Royalty Payments

Royalty payments are usage-based payments made by a licensee to a licensor for the continuing use of an asset, such as an intellectual-property right. The Government of Canada's Practitioner's Guide for Pricing uses the plural form "royalties" for these payments. You can read the guide on CanadaBuys.

In Canadian defence-contracting guidance, the term also covers payments that a contractor or subcontractor must make to a third party for the use of patented technology or other licensed rights in performing a contract. CanadaBuys sets out this treatment in its guidance on royalty payments and licence agreements.

The parties to a royalty arrangement

Three parties usually appear in a royalty arrangement:

• Licensor: the rights holder who receives the payment.
• Licensee: the contractor or other party that receives permission to use the asset.
• Contracting authority: the government buyer, which decides whether the royalty is an allowable and acceptable contract cost.

Related terms in Canadian procurement include licence agreements, manufacturing licences, technical assistance agreements, patent royalties, intellectual-property rights and unrestricted rights to use technical data. The Supply Manual annexes on CanadaBuys reference several of these concepts.

When royalties arise in a federal contract

Royalty payments arise when performing a contract requires intellectual property, patented inventions, technical data, manufacturing technology, technical assistance or licensed designs. They are an established issue in Canadian federal procurement, particularly in defence and in other purchases involving patented products or third-party intellectual property.

CanadaBuys tells contracting authorities to plan for royalty payments, technical-assistance agreements and manufacturing licences when they are required or anticipated as part of the procurement strategy. For defence contracts, royalties payable by contractors or subcontractors to third parties may be paid when they are valid costs identified in the solicitation and the amounts charged are acceptable to Canada. This is set out in the CanadaBuys royalty guidance.

Approval thresholds for royalties

The size of the royalty determines who inside government must approve it. According to CanadaBuys, a royalty of 5% or less of the selling price of the patented item requires Director approval. A royalty exceeding 5% requires Deputy Minister approval before the contract is entered into.

The same approval process applies if the royalty increases, or if additional items become subject to royalties, during the contract. When approval is sought for a royalty above 5%, the guidance requires details of the royalties and a forecast of anticipated future purchases.

How royalties appear in solicitations and requirement planning

Canada's Supply Manual states that, where royalty payments may be required from a contractor or subcontractor during contract performance, the applicable general or supplemental general conditions should be included in the bid solicitation.

Royalties also come up when a requirement is defined. CanadaBuys procurement guidance tells officials to determine whether the government will have unrestricted rights to use technical data or whether royalty payments are involved. Correctional Service Canada's contracting financial directive likewise requires consideration of whether there are unrestricted rights to use intellectual property or whether royalty payments are involved.

What royalty payments mean for a supplier

If your proposed solution depends on licensed or patented technology, identify every royalty or licence cost tied to it before you bid. Disclose those costs in the manner the solicitation requires, and be ready to provide supporting details when the contracting authority asks. Confirm that the proposed amounts are allowable under the applicable contract terms.

Check the solicitation for the general or supplemental general conditions that deal with royalties. If a royalty could rise above 5% of the selling price of the patented item, expect a higher level of approval and a request for a forecast of future purchases.