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26. September 2021

Licensing Agreement Revenue

Licensing agreements are often used for the commercialization of technologies invented by universities or government laboratories. However, if your market considers opposition to data sharing to be more common, I would check the structure of how your software is delivered. The software licensing program could collect this revenue data, so you don`t have to worry about trusting licensees. An example of a third-party licensing program that I have seen (to which I am in no way related) is www.licensecloud.com/ The main challenges in this area relate to determining whether the granting of intellectual property licenses constitutes a thing or service in its own right and, if so, whether the resulting performance obligation is fulfilled over time or at some point. In many licensing agreements, the focus is on turnover, which is usually the basis for calculating royalties. However, licensors who don`t insist on a carefully considered definition of gross revenue are literally leaving money on the table. This is due to the fact that a licensor wants to have as little space as possible between net and gross sales amounts, with maximum exclusions or restrictions for quotas, credits or discounts that can reduce net turnover. Escalation of royalties and de-escalation. In a trademark/brand license, royalty increases or de-escalations are usually related to certain sales bricks. While such milestones can be based on currency or units, the use of money facilitates calculation and minimizes the potential for manipulation. However, if units are selected as a milestone, please note that a licensee may apply the highest royalty to the cheapest product and vice versa in order to inappropriately reduce its royalty obligations. To avoid this, licensors should include in the agreement a language on how to calculate escalations or de-escalations during billing periods where milestones have been completed. Note the following: Documentation required.

The royalty review provision should expressly mention all the documents that the licensee must provide in the event of an audit. This may include performance records relating to the specific licence agreement, complete records of the licensee`s activities and information about the company as a whole (including disclosure of other relationships and activities of the licensor). Interest penalties. A strict licensing agreement should include specific provisions covering all interest payments due to the licensor, such as. B penalties for overdue licence payments, adjustments or self-reported audit comparisons. This language protects the financial interests of the licensor, while incentivizing licensees to make correct and timely license payments. The easiest way to set an interest rate is to add a premium to the policy rate and calculate interest rate penalties. Non-monetary transactions. In many cases, licensees may try to reduce net turnover by not recognizing the value of certain non-monetary transactions such as exchanges, business sales, sales to related businesses, or an incorrect valuation of these activities. To resolve these issues, make sure that the license agreement clearly defines how these activities will be considered and evaluated. For example, intra-company transfers should not be accounted for for royalty purposes, as royalties should be based on the sales of the business that received the transfer (which can be made at retail prices). Trade should be based on list prices, highest selling prices or average prices.

For these reasons, any robust licensing agreement requires a robust and thoughtful determination of royalty review, covering a wide range of licensing rights and a narrow scope of application with respect to examination limitations.