Patent Law

The above titled article by Glenn S. Newman, Richard J. Gering and Jeffrey N. Press appeared in the September 2008 issue of the Journal of Accountancy.  The following is excerpted from this article:

• In recent years, focus has shifted to the increased value of intangible assets. As such, competition, sometimes unlawful, has resulted in extensive litigation and/or negotiation between parties for the use of intangibles.

• Methodologies to quantify a reasonable royalty are consistent with general valuation approaches?market (other licenses), income (profitability), and cost (design?around).

• The Georgia-Pacific dispute is the seminal case that identified15 factors to consider in estimating a hypothetical reasonable royalty.

• Be careful in determining an appropriate royalty base?consider what the market considers important, and the functional relationship between patented and unpatented products sold together.

• Whichever method is used to determine a royalty, be forewarned that others will likely have an opposing point of view. Accordingly, make sure it passes the smell test.

Types of Royalties

The licensor and licensee may structure royalty payments in many ways. Here are some typical forms of royalty payment:

• A running royalty based on a percent of the net sales price

•  A running royalty based on a dollar amount per unit

•  Lump sum or paid-up amounts

•  Hybrid agreements that combine lump-sum milestone payments with running rates

•  Tiered rates that adjust at different sales levels

•  Different rates for different fields-of-use or geographic markets

•  Different rates when there are multiple patents that cover a single product or technology

•  Minimums and maximums both annually and over the life of the agreement

Read the full article here.