Royalty (redevance)

A royalty, or redevance in French, is the periodic remuneration paid by a licensee to the owner of an intellectual property right in return for permission to exploit that right. It is the usual consideration for a patent, trade mark, software or copyright licence. The French Intellectual Property Code lays down no general regime for royalties, which are a matter of freedom of contract, subject to the specific copyright rules that in principle require proportional remuneration of the author based on revenue.

Methods of calculation

A royalty may be a lump sum, proportional or a mix of both. A proportional royalty is expressed as a percentage of a base, most often the net turnover on the products covered, sometimes the number of units sold. Defining the base is the most sensitive clause in the agreement, as it determines what is included in the sale price, the permitted deductions and the treatment of intra-group sales. Agreements frequently provide for an annual guaranteed minimum, which protects the licensor against under-exploitation, and for rates that decrease in volume tiers. In patent matters, the royalty ceases to be due on products that no longer practise a claim in force, and a clause requiring payment after the patent has expired is viewed with suspicion under competition law.

Reporting and payment

The agreement provides for periodic sales reports by the licensee, the payment deadline and a right for the licensor to audit the accounts, exercised by an independent expert and coupled with a penalty where the discrepancy found exceeds a threshold. Non-payment entitles the licensor to terminate the agreement, and continued exploitation outside the licence becomes infringement. Where the licensor is established abroad, royalties paid from France may be subject to withholding tax at a rate that depends on the applicable tax treaty, and royalties received by a French company on patents or similar assets may qualify for the reduced rate under the patent tax regime.

The rate in standard essential patent licences

Rate setting becomes contentious where a patent is essential to a standard and must be licensed on fair, reasonable and non-discriminatory terms. The parties and the courts then rely on comparable licences, on the value of the patented technology in the product and on the aggregate royalty burden on a standard, in order to avoid royalty stacking. The royalty base, whether the component or the end product, is at the heart of these discussions.

Key points

A royalty remunerates permission to exploit an intellectual property right and is most often calculated as a percentage of a base that must be defined precisely. The guaranteed minimum, audit right, penalty for late payment and fate of the royalty after the patent expires must be settled in the agreement. Check the tax treatment of the sums paid or received, in particular withholding tax on cross-border flows.

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This glossary entry is general in scope and does not constitute legal advice.

Dhenne Avocats litigates patent disputes before the Paris Judicial Court, the Paris Court of Appeal and the Unified Patent Court. When the question arises in a real case, the right moment is almost always before proceedings are issued.

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