Royalties

The Royalty System
Royalty system is a way of collaboration between Companies and the Designer, where the Designer agrees to take a percentage share of the sales of products instead of a single payment. The system is around for many years and it has especially become popular in the Italy after the industrial revolution. For Designers, Royalties means letting a Company use the design rights for usually an unlimited period of time where the Company produces the Product and pays a fee – the royalty fee – from the agreed percentage of gross or net revenues derived from the sale of the product or as a fixed price per unit sold of an item. Royalty rates differ from the industries and also by the type of the product design that is being leased, and is also influenced by the companies who would produce the product. For Companies, royalty system offers a way to work with Designers without having the need to pay the Designers in advance.

Benefits of the Royalty System
Royalty system makes the Designer and Company understand each other by making their interests converge at the one aim of creating a good selling product. This creates incentive for the Designer to invest more time on the design, in return for expected future sales, and also creates more incentive for the Company to invest more on marketing the Designers name. The model deconstructs the traditional Buyer-Seller relationship between the parties and forces the Designer and the Company to unite as a team to improve the design further. Product development is faster and Designers usually give after-support to the Company so that the products can be sold more.

Advance Payments under the Royalty System
Due to the nature of the Royalty System, designers are expected to make returns only after a period of time when the production has started and sales start. This can sometimes take up to three years, and Designers need to sustain themselves. Designers in this case can request an Advance Payment to be paid immediately, which will be discounted from future royalties.

Fixed Sales Requirement
Some companies have a tendency to not to record sales of products in order to escape from value-added and income tax, which in turn effects the royalty fees as it appears that the product was not sold at all. Even if book records are analyzed, it is not possible to see the sales as they never occur on the paper at the first place. In addition some companies could report less sales figures to the Designers in order to avoid royalty payments. In both scenarios, the designer can impose an article in the agreement either as a Fix Sales Requirement or as an Advanced Payment to guarantee his share.

Re-Lease or Resell
Companies are profit oriented. If your design is not selling, they will stop its production. In some cases, it means that your design was not a good design in sense of marketing; it did not sell enough, but in other cases it can also mean that the company that produced your design was not able to fully market and sell your design. In any case, you would want to include an article in the agreement that if the design is not produced for a certain period of time, or if the production is ceased for a long period of time, you could resell or re-lease the design to another company.

Negotiating Royalty Rates
Determining an appropriate royalty rate is a critical part of structuring a successful licensing agreement. Rates can vary widely depending on the industry, the uniqueness and market potential of the design, the designer's track record and brand value, and the company's capabilities and reach. Designers should research comparable deals in their space to benchmark typical rates. It's also important to model out different sales scenarios to ensure the royalty rate provides sufficient upside if the product is a hit, while still being reasonable for the company. Having an experienced IP lawyer to help negotiate terms can ensure the designer's interests are protected.

Royalty Auditing and Enforcement
Even with a well-structured royalty agreement in place, designers need to be proactive about monitoring and enforcing their rights. Most agreements allow the designer to audit the company's books to verify sales numbers and royalty calculations. Designers should exercise this right periodically, either directly or by hiring a royalty auditing specialist. If discrepancies are found, designers may need to take legal action to recover unpaid royalties. Having clear definitions and formulas for calculating royalties in the contract is crucial for enforcement.

International Considerations
If a design will be sold internationally, additional factors come into play with royalty agreements. Foreign tax laws, currency exchange rates, and restrictions on IP transfers can all impact royalty payments. The agreement should specify which party is responsible for foreign taxes and any currency conversions. Designers may also need to register their IP rights separately in foreign jurisdictions to enable royalty collection. Working with legal counsel experienced in international IP licensing is advisable for global agreements.

Bundling and Sublicensing
In some cases, a company may want to include a licensed design as part of a larger product bundle or collection. The royalty agreement should specify if this is allowed, and how royalties will be apportioned for bundled sales. Similarly, the company may wish to sublicense the design rights to third parties for certain uses. Designers should carefully consider whether to permit sublicensing, and ensure the agreement requires their approval and a fair royalty split on any sublicensing arrangements.

Rewarding Brand Value
For established designers with strong reputations and followings, royalty agreements should account for more than just the design itself. The designer's name and cachet can be a major driver of a product's success. Agreements may include separate royalty rates or minimum guarantees for use of the designer's name, likeness, or brand in marketing the products. Designers should be sure they are being compensated fairly for the full value they bring to a partnership.

Audit Rights and Transparency
To ensure accurate royalty payments, designers should negotiate for audit rights, allowing them to inspect the company's sales records periodically. This provision guarantees transparency and accountability, enabling designers to verify that reported sales match actual figures. Audits can be conducted annually or biannually, and the agreement should specify the process and conditions for requesting one. In case discrepancies are found, the company should cover the audit costs and settle any underpaid royalties.

Intellectual Property Protection
Designers must also prioritize protecting their intellectual property rights. Registering designs with appropriate authorities, applying for patents where applicable, and understanding copyright laws are crucial steps. Agreements should include clear language regarding IP ownership, ensuring that the designer retains ownership while granting the company the rights to use the design within defined limits. Additionally, designers should include clauses to prevent the unauthorized use of their designs by third parties and specify the actions the company must take in the event of infringement.

Termination and Renewal Clauses
Termination and renewal clauses are essential components of any royalty agreement. These clauses outline the conditions under which the agreement can be terminated or renewed. Designers should ensure that they can terminate the agreement if the company fails to meet certain performance metrics or breaches the contract terms. Renewal clauses should be structured to provide designers with the flexibility to renegotiate terms based on market changes or the success of the product.

Dispute Resolution and Legal Jurisdiction
Including a dispute resolution clause in the agreement helps both parties address conflicts efficiently. This clause should specify the preferred method of resolution, whether through mediation, arbitration, or litigation. Additionally, the legal jurisdiction should be clearly defined to avoid ambiguity. Designers are advised to consult with legal professionals to ensure that dispute resolution mechanisms align with their best interests.

Termination and Post-Term Royalties
Royalty agreements should include clear terms for when and how either party can terminate the deal, and what happens to remaining inventory and future royalty rights upon termination. Designers may want to negotiate for the right to continue receiving royalties for a period after termination, especially if the company has built up significant inventory. Termination clauses should also address what happens if the company fails to meet minimum sales targets or royalty payments. Having a well-defined termination framework can avoid messy disputes down the road.

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