Structuring Patent Royalties to Avoid Unnecessary U.S. Customs Duties: Lessons from CBP Rulings

In today’s trade environment, characterized by changing tariffs and heightened scrutiny of cross-border transactions, companies should be vigilant in structuring their patent licensing agreements. With duties on certain imported goods now reaching 25% or more, even routine licensing terms can produce unexpected and costly customs liabilities. One important consideration is whether royalty payments associated with these licenses must be added to the dutiable value of imported goods. Under 19 C.F.R. § 152.103(f), royalties or license fees that are paid “as a condition of the sale” of imported merchandise are generally dutiable — meaning they increase the assessed value of the goods and, in turn, the import duty owed.[1]

This issue is particularly relevant in the context of patent litigation, where many disputes end with a negotiated license agreement. If the licensed products are imported into the United States, and the royalty structure is not carefully crafted, the licensee may expose itself to a second layer of financial liability in the form of increased customs duties. Fortunately, U.S. Customs and Border Protection (CBP) precedent offers examples of how to structure royalty-bearing patent licenses to help avoid triggering § 152.103(f). Below, we walk through four real-world CBP rulings — two where royalties were dutiable, and two where they weren’t — to draw out practical guidance.

Legal Framework

According to 19 C.F.R. § 152.103(f), the dutiability of royalty payments hinges on two primary factors:

1. Condition of Sale: Whether the buyer is required to pay the royalty or license fee as a condition of the sale of the merchandise for exportation to the United States.[2]
2. Recipient and Circumstances: To whom and under what circumstances the payments are made. [3]

If the royalty is not a condition of the sale or is paid to a third party unrelated to the seller, it may not be dutiable.

Dutiable: Royalties Tied to Sales or Importation

1. HQ 548560 (Sept. 3, 2004)

Facts: Syngenta Crop Protection, Inc., a U.S. importer, entered into a license agreement with Syngenta Investment Corporation, a related foreign entity, to import and sell agricultural chemical products. Under this agreement, Syngenta Crop Protection was required to pay royalties based on the net sales of the imported products. The license agreement stipulated that the payment of royalties was mandatory for the right to sell the products in the United States. Additionally, the imported products were purchased from another related entity, creating a network of interrelated parties.

CBP Ruling: CBP determined that the royalty payments were dutiable under 19 U.S.C. § 1401a(b)(1)(D) and 19 C.F.R. § 152.103(f). The key factors influencing this decision included:

• The royalty payments were a condition of the sale, as the importer could not purchase the merchandise without agreeing to pay the royalties.
• The licensor, seller, and importer were all related entities, indicating that the royalty payments were intrinsically linked to the sale of the imported goods.
• The license and supply agreements were interrelated, and the royalty payments were required each time the licensed merchandise was imported and resold.

Takeaway: When royalty payments are made to a party related to the seller, and the payment is a condition of the sale of the imported merchandise, CBP may determine that such payments are dutiable. The interrelation of agreements and the relationships between the parties play a significant role in this determination.

2. HQ H024980 (Jul. 22, 2008)

Facts: A U.S. company imported goods from a foreign manufacturer with which it had also executed a license agreement for patented technology used in those products. The license required royalty payments based on the number of imported units. Although the license and sales contracts were nominally separate, they were negotiated together, and the license was functionally necessary to acquire the goods. The royalties were paid to the same entity that sold the goods to the importer.

CBP Ruling: CBP found the royalties to be dutiable under 19 C.F.R. § 152.103(f). It concluded that:

• The royalties were paid to the seller, and were calculated on a per-unit imported basis;
• The patent royalty arrangement, while documented separately from the sales agreement, was effectively a prerequisite to the importer acquiring the goods;
• There was a direct link between the royalty and the merchandise — the patented features being licensed were incorporated into the imported goods.

Takeaway: When a royalty arrangement is tightly bound up with the purchase of imported goods — especially where the royalty is paid to the seller, based on imported units, and covers IP embodied in the products — CBP may determine that the payment is part of the customs value. Even if agreements are structured separately on paper, CBP focuses on commercial substance, not form.

Not Dutiable: Royalties Sufficiently Outside the Sale

1. HQ 545998 (Nov. 13, 1996)

Facts: The importer paid royalties under a patent license agreement for the right to manufacture goods domestically using patented processes. The imported components were not themselves subject to any royalty and could be imported independently of the licensing relationship. The royalty was calculated based on finished goods sales volume within the United States and was paid to a third party not involved in the import transactions.

CBP Ruling: CBP found the royalties were not dutiable, holding that:

• The royalties were tied to domestic production, not the import transaction itself;
• There was no requirement that the importer pay the royalty in order to obtain the imported goods; and
• The royalty payments did not influence or condition the sale price or delivery of the imported articles.

Takeaway: Where the royalty is based on post-importation activities (such as manufacturing or domestic use), is not required to purchase the goods, and is not paid to the seller, CBP may decline to treat the royalty as part of the dutiable value. However, to preserve this favorable treatment, licensees should still ensure that any agreements calling for payment of a royalty are contractually and operationally distinct from any import arrangements.

2.   HQ H024979 (May 19, 2009)

Facts: A U.S. importer entered into a license agreement with an unrelated third-party licensor to use patented technology in the production of goods. The license agreement stipulated that the importer would pay royalties based on the number of units imported. The royalty payments were made to the third-party licensor, who was not the seller of the imported goods. The sales agreement for the imported goods did not reference the license agreement, indicating a separation between the two.

CBP Ruling: CBP concluded that the royalty payments were not dutiable under 19 C.F.R. § 152.103(f). The key factors influencing this decision included:

• The licensor and seller were unrelated entities, suggesting that the royalty payments were not intrinsically linked to the sale of the imported goods.
• The license and sales agreements were separate, and the royalty payments were not required as a condition of the sale of the imported merchandise.

Takeaway: Although the royalties were calculated based on import volumes, CBP emphasized that they were not a condition of the sale and were paid to a third party unrelated to the seller. The separation of agreements and the lack of a requirement to pay royalties as a condition of sale are significant factors in this determination.

Conclusion

In an era of increasing tariff enforcement and evolving trade policy, the difference between a non-dutiable and dutiable royalty can be measured in the millions. The CBP rulings surveyed here provide guidance for both patent holders and potential licensees. A licensee will prefer a royalty arrangement that results in no additional customs liability, and at a minimum will need to know whether the potential total liability is a combination of the royalty and any applicable tariff. If the patent holder can structure the agreement so that royalties do not lead to additional customs liability, that agreement will be more attractive to potential licensees.

By proactively aligning license structures with CBP’s guidance, litigants can help preserve the intended economics of a settlement.

Endnotes

1. 19 C.F.R. § 152.103 (2024), available at https://www.law.cornell.edu/cfr/text/19/152.103 (last visited Apr. 11, 2025).
2. See id.
3. See id.