Royalty law refers to a type of law that governs royalty payments in a licensing agreement. In such an agreement, the licensee is usually required to pay the licensor a certain amount of money as a royalty for the right to manufacture, use, or sell the licensed product.

Royalties can be applicable to:

  • Copyrighted works
  • Patented items
  • Other types of intellectual property

The payment of royalty is common in the music, television, movie, publishing, and software industries.

What Is a Royalty?

A royalty refers to a fixed amount per sale or a percentage of profit that a creator is entitled to receive from the distributor, manufacturer, publisher, or agent that he or she has entered into a licensing agreement with. Inventors, moviemakers, authors, scriptwriters, musicians, music composers, and other creators contract with distributors, manufacturers, producers, publishers, and movie production companies to receive royalty fees in exchange for licenses to manufacture or to sell their products.

Royalties are payments the licensee makes to the licensor in exchange for the legal right to use his or her intellectual property or assets. For instance, Microsoft created the Windows operating system to facilitate operations and file management in personal computers. IBM, Compaq, and other computer manufacturers pay royalty fees to Microsoft to obtain permission to use Windows in their computers. Some other industries where royalties are common include:

  • Fashion industry
  • Book publishing industry
  • Music industry
  • Television industry
  • Oil and gas industry

Royalties for the Use of Copyrighted Items

Perhaps the most common application of royalties people can relate to is the payment of royalties for the use of copyrighted materials. For example, a radio station is required to pay a royalty fee every time it plays a song. Also, a cable television provider has to pay a television station a royalty each time it transmits the station's signal. Every newspaper, magazine, and book published in the U.S. has a copyright protection. A royalty fee must be paid every time someone other than the publisher reproduces a part of a print product.

In the U.S., a number of organizations are responsible for overseeing and managing royalty agreements that involve copyrighted materials. They include government agencies and nonprofit organizations that monitor intellectual property rights and sometimes collect royalties on behalf of member companies. The U.S. Patent and Trademark Office and the U.S. Copyright Office are the two main government agencies that deal with situations involving royalties. While they are not directly involved in the payment of royalties, they both play a vital role in the process.

The U.S. Copyright Office ensures that all original authored works have full protection under the law. Only the person or the business organization that owns the copyright for a work is allowed to license it and receive royalties for it. In addition, the Copyright Office is the agency that decides when royalties are required.

Royalties for the Use of Patented Items

The U.S. Patent and Trademark Office provides protection for inventors and their inventions. When someone invents a new product, service, or process, he or she may apply for a patent to establish that he or she is indeed the inventor. This entitles him or her to full protection under the law. In the event the product or process is too similar to an existing patent or exists, the inventor will not be granted a patent. Similar to a copyright, a patent gives its holder the right to license the patented item and receive royalties for it.

How Royalties Work

If you decide to license an invention, you will continue to be the owner of the work. This means you will own the copyright or patent while the licensee produces and sells the item. After granting the license, you will be entitled to royalty payments, which are continuing payments typically based on a percentage of the income generated from the licensed item. For instance, you may keep 20 percent of the gross revenue, while the licensee receives 80 percent.

You also have the option of assigning the copyright or patent for your creation. It may give you a big lump-sum payment, but you will have to forego royalties from future sales.

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