Abstract
A relatively simple method for ongoing retrospective valuations of intellectual property (IP) for the purpose of setting royalty rates is described. The method uses measureable variables that indicate directly the value of an IP to a licensee over time. Protections are built into the method to preclude royalties that would be unfair to either the licensee or licensor. Unlike the cost- or income-based methods used in current practice, the described method does not require any assumptions about the future and is therefore immune to the uncertainties and possible inaccuracies that are inherent to prospective valuations. Although forecasting is needed for some purposes, such as for certain tax purposes or for the overall valuation of a company by stock analysts, the described retrospective valuations can be usefully applied for setting royalty rates that closely track and reflect changes in market conditions, patent protection, and product design.
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Notes
Formulas of greater complexity could be proposed, e.g., royalty rate= k 1 × Δ market share + k 2 × relative importance of the IP to the product, which would allow for different weightings of the metrics Δ market share and relative importance of the IP to the product. However, for the purposes of the present discussion, the simplest form of the equation is sufficient for understanding the described approach.
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Appendices
Appendix A
The Georgia-Pacific factors (Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1,116 [S.D.N.Y 1970]).
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1.
The royalties received by the patentee for the licensing of the patent in suit, proving or tending to prove an established royalty.
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2.
The rates paid by the licensee for the use of other patents comparable to the patent in suit.
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3.
The nature and scope of the license, as exclusive or non-exclusive; or as restricted or non-restricted in terms of territory or with respect to whom the manufactured product may be sold.
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4.
The licensor’s established policy and marketing program to maintain his patent monopoly by not licensing others to use the invention or by granting licenses under special conditions designed to preserve that monopoly.
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5.
The commercial relationship between the licensor and licensee, such as whether they are inventor and promoter.
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6.
The effect of selling the patented specialty in promoting sales of other products of the licensee; that existing value of the invention to the licensor as a generator of sales of his non-patented items; and the extent of such derivative or convoyed sales.
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7.
The duration of the patent and the term of the license.
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8.
The established profitability of the product made under the patent, its commercial success, and its current popularity.
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9.
The utility and advantages of the patented property over the old modes or devices, if any, that had been used for working out similar results.
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10.
The nature of the patented invention; the character of the commercial embodiment of it as owned and produced by the licensor; and the benefits to those who have used the invention.
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11.
The extent to which the infringer has made use of the invention; and any evidence probative of the value of that use.
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12.
The portion of the profit or of the selling price that may be customary in the particular business or in comparable business to allow for the use of the invention or analogous inventions.
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13.
The portion of the realized profit that should be credited to the invention as distinguished from non-patented elements, the manufacturing process, business risk, or significant features or improvements added by the infringer.
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14.
The opinion testimony of qualified experts.
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15.
The amount that a licensor (such as the patentee) and a licensee (such as the infringer) would have agreed upon (at the time the infringement began) if both had been reasonably and voluntarily trying to reach an agreement; that is the amount which a prudent licensee—who desired, as a business proposition, to obtain a license to manufacture and sell a particular article embodying the patented invention—would have been willing to pay as a royalty and yet be able to make a reasonable profit and which amount would have been acceptable by a prudent patentee who was willing to grant a license.
Appendix B
See Table 1.
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Wilson, B.S. Retrospective valuations of intellectual property. J Technol Transf 37, 124–133 (2012). https://doi.org/10.1007/s10961-010-9172-9
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DOI: https://doi.org/10.1007/s10961-010-9172-9