator shall pass an ex-parte order, which would be enforceable on both the Parties;
• The seat and venue of the Arbitration is *******, India and the medium of communication will be in English.

Infringement of Patent Royalty Agreement

• If a Licensee breaches the Patent Royalty Agreement and prefers to go against the provisions of the agreement or conduct any activity outside the scope of the agreement;
• It can also be infringed if the Licensee exploits the invented patent without the prior permission of the Licensor or the owner of the patent.

These are the few instances where the patent royalty agreement may be infringed and it typically results in court proceedings and monetary compensation.

Conclusion

Patent Royalty Agreement mainly focuses on the patent licensing royalty rate. So before deciding any rate, the Licensor needs to calculate fair royalties based upon the income, cost or marketable rates. Basically, the royalty rates can be anything from 0.1% to 25% and it may vary from product to product and industry to industry. 

The other important aspect while drafting a Patent Royalty Agreement, one must ensure that the provisions set forth in the Agreement are deemed constitutional. 

References

• https://blog.ipleaders.in/patent-licensing-agreement/ 
• https://www.mondaq.com/india/patent/805902/patent-licensing 
• https://www.sec.gov/Archives/edgar/data/1419177/000141917708000009/exhibit10-4.htm 

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skill.