Royalty Fees and Writers

As an aspiring writer in the world of digital publishing, you may be wondering how royalty fees relate to your livelihood. Simple: royalties are how you get paid. According to The Bindery article “Royalties: How Do Publishers Pay Authors (Links to an external site.),” there are different types of royalties, the primary type being royalties known as a “list royalty” or a “retail royalty.”

Most publishers in general categories, especially New York publishers, pay authors royalties as a percentage of the retail price of the book, which is an example of list and retail royalties. However, there are many publishers who pay authors “royalties on net sales,” which means that they pay authors their royalty percentage after the discounts the publishers give to retail stores are figured in.

Side note: publishers sell books to bookstores for a range of discounts, sometimes up to half off the cover price or more.

What is a “Royalty”?

A royalty is defined by Investopedia as (Links to an external site.) “a legally-binding payment made to an individual, for the ongoing use of his or her originally-created assets, including copyrighted works, franchises, and natural resources.”

Royalties are written into contracts for musicians, artists, writers, and any other creator whose work is used by another source as a way of compensating the artist for their work.

Royalty payments comprise “a percentage of the gross or net revenues obtained from using the owner’s property.” In order to decide on these payments, a third party and a creator will lay out a “license agreement,” along with the limitations of the royalty, “such as its geographic limitations, the duration of the agreement, and the type of products with particular royalty cuts.”

According to The Balance Small Business (Links to an external site.),

There are a number of ways that franchisors establish what their ongoing royalty fee will be. The most common is a percentage of the Gross Sales that the franchisee earns. Typically this ranges from between five and nine percent. So, essentially, the franchisee is taking in 91-95% of their gross sales with the rest going to the franchisor.

This means that royalty fees are completely up to the franchisor’s discretion, depending on how high or low they wish to make it (although, typically, it’s less than 10%). To summarize, whenever a creator’s work is being used by the franchisors, like a song playing in the background of a commercial, the creator will be paid a set percentage of the income the franchisor makes from said advertisement (decided upon in a license agreement).

The payment of a royalty comes in the form of a “royalty check” – a check a creator gets for the use of their work. As RSG Media (Links to an external site.) states,

When you write a book, royalty check is the royalties earned from sale of every copy. When you compose a song, royalty is when someone performs it professionally or purchases your CD. You can also earn royalty from your land or property, if someone purchases your mineral rights. The amount of gas or oil produced will provide you a royalty. You can earn royalty checks annually, half-yearly or quarterly, depending upon the royalty agreement.

Royalty vs. License

Here’s where the importance of reading your contract comes into play as some confusion can occur concerning the difference between royalties and licenses. A license is defined by RSG Media (Links to an external site.) as “an agreement between two parties for using someone’s property without paying any money for it.” Whereas a royalty insinuates a payment for the use of the creator’s work, a license allows the third party to use the work without having to actually pay anything for it.

Licenses have what’s known as a licensing fee, which is “an amount of money paid by an individual or business to the licensor, which is mostly government, for enjoying the privilege of being licensed to use someone else property” for a set period of time.

The Licensor receives a perpetual/time bound payment as a percentage of sales in regards for using the intellectual property. You can take for example – an earning from copyright, patent on new products, and consumer product licensing more.

Royalties and licenses are members of same family; these terms are just two faces of same coin.

Know Your Contract

With any kind of contract, there is room for suspicious activity. When one party ignores the contract and goes outside the bounds of the licensing agreement, it’s up to the other party to decide whether to stay with the agreement and risk another breach of contract or terminate the license agreement altogether.

One such case involving a breach of a license agreement involves a toy creator and a line of baby toys. According to Markowitz Herbold PC (Links to an external site.),

A toy inventor sold his entire line of baby toy products to a large toy company in exchange for royalties on the future sales of his products.  The royalty agreement, which spanned many years, contained separate royalty rates for different categories of toys, including a rate for toys that had already been commercialized by the inventor (“original toys”), and another rate for toys that were “derived from” these original toys.   

Though the company paid royalty fees for the sales of a multitude of toys, the toy maker stated that it “misclassified toys” to keep from paying more fees. The toy maker then had to decide whether to sue for the previous grievances or terminate the contract entirely and try to get payment for the remainder of the agreement.

In the end, the toy maker ended the license agreement and “sued to recover the future royalties that he would have earned under the royalty agreement if the toy company had not breached the agreement.”

It is always important to understand the terms of ending a licensing agreement.

If the terminating party revokes the licensee’s right to use its intellectual property, the licensee may have to pull products off shelves.  If the licensor’s initial termination was not justified, the licensor may be held responsible for the licensee’s damages. In the inventor’s case, the toy company counter-sued for breach of contract, in part based on what it claimed was the inventor’s improper termination of the contract.

The result of early termination is usually laid out in the license agreement as a “royalty agreement’s termination provision standards.”

As a new writer, it can be intimidating trying to understand contracts saturated in unfamiliar legal jargon, especially when your focus is sharing your work with the world. However, understanding the contract is of the highest importance when making sure you are getting your full rights as a creator.

The biggest lesson a writer can gain from this article is to find a good editor/manager to help and ALWAYS READ YOUR CONTRACT. Then, maybe you can one day watch Jon Snow quote your poem in a car commercial or hear your song playing in the aisles of Target as you buy caramel popcorn.

With a proper understanding of your contract and the ability to write something worth selling, the world is at your fingertips and the royalties will be in your pocket.