Our very own Don Baker is quoted in an article on the sometimes tricky implementation of royalty triggers in license agreements in this month’s edition of Technology Transfer Tactics, a publication on best practices in tech transfer (paid subscription required).  Here’s the quote:

Basing a royalty on annual sales, as Alder discovered, is one of those areas with a distinct grayish tint. “You have to deal with defining ‘annual,’” explains Donald H. Baker Jr., a principal at Safford & Baker PLLC, Bloomfield Hills, MI. “Does that mean calendar year sales? Sales during a rolling 12-month period? And do you measure it when it’s collected or when it’s accrued? You have to be very careful to be sure the terms are crystal clear. There’s no substitute for extremely tight definitions.” He adds: “If you have trigger, you’ve got to build a lot of structure around anti-avoidance. Say you have a license agreement that says the licensee owes 6% of net sales until those sales hit a certain point, and then after that, it’s going to be 8%. Now you’re talking about, ‘Net sales to whom? End users? Affiliates?’ Any time you’ve got a trigger, you have to work harder.” Still, he calls royalty triggers “a really useful mechanism, because having flexible approaches to solving economic problems is another arrow in your quiver.” Indeed, he enthuses, “I think they’re great, and I use them all the time, and in a variety of contexts. They really make a lot of sense because they recognize that a constant royalty rate rarely recognizes what’s going to happen across the life of the IP. Triggers represent simple recognition of the fact that in the early stages of an enterprise, the licensee will be spending more to develop the market. So why not incentivize that somehow?”

–Matt