Minimum royalties: Overview, definition, and example
What are minimum royalties?
Minimum royalties are a predefined, guaranteed amount of royalty payments that a licensee (the party receiving the rights) must pay to the licensor (the party granting the rights), regardless of the actual sales or usage of the licensed product or service. These royalties are typically set in licensing agreements for intellectual property (IP), such as patents, trademarks, copyrights, or franchise rights. The minimum royalties ensure that the licensor receives a certain amount of compensation even if the licensee's sales do not meet expectations.
In most cases, the minimum royalties are agreed upon at the outset of the contract and are paid periodically (e.g., annually, quarterly) over the term of the agreement. If the licensee’s sales or usage exceed expectations, the licensor may receive additional royalty payments based on actual sales, but the minimum royalty amount serves as a floor to guarantee some income.
Why are minimum royalties important?
Minimum royalties are important because they provide a guaranteed income stream for the licensor, even in cases where the licensed product or service does not generate as much revenue as anticipated. This can help the licensor plan financially and reduce the risk of relying solely on performance-based royalties.
For the licensee, agreeing to minimum royalties can help secure the rights to use the IP, but it also establishes a clear financial commitment regardless of sales performance. This can help incentivize the licensee to make efforts to market the product and drive sales in order to exceed the minimum threshold.
Understanding minimum royalties through an example
Imagine a company, XYZ Corp., that licenses the rights to use a popular trademark for its line of merchandise. The licensing agreement stipulates that XYZ Corp. must pay a minimum royalty of $100,000 per year to the trademark holder, ABC Ltd., regardless of the sales performance of the merchandise. If XYZ Corp. sells enough merchandise to generate $150,000 in royalties, it will pay the additional $50,000. However, if the sales fall short and only generate $80,000, XYZ Corp. is still required to pay the minimum royalty of $100,000 to ABC Ltd.
In another example, a music streaming service licenses a catalog of songs from a record label. The agreement includes a minimum royalty clause of $500,000 per year. Even if the number of streams falls short and the royalty payments from streams are only $400,000, the service must still pay the $500,000 minimum royalty, ensuring that the record label receives guaranteed compensation.
An example of a minimum royalties clause
Here’s how a minimum royalties clause might look in a licensing agreement:
“The Licensee agrees to pay the Licensor a minimum royalty of $200,000 per year, payable in quarterly installments. In the event that the royalty payments based on actual sales exceed the minimum, the Licensee shall pay the difference to the Licensor. If the royalty payments based on sales are less than the minimum amount, the Licensee shall still be required to pay the minimum royalty of $200,000 per year.”
Conclusion
Minimum royalties provide a guaranteed revenue stream for the licensor, ensuring that they receive a fixed amount of income from the licensing agreement, regardless of the licensee’s sales or usage. These royalties offer financial stability to the licensor and serve as a safeguard against poor performance by the licensee. For the licensee, agreeing to minimum royalties provides access to valuable intellectual property but comes with a clear financial obligation, encouraging efforts to generate higher sales to exceed the minimum and reduce the financial burden.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.