It is common practice, in intellectual property licence agreements governed by English law, for the licensee to be granted an exclusive licence to exploit IP within a defined territory for a defined period of time. One of the most common royalty payment mechanics in such licence agreements is for the payment of an annual royalty calculated as a fixed percentage of annual sales turnover or of the net sales price of each “Licenced Product” sold within the territory.
The effect of all such percentage-based royalties is to give the licensor a direct commercial interest in the successful exploitation of the licensed IP: higher sales resulting in higher percentage-based royalties.
Due to the exclusive nature of the licence, it is equally important that the licensor is able to either (i) terminate the licence agreement; or (ii) claim for lost royalties, should the licensee be unable or unwilling to properly exploit the licensed IP. Otherwise, the licensor may find itself trapped in a licence agreement receiving significantly less royalties then the IP should be generating.
A common example of contractual provisions that protect a licensor from an under-performing licensee are “endeavour” clauses commonly featuring in English law IP licences.
There are three standard variations of endeavour clauses, with “best endeavours” setting the highest bar of what is required from the obligor, followed by “all reasonable endeavours,” and finally “reasonable endeavours.” If a licence fails to generate the expected royalties, the licensor may wish to rely on the licensee’s breach of the applicable endeavour clause to terminate the licence.
We explain how these clauses work in the full PDF article, which you can read here.
This article first appeared in “Les Nouvelles”, a publication by LES.