How To Handle Sublicensing Royalties In A License Agreement?

Wednesday, November 1st 2023. | Agreement Templates
Free Licensing Agreement Template PDF & Word
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A license agreement is a legal contract that allows one party (the licensee) to use the intellectual property or assets of another party (the licensor) in exchange for certain royalties or fees. Sublicensing is a common practice in licensing agreements where the licensee grants the right to use the licensed property to a third party (the sublicensee).

Why Sublicensing?

Sublicensing can be beneficial for both the licensee and the licensor. It allows the licensee to expand their business reach by granting rights to third parties, who in turn pay royalties to the licensee. For the licensor, sublicensing can generate additional revenue streams without having to directly engage with sublicensees.

1. Clearly Define Sublicensing Terms

When entering into a license agreement, it is crucial to clearly define the terms and conditions of sublicensing. Specify whether sublicensing is allowed, the scope of sublicensing rights, and any limitations or restrictions on sublicensing. This will prevent any misunderstandings or disputes in the future.

2. Include Royalty Clauses

In the license agreement, include specific royalty clauses that outline the sublicensing royalties payable to the licensee. Clearly state the percentage or amount of royalties to be paid by the sublicensee, the frequency of payments, and the mechanism for calculating royalties. This will ensure transparency and facilitate smooth royalty collection.

3. Monitor Sublicensing Activities

It is essential for the licensee to monitor the sublicensing activities to ensure compliance with the license agreement. Regularly review sublicensee reports, financial statements, and other relevant documents to verify the accuracy of royalty payments. If any discrepancies or non-compliance are found, take appropriate actions to rectify the situation.

4. Have Sublicensing Approval Mechanism

Consider including a sublicensing approval mechanism in the license agreement. This allows the licensor to review and approve or reject sublicensee proposals before sublicensing rights are granted. This ensures that the licensor has control over the quality and reputation of the licensed property.

5. Address Disputes and Termination

Include dispute resolution and termination clauses in the license agreement to address any potential issues related to sublicensing. Clearly outline the procedures for resolving disputes and the conditions under which the license agreement can be terminated. This will protect the interests of both parties involved.

Frequently Asked Questions (FAQ)

1. What are sublicensing royalties?

Sublicensing royalties are the payments made by sublicensees to the licensee for the right to use the licensed property. These royalties are usually a percentage or a fixed amount of the sublicensing revenue.

2. How are sublicensing royalties calculated?

Sublicensing royalties can be calculated based on a percentage of the sublicensing revenue or a fixed amount per sublicensee. The specific calculation method should be clearly mentioned in the license agreement.

3. Can sublicensing royalties be negotiable?

Yes, sublicensing royalties can be negotiable between the licensee and the licensor. The terms and conditions of sublicensing, including royalties, can be discussed and mutually agreed upon during the negotiation process.

4. What happens if a sublicensee fails to pay royalties?

If a sublicensee fails to pay royalties as per the license agreement, the licensee should take appropriate actions to enforce the payment. This may involve legal remedies, such as sending a notice of default or initiating legal proceedings to recover the unpaid royalties.

5. Can sublicensing rights be revoked?

Yes, sublicensing rights can be revoked if the sublicensee breaches the terms and conditions of the license agreement or fails to comply with the sublicensing requirements. The license agreement should clearly outline the grounds for revoking sublicensing rights.

6. Can sublicensing royalties be adjusted?

Yes, sublicensing royalties can be adjusted if mutually agreed upon by the licensee and the licensor. The license agreement should specify the circumstances under which royalty adjustments can be made and the procedure for such adjustments.

7. Do sublicensees have to pay royalties directly to the licensor?

No, sublicensees typically pay royalties directly to the licensee, who then distributes the royalties to the licensor as per the terms of the license agreement.

8. Are sublicensing royalties taxable?

The taxability of sublicensing royalties depends on the jurisdiction and applicable tax laws. It is advisable to consult with a tax professional or legal advisor to understand the tax implications of sublicensing royalties.

9. Can sublicensing royalties be paid in advance?

Yes, sublicensing royalties can be paid in advance as per the agreement between the licensee and the sublicensee. This can be beneficial for the licensee as it provides upfront revenue and financial stability.

10. Can sublicensing royalties be shared between the licensee and the licensor?

Yes, sublicensing royalties can be shared between the licensee and the licensor as per their agreement. The license agreement should clearly specify the sharing ratio or mechanism for distributing the sublicensing royalties.


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