Malcolm Rivera
When determining patent royalty rates, it is essential to consider comparable licenses and market rates to ensure fair compensation and avoid patent misuse. This involves examining the technological and economic comparability of licenses, including the royalty bases, agreement dates, and the number of patents licensed. The market approach, cost approach, and income approach are commonly used to calculate royalty rates, taking into account factors such as income, costs, market conditions, and the cost of producing a similar patented asset.
| Characteristics | Values |
|---|---|
| Royalty rates | 0.1% to 25% |
| Basis for royalty rates | Income, costs, or comparable market rates |
| Methods to determine royalty rates | The income approach, the market approach, the cost approach, the CUP method |
| Factors affecting royalty rates | Individual circumstances of the patent, industry, product |
| License agreements | Comparable in terms of technology and the economic relationship between parties |
| License comparability | Technical and economic comparability of the reference agreement in relation to the hypothetical negotiation |
| Royalty obligations | Terminate when all licensed rights expire |
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What You'll Learn
- Comparable licenses must be sufficiently comparable in technology and economic relationship
- Comparisons of past patent licenses must account for technological and economic differences
- The market approach: basing royalty rates on comparable patents in the market
- The cost approach: basing royalty rates on the cost of producing a similar patented asset
- Hybrid licenses: tying the term of the license to the term of the patent rights
Comparable licenses must be sufficiently comparable in technology and economic relationship
When determining fair royalty rates for patent licensing, it is essential to consider comparable licenses in terms of technology and economic relationships. This means that the licenses being compared should relate to similar technologies and reflect similar economic conditions between the parties involved.
Firstly, technological comparability ensures that the licenses being compared cover similar patented technologies. For instance, in Wordtech Systems, Inc. v. Integrated Networks Solutions, Inc., the court emphasised the need to account for "technological and economic differences" when comparing past patent licenses to the infringement case at hand. This means that the technologies covered by the licenses should be analogous, and vague or loose comparisons between different technologies are insufficient.
Secondly, economic comparability considers the commercial situation and the relationship between the parties. This includes factors such as the negotiation dynamics, the market conditions at the time of negotiation, and the cost of available non-infringing alternatives. For example, in Apple Inc. v. Motorola, Inc., the court highlighted that comparable licenses inherently account for market conditions and various factors that are challenging to value, such as the cost of non-infringing alternatives.
It is important to note that prior licenses are rarely perfectly analogous to the infringement action. Therefore, when relying on comparable licenses, it is crucial to account for distinguishing factors, such as the number of patents covered, cross-licensing terms, and the inclusion of foreign intellectual property rights. Additionally, economic differences may arise when the license does not reflect the hypothetical negotiation or when it is not a bare license for the specific claims at issue.
To determine reasonable royalty rates, damages experts may also consider the specific circumstances of the parties involved. For example, they might assess whether the licensor needed funds to continue its licensing campaign or whether the licensee could afford a reasonable royalty, as these factors can influence the agreed-upon amount.
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Comparisons of past patent licenses must account for technological and economic differences
When determining fair royalty rates, several factors must be taken into account, including income, costs, and comparable market rates. Royalty rates can vary from 0.1% to 25% and can differ across products and industries. To calculate royalty rates for a patent, professionals often use the income approach, the market approach, or the cost approach. The income approach estimates the income the patent will generate and bases the royalty rate on that. The market approach involves basing the royalty rate on the royalties charged for comparable patents in the market. The cost approach calculates the cost of producing a similar patented asset and bases the royalty on that.
When using past patent licenses as a basis for comparison, it is important to account for technological and economic differences. This was highlighted in Wordtech Systems, Inc. v. Integrated Networks Solutions, Inc. (2010), where the court considered the "technological and economic differences" between past patent licenses and the infringement at hand. Economic differences can arise when the commercial situation leading to the license does not reflect a hypothetical negotiation, or when the license is not a bare license for the claims at issue. For instance, in Lucent Technologies, Inc. v. Gateway, Inc. (2009), the court emphasized the need for a basis of comparison when using a running-royalty agreement to award lump-sum damages.
The Federal Circuit has provided guidance on license agreement comparability, emphasizing the importance of both technical and economic comparability. In Omega v. Calamp (2021), the court rejected the notion that a party could rely solely on an internal licensing policy without considering the specific patents and technology involved. Similarly, in VirnetX, Inc. v. Apple Inc. (2014), the court noted that prior licenses are rarely perfectly analogous, and vague comparability is insufficient. Instead, licenses must be sufficiently comparable in terms of technology and the economic relationship between the parties, as seen in Studiengesellschaft Kohle, m.b.H. v. Dart Indus., Inc. (1988).
To effectively determine license comparability, it is crucial to analyze the distinguishing factors between the reference agreement and the hypothetical negotiation. These factors can include royalty bases, agreement dates, and the number of patents licensed. Additionally, it is important to consider the licensee's ability to pay a reasonable royalty and the licensor's financial situation during the negotiation. By examining these aspects, damages experts can gain a more comprehensive understanding of the comparability between past patent licenses and the current infringement action.
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The market approach: basing royalty rates on comparable patents in the market
When determining fair royalty rates, it is important to consider the individual circumstances of the patent. This includes income, costs, or comparable market rates. One of the main methods to calculate royalty rates for a patent is the market approach. This method bases the royalty rate on the royalties charged for comparable patents in the market.
The market approach is a valuable tool when negotiating patent royalty rates for a license agreement, valuing a patented product, or analyzing an intercompany transaction for transfer pricing purposes. It is important to note that licenses must be sufficiently comparable, and vague comparability is not enough. Comparisons of past patent licenses to the infringement must take into account the technological and economic differences between them. This includes differences in royalty bases, agreement dates, and the number of patents licensed under the reference and hypothetical agreements.
When determining the comparability of a license, it is crucial to consider both the technical and economic comparability of the reference agreement in relation to the hypothetical negotiation. This involves analyzing the economic relationship between the parties and the cost of available, non-infringing alternatives. Additionally, it is important to examine whether there are other reasons why a licensor may have deviated from their settlement demand or damages claim. For example, the licensee's financial situation or the licensor's need for funds may impact the agreed-upon consideration.
To effectively use the market approach, it is essential to have access to reliable and recent comparable market rate data. This data can be obtained through specialized databases such as RoyaltyRange, which provide royalty rates for comparable uncontrolled transactions. By utilizing these tools, professionals can ensure that the royalty rates they set are fair and in line with market practices.
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The cost approach: basing royalty rates on the cost of producing a similar patented asset
When determining fair royalty rates, it is important to consider the individual circumstances of the patent. Royalty rates can be anything from 0.1% to 25% and can differ from product to product and industry to industry.
One way to determine royalty rates is through the cost approach. This approach involves calculating the cost of producing a similar patented asset and then basing the royalty rate on that cost. This method is particularly useful when there are no perfectly analogous prior licenses to compare to. It is important to note that the cost approach should not be used in isolation, and it is recommended to compare and contrast the results with comparable market rates.
For example, let's say Company A has a patent for a new type of solar panel and wants to license it to Company B. Using the cost approach, Company A would first need to calculate the cost of producing the solar panel, including research and development, materials, and manufacturing costs. This calculation would then serve as the basis for the royalty rate charged to Company B for using the patented technology.
The cost approach can be particularly useful in industries with high upfront costs, such as pharmaceuticals or aerospace, where the cost of developing and producing a product can be significant. By using the cost approach, companies can ensure that the royalty rates are fair and reasonable, reflecting the investment made in developing the patented asset.
It is worth noting that the cost approach may not always be the most suitable method for determining royalty rates. Other approaches, such as the market approach (which bases the royalty rate on comparable patents in the market) or the income approach (which estimates the income the patent will generate and bases the royalty rate on that), may also be considered to ensure a fair and reasonable royalty rate.
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Hybrid licenses: tying the term of the license to the term of the patent rights
Hybrid licenses are becoming increasingly popular in the United States. However, they are tricky to navigate due to patent misuse concerns. A hybrid license involves not only patent rights but also additional rights that a licensee requires to fully utilize the patent rights.
When it comes to determining fair royalty rates, several factors must be considered. These include income, costs, and comparable market rates. Royalty rates can range from 0.1% to 25% and vary across industries and products. To calculate royalties, one can use methods such as the income approach, the market approach, and the cost approach. The income approach estimates the income a patent will generate and bases the royalty on that. The market approach uses royalty rates for comparable patents in the market, while the cost approach calculates the cost of producing a similar patented asset.
To address patent misuse concerns, one strategy is to tie the term of the hybrid license to the term of the patent rights included in the bundle. This ensures that the royalty obligations for all licensed rights terminate simultaneously. In some cases, the term of the hybrid license may extend beyond the last-to-expire patent right. In such cases, the agreement should specify the portion of the royalty attributable to patent rights and other licensed rights. Alternatively, the agreement can provide for a decreased royalty once the patent rights expire.
Additionally, it is beneficial to incorporate both patent and trade secret rights into a hybrid agreement. This strengthens the relationship between the licensor and licensee and can lead to future cooperation and improvements. However, it's important to carefully assess joint ownership constraints, determine the rights of the potential licensor, and draft the license agreement accordingly.
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Frequently asked questions
There are three main methods for determining comparable license royalty rates: the income approach, the market approach, and the cost approach. The income approach estimates the income the patent will generate and bases the royalty rate on that. The market approach bases the royalty rate on comparable patents in the market. The cost approach works out the cost of producing a similar patented asset and bases the royalty on that.
It is important to consider both the technological and economic comparability of the reference agreement in relation to the hypothetical negotiation. The economic relationship between the parties and the market conditions at the time of the hypothetical negotiation should also be taken into account.
Prior licenses are rarely perfectly analogous to the infringement action. Licenses used for comparison must be sufficiently comparable, and vague comparability is not enough. Comparisons of past patent licenses to the infringement must account for "the technological and economic differences" between them.
