Three Tips To Negotiating The Best Royalty Agreement

Royalty Agreement, Licensing Agreement

When negotiating the use of your property, patent or process in exchange for royalties, these three basic tips are key to prioritize while commencing negotiations.

This week, we discussed some lessons learned from the recent news that the famed Broadway troupe Blue Man Group has been sued over a dispute over royalties brought by a composer as an example of how not to handle setting up a royalty agreement.  Here, we’ll discuss factors to keep in mind while negotiating a royalties agreement so you can (hopefully) avoid problems.  

  1. Words Matter.  Definitions, requirements and terms do not always mean what you think they mean.  That is why you should include a section defining material terms in your agreement. These definitions can be crucial, and must be discussed with your attorneys so that the final document is clear and concise. 
  2. Dollars and sense.  Obviously, financial terms of agreement are the most meaningful to everyone. Typically, royalties are calculated by multiplying “net” sales by the royalty percentage agreed upon by the parties.  But, who is is to say how “net” sales are calculated? Watch out for unclear payment terms – what you think you are going to get may not be the same as what you actually get. This all depends on what is considered “gross” and “net” revenue, what payments are “guaranteed”, what are the costs of conducting business, who will bear those costs. If you leave the negotiation without a clear understanding of what these terms are, then you are setting yourself up for failure and a possible trip to the court house.
  3. Protect Your Brand.  While terms may differ depending upon the industry, licensed products or property should meet a certain minimum level of quality agreed upon by the parties.  If you are licensing a brand, you do not want your brand represented in a deficient way.  Set up periodic checks for quality control to make sure brand and product meet your standards, and set up consequences when they fail to make the grade.
Unless you, are an experienced negotiator, you should hire an attorney to manage these agreements in order to minimize your risk now and in the future. 

*Gene Berardelli may be contacted at:

Gene is a New York street-smart attorney with an extreme passion for success. Gene specializes in litigation, arbitration and general corporate law for New York-based and international clients. He, also, is the host of a popular New York talk radio program.

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