Kicker Clause, Royalty

A clause that provides for a royalty rate to increase if the license turns out to be unexpectedly more profitable to the licensee than was assumed when the license was entered into. For example, suppose the license is based at a rate of 5 percent based on a market size of say $100 million, and sunk cost for plant and development of say $40 million (which the licensor must recover before making a profit), but the license parties are aware of another potential market or factor that could drive the overall market size to say $300 million. A kicker clause might be included that raise the royalty rate slightly if this market became accessible.

Kicker clauses are very rare in ad valorum licenses, since the licensee can argue that the licensee benefits from the additional market based on the royalty rate. They are more common in paid up license situations or where a license fee has been charged, i.e., if the license cost, paid up, $5 million in the above context, a kicker clause might be for an additional $10 million. The upside of a kicker clause for a licensor is that it protects it from the consequences of mistaken assumptions; the downside for the licensee is that the license may cost more, the cost may be uncertain and a that a poorly drafted clause will result in a royalty dispute. See Escalator Clause.