Royalty agreement

How BC law treats it

A royalty agreement is usually part of, or the same document as, a licensing agreement. The ownership and transfer of the underlying rights are federal: an assignment of copyright, or a licence granting an interest in it, must be in writing signed by the owner (Copyright Act, RSC 1985, c C-42, s. 13(4)). Patent assignments must also be in writing. Under the Trademarks Act, RSC 1985, c T-13, s. 50, a trademark owner must control the character or quality of the licensee's goods or services for the licensee's use to count as the owner's use. Core terms include the royalty base (gross or net sales and permitted deductions), rate, minimums, advances, reporting and payment schedule, currency, late interest, tax withholding, audit rights, exclusivity, territory, term, termination triggers and what happens to inventory after termination. Courts interpret these terms using ordinary contract principles, reading the words in light of the surrounding circumstances known to both parties at the time (Sattva Capital Corp v Creston Moly Corp, 2014 SCC 53). Royalty disputes usually concern underpayment, the meaning of 'net sales', or termination. Many agreements require arbitration, which in BC is governed by the Arbitration Act, SBC 2020, c 2 for domestic matters. A claim for unpaid royalties is generally subject to the two year basic limitation period under the Limitation Act, SBC 2012, c 13, which can bar older underpayments discovered in a late audit.

What it means for your business

The royalty agreement decides whether a licensing deal makes money. Weak audit rights, loose deduction clauses and no minimums can leave an owner with far less than expected and no practical remedy. For licensees, clear calculation rules and caps on audit frequency reduce dispute risk. Both sides should plan the exit: what happens to unsold stock, sublicences and accrued royalties when the agreement ends. Example: A North Vancouver inventor licenses a patented bike rack design to a manufacturer for a 5% net royalty with quarterly reports. After an audit shows 12% underreporting, the inventor recovers the shortfall plus audit costs under the agreement's audit clause.

Risks and common mistakes

Failing to put an assignment or exclusive licence of copyright in signed writing. Letting a trademark licensee operate without quality control provisions, which can weaken the mark. Leaving audits until years later, when the limitation period has run on older underpayments. Omitting a termination clause that deals with sell off periods and return of materials. Copying a royalty clause from another industry without adjusting the base and deductions.