What's a GMAR?

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GMAR is short for guaranteed minimum annual royalty  (or guaranteed minimum royalty). GMAR is an annual payment the licensee must pay the inventor-licensor each year. It’s a guarantee that the licensor will receive a certain payment, regardless of how well the product sells in any year.

How does a GMAR work? Each year, you receive your GMAR payment. At the end of each year, the earned royalties are totaled. (The earned royalties are the actual royalties that accumulated from net sales that year.) What happens next depends upon the agreement.

Credits -- When Royalties Exceed the GMAR

The GMAR is a minimum payment to compensate you for royalties that are expected that year. But what happens if the royalties exceed the GMAR payment? In that situation, the licensee has paid fewer royalties to you through the GMAR than you actually earned. Depending upon how your agreement is negotiated, either 1) you may receive a credit payment at the end of the year, or 2) the licensee may hold onto this money as a carryforward credit, and then deduct it against your account in the following years if you have a loss.

The carryforward credit option is usually not recommended because it prevents you from receiving earned royalties for another year. However, licensees prefer it because new product sales may be unpredictable. The first year may be booming, but sales may slow down the second year.

Deficiencies -- When the GMAR Exceeds the Earned Royalties

What happens if the GMAR payment is more than the royalties that you actually earned in a year? For example, say you were paid a $10,000 GMAR but the royalties only totaled $9,000 that year. The licensee paid more royalties to you than you earned.

Depending upon how your agreement is negotiated, 1) the licensee may have to absorb the deficiency, or 2) the contract may permit the licensee to carry forward or cumulate royalty deficiencies, diminishing next year’s GMAR payment accordingly, or 3) if there is a carryforward credit provision, then the deficiency is applied against a previous year’s credit.

EXAMPLE

Your license agreement provides for a GMAR of $10,000 to be paid on January 1 of each year. The first year’s total royalty was only $6,000, which is $4,000 less than the GMAR, so there is a deficiency of $4,000. The second year’s total royalty was $14,000. That’s $4,000 more than the GMAR. So, for the second year, there is a credit of $4,000.

If you had a carryforward provision, you would have received a total of $20,000 for the two years because the first-year deficiency of $4,000 would have canceled out the second-year credit of $4,000. If you had no carryforward provision, you would have received a total of $24,000. You would have received the $4,000 credit from the second year and the $4,000 first-year deficiency would have no effect on your payments.

To sum up, if you are fortunate enough to negotiate a GMAR, your preference should be for a GMAR without a carryforward (sometimes referred to as noncumulating) requirement. You should also be aware that GMARs can be suspended (that is, no payment is required) if certain things occur. Sometimes a contract will provide that no GMAR has to be paid if, through no fault of the licensee, it is impossible to manufacture the product or to obtain the raw materials for the product.

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