Determining Royalty Rate and Length on High-Tech Products
I was wondering if someone can give me methodologies, strategies, and references for answering this question, as I have to develop a revenue model.
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This question ws heavily edited and redacted before being taken off the Patent stack exchange and put here instead. Originally, the question asked for licensing guidelines for a patent relating to a high profit margin advanced techonolgy. If the answer (never intended for OnStartups) continues to receive negative votes, it will be removed. – Yorick 11 years ago
1 Answer
Licensing tends to be very fact specific, but there are some general concepts.
The most common calculation is a percentage of gross revenues for the good or service sold. There is a big difference between a percentage of gross vs. net. The licensor (patentee) usually insists on gross, since some quick accounting and increased expenses might bring the effective royalty based on net to $zero.
Are there accompanying goods or services included? This can be answered fairly by determining what the patent claims cover.
Is this a high or low profit margin item? Are there competitors? Substitute goods/services? What will the market bear? Does the patentee/licensor have market power? The better positioned the patentee, the higher the royalty.
Is the patent strong? Successfully asserted in litigation? Re-examined? Previously licensed? Does the licensee have opinion of counsel saying the patent is invalid or does not cover the product? Is the license the result of a patent infringement settlement? The stronger the relative position of the patentee, the higher the royalty.
Is this an exclusive license? Exclusivity costs more.
Are other rights combined in the license such as other patents, trademarks, know-how? The more of a full service suite being provided, the higher the royalty. Duration of a patent license cannot exceed the term of the patent. Improvement patents and other intellectual property have been used to extend a license beyond an initial patent term.
Is the licensee in a position to grant a cross-license of their own patents? Who has responsibility to enforce the patent? Who has rights to patent any improvements?
All of these play into negotiations to arrive at the royalty rate. A great place to start might be to research royalty rates on similar types of licenses.
Your law library has a full set of IP licensing treatises complete with forms and even sample licenses.
