5 considerations in a Royalty/ Licensing Contract

When it comes to industrial design, royalty contracts are a reality that many designers can’t avoid. They can offer the opportunity to break into a new industry, work with renowned brands, and potentially make a lot of money. The royalty contract, also known as a licensing agreement, is one of the most important aspects of a relationship with a client. It sets the terms for getting paid, protects your intellectual property, and establishes respectful parameters for the relationship. These contracts come in many forms, some as brief as two pages, and others as extensive as fifteen. Reviewing such contracts can be a complex and daunting task, especially if you can’t afford a $400/hour lawyer.

In this article, I will discuss the five most important considerations when reviewing a royalty contract for an industrial design consultant. These are aspects to keep in mind and not strategies or clauses to craft the perfect contract. You can have the perfect contract, but the reality is that a good contract presents a win-win scenario where both parties feel protected, valued, and respected.

1. Royalty Rates

The royalty rate is probably the most important consideration. It is the percentage of revenue that the designer will receive for their design. It is essential to carefully review this rate and ensure that it is fair and competitive. Generally, royalty rates for industrial design can range from 2% to 10% of wholesale sales, depending on the industry, product type, and level of exclusivity of the design. I recommend reading my article “Working for Royalties as an Industrial Designer.” The clause that specifies how you are paid should include the following terms:

• Define what the company needs to pay you and how, whether it’s advanced royalties plus royalties, flat fee plus royalties, or just royalties. Define these terms in the contract to eliminate ambiguity.
• Specify the amount in both numbers and letters, including the currency in which royalties should be paid.
• Specify the schedule of payments, whether it’s every quarter or trimester if you are receiving just royalties. If you are getting an advance on royalties, when does this payment need to be rendered?
• What is the royalty based on? Is it the retail price, wholesale price, or factory price? This can be easy to miss, so make sure it is well-defined.
• Request royalty reports. This is crucial not only to get paid but to understand what the total calculation entails. This should be followed by a clause that allows you to audit the brand’s books if you suspect that the calculations are incorrect. These are extreme scenarios that you should anticipate; that’s what contracts are for — worst-case scenarios.
• Specify what happens if royalties are not paid. Traditionally there is a clause that provides a percentage above the lending rate of a specific bank, which will accumulate on a specific timeline if royalties are not paid in time.

Variations:You may ask that the advance royalty is not deducted from your future royalties until a minimum royalty collection is made or a specific timeframe.

2. When Does the License Transfer?

It is essential to define when the rights to manufacture the intellectual property transfer. In simpler terms, when is the design “accepted”? Most companies will push for the moment they commit to a minimum order quantity from a supplier. It’s a double-edged sword. You want the brand to take the license to transfer soon as they accept the design so that they can protect it better than you can, but you also don’t want to do it without a specific time limit because they can hold your design in “development” indefinitely, holding you back from present it to other companies. Your clause should include:

• Specify the procedures that must be followed for the acceptance of the product and transfer of the license to manufacture it. This will ensure that there is a clear understanding of the requirements and expectations of both parties. This can also be done in the form of and ‘Exhibit’ which outlines the project plan with phases, delivery schedules and specific deliverables.
• Establish a timeframe for the brand to hold the rights to manufacture your design before they revert back to you. This will prevent them from indefinitely holding onto your intellectual property and push them to manufacture it.

We learn from experience, and in my case, I designed a line of coffee products for one of America’s largest housewares corporations. We worked closely with their suppliers, who sampled our products and showcased them under one of their major brands at the IHS trade show. However, when internal management changed, the project was unfortunately shelved. The overseas vendor seized the opportunity and showcased our designs on the open market and at the Canton Fair, and another well-known brand bought them.

When I raised this issue with the original brand, who was supposedly protecting my intellectual property, they claimed that the design was never “accepted” according to our contract, even though we had exchanged emails, provided samples, and introduced the products at a trade show. According to our contract, the product was never officially accepted through a documented procedure, creating a loophole that is hard to fight against. The brand that ultimately sold the product and benefited from my IP felt no obligation to pay any compensation for our work, as they had bought it in the open market.

Variations:In addition, it is important to clarify the rights that the brand has with respect to your intellectual property. Specifically, it is important to determine whether they are permitted to sub-license it, and if so, what are the terms and to whom can they sub-license it. For instance, if they want to partner with a specific company, such as Disney, for a private label, what are the terms of the agreement?

It is crucial to ensure that any sub-licensing arrangements align with your vision for the product and that you retain the right to terminate the agreement if the licensee breaches any of the terms

3. Liability

Having a liability clause in a licensing contract is important because it helps to protect you from issues that may arise outside of the scope of your work. It enables you to allocate and manage risk between the parties involved in the agreement. A liability clause specifies the extent of liability that each party assumes in the event that the licensed product causes harm or damage to others.

For instance, if you design a chair, it is the responsibility of the manufacturer to ensure that the design is safe, choose the right manufacturer and select materials that will make the product safe. You, as the designer, should not be liable for any damages caused by the chair breaking, the chair causing harm to someone, or the chair being involved in any type of legal dispute, except for the originality of the design.

• Include a clause that clearly outlines the obligations of the designer and the manufacturer, and specify the extent of their liability in case of a product liability claim.
• It is also important to include your team in this clause by specifying “Designer and its Affiliates” to ensure that the people who work for you are protected as well.

Variations: This is not really a variation but I thought I include it here. Intellectual Property Liability is also important, and there is a whole section of the contract for this.In this section, you should explicitly state that the product you designed is completely original and is not infringing on the intellectual property rights of any other products. However, it is essential to conduct thorough research during the design process to ensure that this statement is accurate.

4. Derivative Products

Derivative products in a licensing contract refer to products that are created based on the original licensed product. These derivative products are typically variations, adaptations, or modifications of the original product that may have different features, capabilities, or applications. Without this clause, the company may create versions of your design and not be obliged to pay you any royalty. You should be entitled to a portion if not all of the royalties from derivative products. Clauses for this should include:

• Definition of what defines your product ie. choose materials, form language, utility, etc.
• How derivative products should be developed, and what involvement you wish you have
• The compensation for any derivative product created as a result of your original.

Derivative products can be an important source of revenue and growth for both you and the company. However, it often happens, the brand sees a produced design as their own, so they consider derivative products not included in the original contract. Adding it from the beginning will prevent any friction with a client and the hardship of seeing your design’s children out in the world while you are not getting paid for it.

5. Miscellaneous

In addition to the key clauses discussed earlier, there are several other valuable clauses to consider when drafting a licensing contract.

• Designer’s Artistic Credit: Not all companies want to promote they hired an outside entity to design for them, I don’t see why, it’s great marketing. Make sure you include a clause that specifies you will be credited in all marketing materials, packaging, and the product. You can even include Exhibits with images to illustrate how your name and brand will be promoted.
• Free Sample: A free sample clause may seem small, but it can be a nice perk. As a designer, you may be entitled to a free all-cost sample of the product you design.
• Discount on Products: This is a nice perk if you like the work of the company you are working with. This clause allows you to purchase the product at a discounted rate, typically 50% off the retail price, as if you were a retailer. This allows you to give your designs as gifts or promote them at little cost to you.
• In case of death: It is crucial to include a clause in case of death. Royalty payments are a long-term investment of your time, so it is necessary to specify who will be the designated recipient of your IP and royalties in the event of your death.

Conclusion

This is not legal advice, and they are not applicable to all business relationships. These are based on my experience working in the Industrial Design industry. Some clients will offer you few to none of the above clauses, ultimately is up to you to leverage the project and what you want out of it. A good contract shows respect for what you do and is a win-win setup, not a war to see who screws over the other.

I am currently working on contract templates you will be able to download from my site, so you can get a good foundation on your next licensing deal. In the meantime:

1. Define how you get paid, when, how, and what happens when you don't.
2. Define when your IP is transferred to the company for use.
3. Protect yourself from anything that can for wrong with your design.
4. Include variations of your product in the contract
5. Make sure to get credit and the perks of working with the company.

Like my Article?

Follow me for more design-related articles. If you enjoyed this post, please show some appreciation by clicking on the “clap” button. Did you know — you can hit it up to 50 times? It helps the content reach out to more people like you who might benefit from reading it.

If you need help with navigating a client who offered you royalties, happy to talk to you, just book a call through ADP List, a mentoring platform.

Feel free to drop a message on LinkedIn or by Email for any questions, feedback, and suggestions. This will help me improve and also inspire me to create more.