Various facets of intellectual property rights and protections have been previously discussed on the Cardozo Online Blog, providing us an understanding of the protections afforded to creators and inventors. But what happens when an individual or company beyond the copyright, patent, or trademark holder wants to use the protected asset?
This is where royalties and royalty rates come into play.
In the World of IP, What is a Royalty?
A royalty is a payment made to a person or a company for the use of their intellectual property assets that are copyrighted, trademarked, or patented.1 In order to use an intellectual property asset, the owner of the asset has to be willing to let someone else use it and enter into a formal licensing agreement in order to protect the way their intellectual property will be used.
When the general layperson thinks about royalties, it is likely that music comes to mind. Musicians receive royalties when their original songs are used in movies and television shows and even when they are played on the radio. Streaming services are the latest frontier for music royalties and as we have seen from services like Spotify, royalty payments from streaming are very complex.2
The entertainment industry is not the only place you will find royalty payments at work. Let’s explore how royalty rates are determined and the various industries where they apply so see how they are trending.
How are Royalty Rates Determined and Charged?
Figuring out the value of the intellectual property in question is the first place to start when figuring out what to charge. The goal is to avoid rates being too high or too low.
There are three valuation approaches that can be applied to determine intellectual property value3:
- Cost-based valuation
- Market-based valuation
- Income-based valuation
Intellectual property holders will want to have an understanding of how to use these processes, or hire someone who does. After the valuation has been determined, the next step is to look at the current market rates on the specific piece of intellectual property.
Keep in mind that intellectual property royalties can be affected by a number of factors, including3:
- Market size
- Competition in the market
- Strength of the intellectual property protection
- Stage of development of the product or service
- Uniqueness of the invention
- Exclusivity of the licensing agreement
With these factors and the valuation in play, it is important to understand how royalty payments can be structured. This structure will be determined in the licensing agreement and will be charged monthly, quarterly, or annually.
There are several ways to structure the payments3:
- Royalty percentages—the rate is a specific percentage (6%, for example) and the person licensing the intellectual property must pay that percentage of the net gross revenue generated by the property for the duration of the agreement. This is the most popular way to structure royalty rates.
- Fixed fees—the fee is determined in the licensing agreement and will not change based on gross revenue. The fee is paid regularly throughout the duration of the agreement and both parties know the exact amount to be paid.
- Variable or fixed rates—unproven intellectual property is typically paid on a variable royalty rate, meaning the rate will be lower until specific conditions are met to bump up the rate.
- Minimum royalty rates—the license is required to pay a minimum royalty payment, no matter the revenue.
Royalty Rates by Industry
Royalty rates are continually evolving with the market. According to recent data, the bulk of transactions were taking place over industries like business services, consumer services, pharmaceuticals, biotechnology, computers, and healthcare products and supplies as the leading industries. Biotech and pharmaceuticals were on a dramatic incline and business and consumer services were beginning to trend downward.4
The types of agreements were also in flux at the time, with service agreements on a downward trend and manufacturing/process intangibles agreement types on the rise.
Overall, based on data from the previous 10 years, royalty rates bases have become more diverse, meaning that the structure of payments has gotten more creative. Rather than the heavy focus on royalty percentages, the other payment structures are being more widely utilized.
Understand Royalties and Other IP Complexities at Cardozo Law
As you can discern from our overview of royalty rates, intellectual property law is complex, especially in today’s world. Gain a better understanding of how different areas of IP law overlap while also building a strong foundation in patent, copyright, and trademark law.
Cardozo School of Law has been a leader in IP law from its start. With an online LL.M. in Intellectual Property from Cardozo, you will build a deep knowledge base of how IP laws are being interpreted to defend intellectual property rights. Learn more about the coursework that will help you understand the intricacies and complexities of IP law.
- Retrieved October 11, 2021, from investopedia.com/terms/r/royalty.asp
- Retrieved October 11, 2021, from variety.com/2021/digital/news/spotify-loud-clear-guide-royalty-payment-system-1234933349/
- Retrieved October 11, 2021, from royaltyrange.com/home/blog/intellectual-property-royalties-everything-you-need-to-know
- Retrieved October 11, 2021, from bvresources.com/blogs/intellectual-property-news/2018/04/18/intellectual-property-trends-average-royalty-rates-most-active-industries-and-more