The Design Doctor: How do royalties work?

Dear Design Doctor

A leading UK ribbon wholesaler and manufacturer wants me to design a range especially for them, under my name. 

How does this work? What do I need to put in place to keep the designs my own? How do they pay me? Do I get royalties? What are the legal implications? What agreements need to be in place?  Please help me as the meeting is looming and I need something under my belt in advance.

The Design Doctor on this licensing question is Patricia van den Akker, Director of The Design Trust:

“Your client is potentially commissioning you to design a range that they will manufacture, promote and sell, under your name.

The basic idea of a license agreement means that it grants permission to a third party to use your intellectual property (e.g. copyright, design right, trade mark or patent).  Licensing your designs, products, surface/ textile patterns, software, illustrations, or photographs in return for royalties can be a very lucrative income stream, without the hassle of having to produce and market your work.

As this is a leading manufacturer in its field where licensing is used regularly I assume that they would have their own licensing contract, and that you can negotiate on the terms and conditions, such as how much you will be paid.

You normally would get a design brief to commission you to design the range, plus a licensing agreement that gives all the details of the arrangement.

There are different ways that you can get paid, and you would negotiate on what works best for you:

• commission only: you would get a design brief and get paid a fixed design fee.  This is a safe option, as you will be paid regardless of the product ever going to market.  However, if the product would be a success you won’t get paid more money than if it would be a flop. Within specific industries there are often more or less fixed rates for specific design jobs, and I suggest you ask around to see if you can find out how much to charge as a design fee.
• royalties only: you will get paid a percentage of the sales, which makes this lucrative if you have the right manufacturer who can produce and market successful products.  But it leaves a lot of financial risk with you, as many designs will never reach the market while you have done lots of design work.
• advance against royalties: This combines the above two, whereby you get a lower fixed design fee than if you would do ‘commission only’, but you also get a royalty once the product starts to sell well.  Your royalty income will accumulate until they reach the level of design fee, and only then will you get paid monthly or quarterly again but now in royalties.  This gives you the security of at least being able to cover your costs, but also allows for potential higher returns if you design a commercially successful product.

What information goes in a licensing agreement?

A licensing agreement is a contract between you the designer and the manufacturer that they can use your copyright (so the copyright stays with you – avoid selling your copyright as you wont earn more money if your range is a success!).  There are many different points that go into a contract, each of which is negotiable:

• Exclusive or non-exclusive: Who has the right to manufacture, market and sell the product or design?  Is there one brand/manufacturer, an agent or others too?  Will you as the designer still be able to sell the same products directly?
• Terms of license: How long will the license be valid for?  What happens if the design is not brought to market, or if sales are low?  Will you be able to terminate the license if sales are below a certain quantity?  What would this quantity be, and how long after will the contract be terminated?
• Geographical scope:  Which geographical area will the license apply to?  Will it be for UK only, Europe, or other areas too?
• Royalty: what is the percentage, how this is calculated, what costs will be deducted, and what are the anticipated selling quantities?
• Records and accounts: What rights have you got to inspect the licensee’s accounts to ensure that the proper records and payments are calculated and received?
• Quality control and reputation: The license will specify in detail the quality of products, materials and colours, with an allowance for you to approve samples prior to distribution.
• Promotion: Agree on how you will be promoted as the designer of the products – are you to be credited as the creator or will they be sold under the licensee’s name?  How will you be credited?  How will you be promoted?  (use of your name and image, especially if you are an established designer will dramatically increase royalty percentage)
• Product liability insurance needs to be arranged and paid for by licensees and sub-licensees to avoid that you are liable for damage or losses suffered by a purchaser.
• Infringement: You need to clarify what action will be taken against an infringer of intellectual property rights of your product.
• Competing products: You need to prohibit the licensee from manufacturing, marketing or selling any products that could be confused with yours.
• Sub-licensees: If the licensee works with sub-contractors to manufacture, market or sell your licensed products, then they must be under obligation to ensure that all relevant provisions are reflected in the sub-license.

In the first instance ask your client exactly what the design brief is, get the licensing agreement, and financial forecasts.  Read the contract in great detail, never sign a contract that you don’t fully understand, and you might want to get advice from a specialist lawyer even at this early stage.

More legal information:

It is really essential that you educate yourself about licensing so that you will be better prepared when negotiation with your client.

Intellectual property organisation Own-it have recently publishes a very useful fact sheet on licensing.  There is also on the Own-it website a podcast about protecting and licensing textile designs which might be relevant to you.  There is lots of free information on the Own-it website that you might like to use, and they regularly run workshops too.

The IPO (Intellectual Property Organisation) has published a free Licensing Guide to learn more about how to license your intellectual property.

ACID is a membership organisation to help protect your intellectual property, who also might be able to help you as they sell standardised licensing agreements.

Good luck with this potentially very exciting new creative and commercial area for you and your business!”

If you found this blog post about royalties and licensing useful, then …

You also might like to check out The Design Trust Guide to Start & Run a Successful Craft Business as there is more information in there about licensing, royalties and alternative income streams.

Our Business Club members can also …

Watch our webinar with Maxine J. Horne of Creative Barcode on How to protect your ideas & designs legally, and the podcast with solicitor Niall Head – Rapson on Making money from your intellectual property: royalties & licensing will be very useful to you too as this gives a really good introduction in how it works.

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