Royalties

Royalties are payments made for the authorized use of intellectual property, such as a patent, copyright, licence or technical know-how, or for rights connected with a patented item. The party that owns the intellectual property receives the payment from the party that uses it.

In Canadian defence procurement, royalties are usually amounts that contractors or subcontractors owe to third parties. Canada can recognize those amounts as valid contract costs. The term most often appears alongside patent licences, manufacturing licences, technical-assistance agreements, foreground intellectual property and royalty-free licences.

Royalties in procurement planning

CanadaBuys guidance directs contracting authorities to plan for royalties before a solicitation is issued. If royalty payments, technical-assistance agreements or manufacturing licences are required or anticipated, the contracting authority must account for them in the procurement strategy. The details of the arrangement are set out up front, not left to be resolved after award. See the CanadaBuys guidance on royalty payments and licence agreements.

In defence contracts, royalties payable by contractors or subcontractors to third parties can be paid when they are valid costs under the solicitation and the amounts are acceptable to Canada.

Approval thresholds for royalties on patented items

The approval level depends on the size of the royalty relative to the selling price of the patented item. According to the CanadaBuys guidance, the thresholds are:

• 5% or less of the selling price: approval from the Director.
• More than 5%: approval from the Deputy Minister before the contract is entered into.

The same approval process applies after award. If royalty amounts increase, or if additional items become subject to royalty payments, the change goes through the approval process again.

Royalty-free licences under the Crown IP policy

The Treasury Board policy on intellectual property arising under Crown procurement contracts addresses when a licence must be royalty-free. Where the Crown owns foreground intellectual property under the policy's specified exceptions, a licence granted to the contractor generally must be royalty-free. The exception is a licence granted as part of transferring the final product or complete system to the private sector. In other cases, the Crown can require royalties. The policy text is available in the Treasury Board policy on intellectual property arising under Crown procurement contracts, and the implementation guide explains how it is applied.

The royalties clause in ProServices contracts

Contracts resulting from PSPC ProServices supply arrangements can include an "Intellectual property infringement and royalties" clause. Under it, the contractor warrants, to the best of its knowledge, that neither the contractor nor Canada will infringe third-party intellectual property in the work. It also states that Canada has no obligation to pay royalties of any kind to anyone in connection with the work. The wording is set out on the PSPC ProServices supply arrangement page.

The clause also sets notification duties. A contractor must tell Canada promptly if a third party makes a claim about intellectual property infringement or royalties related to the work. Depending on the specific clause, the contractor can also be required to take part in defending and settling the claim. A CanadaBuys defence solicitation uses similar language, requiring the parties to notify one another immediately of such claims in the request for proposal.

What royalties mean for a supplier bidding on Canadian public contracts

Suppliers should identify any third-party royalties tied to their solution before they bid. If a patent licence, manufacturing licence or technical-assistance agreement carries royalty payments, those costs need to be valid under the solicitation and acceptable to Canada before they can be paid.

• Check the solicitation for the royalty and intellectual property clauses that apply.
• Expect extra approval steps when a royalty on a patented item is above 5% of its selling price.
• Do not assume Canada will pay royalties on professional services work, because ProServices contracts state it has no such obligation.
• Build a process to notify Canada promptly about any third-party royalty or infringement claim.