Minimum Royalty and Reasonable Efforts to Distribute

Here are two vital tips for software distribution contracts. They’re for any software provider retaining another company as a distributor. That includes value-added reseller (VAR) and original equipment manufacturer (OEM) deals.

dollars from tech distributor

If you get a percentage of distributor revenues, set a minimum royalty in dollars.

Imagine you get a 20% royalty on sales of your software (or sales of the distributor’s VAR or OEM product containing your software). The distributor makes sales and charges its customers … little or nothing. You get (a) 20% of little or (b) nothing.

Why would your distributor do that? It might sell for chump-change as part of a larger deal — one that includes its other products. Or it might give your product away as a promotion.

The solution is a fixed dollar royalty. “Distributor shall provider a royalty of 20% of gross revenues received in exchange for the Software, provided such royalty will not fall below $__ per copy of the Software licensed or distributed.” That should solve it. It also reduces your need to quibble about how much of a fee for several products the distributor should credit to your software.

You might think you could instead give the distributor a minimum price. The distributor won’t sell for less than $X. But price-fixing probably violates antitrust law. A minimum royalty does not.

For more, see Chapter I.G.2 of The Tech Contracts Handbook. And see the sample clauses from that chapter in our clause library.

If you grant exclusive rights to distribute, add “reasonable efforts” or another safety valve.

sale signWhat if you grant exclusive distribution rights in a territory or worldwide … and your distributor doesn’t work hard on sales? You’ve basically shelved your software. You can improve the situation with the ever-popular, never clear reasonable efforts requirement. “Distributor shall exercise reasonable efforts to market and sell the software.” That’s doesn’t exactly the distributor into the sales efforts you want. But if your distributor just doesn’t bother, it’s in breach. (You could play with the language: “best efforts,” “super-powered efforts,” etc. But it probably won’t make much difference. See, “Back to ‘Efforts,’ Part 1: Dreaming Up Other Hierarchies.”)

You’ll get more protection with more specific terms. Give yourself the right to terminate the contract or at least to terminate exclusivity if the distributor misses a sales mark. “If Distributor fails to collect gross revenues of $___ from Software distribution during any calendar year, Provider may terminate this Agreement at any time during January of such calendar year.”

For more, see Chapter II.G of The Tech Contracts Handbook. And see the sample clauses from that chapter in our clause library.

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