A Primer on Intellectual Property and Intangible Asset Royalty Rates
A survey of the structure of royalty rates for intellectual property and intangible assets is explained by experienced expert witness Don Coker.
In intellectual property terms, a royalty is a payment made to the owner of an intellectual property asset for the use of that property over some period of time.
An intellectual property transaction involving the payment of a royalty is often referred to as a licensing transaction, or simply granting a license for the use of the particular intellectual property asset.
In a licensing or royalty transaction, the user of the intellectual property technology does not take ownership of the technology but rather acquires the right to use the technology for some specified period.
Licenses may be granted on an exclusive basis to one party, or an intellectual property asset owner may grant licenses to multiple users at the same time.
In almost all cases, a royalty is structured as a percentage of the gross amount, or possibly the net amount, that results from the user’s sales that are attributable to the particular intellectual property asset that is licensed.
Royalty rates technically can be whatever the two parties agree: but over time, royalty rates for intellectual property assets generally have followed this pattern:
● 50% of all IP royalty rates are for royalties of 2% to 5%.
● 25% of all IP royalty rates are for royalties between 6% and 10%.
● 83% of all IP royalty rates are for royalties of 1% to 10%.
● 85% of all IP royalty rates are for royalties of 1% to 12%.
● Only 15% of all IP royalty rates are for royalties of 13% or higher.
When setting royalty rates, look at royalty rates for other similar intellectual property assets. These can be found in royalty and licensing agreements that are often available online, and sometimes in corporate filings with the Securities and Exchange Commission.
Factors that affect the level of a royalty rate include:
● The uniqueness of the technology, i.e., the scarcity of alternatives.
● The cost for the use of similar technologies.
● The cost savings or other savings offered by the technology when compared to what the user would experience without the use of the technology.
● Synergies with other technologies that the use of the licensed technology will produce.
● The cost that the user would incur to produce technology that would result in the same or similar results for the user without the use of the subject intellectual property technology. (Sometimes referred to as substitution cost.)
● Profits that the use of the licensed technology likely will produce for the user.
In the final analysis, royalty rates are usually set by a negotiation process between the intellectual property owner and the prospective user who wants to license the technology. And more often than not, the resulting royalty rates tend to fall within the ranges cited earlier in this article.
ABOUT THE AUTHOR: Don Coker
Mr. Coker provides expert witness and consulting services.
Over 460 cases for plaintiffs and defendants nationwide, 100+ testimonies, 12 courthouse settlements in all areas of banking and finance. Listed in the databases of recommended expert witness consultants of both the DRI and the American Association for Justice.
Clients have included numerous individual plaintiffs and over 60 banks.
Employment experience includes Citicorp, Ford Credit, and entities that are now JPMorgan Chase Bank, BofA, Regions Financial, Guaranty Bank, and a two-year stint as a high-level governmental financial institution regulator.
B.A. degree from the University of Alabama, and postgraduate and executive education work at Alabama, the University of Houston, SMU, Spring Hill College, and the Harvard Business School.
Called on by clients in 28 countries for work involving 57 countries. Widely published, often called on by the media.
Copyright Don Coker
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.