Royalty rates, what to factor in?

2019-04-10

ROYALTYRATES,WHATTOFACTORIN?
LILIANAKOROSI*
ROBIC,LLP
LAWYERS,PATENTANDTRADEMARKAGENTS
Oneofthefirstrecurringquestionsaskedbyintellectualproperty(IP)licensorsand
licenseesalikeconcernstheroyaltyrate(RoR)theywouldincludeintheirlicense
agreementsandwhatwouldbethestandardRoRintheindustry.
Somespecializedassociations,suchastheLicensingExecutivesSociety(LES)orthe
LicensingIndustryMerchandiser’sAssociation(LIMA),aswellasspecializedvaluatorsin
thefieldofIP(suchasevaluationdivisionsofaccountingfirms)areperformingapplied
analysesinreportsandstudiesonthissubjectmatter,usingapooloflicenseagreements
andotherinformationmadeavailabletothem,andwhichconcernavarietyofindustries.
AnoverviewofdifferentspecializedsourceshighlightingtheRoR†usedinIPlicense
agreementsingeneral,allowedustofindapossibleanswertothisquestionandillustrate
itinthelistbelow:
•ENTERTAIMENTINDUSTRY/MEDIA:12%
•INTERNET:12%
•TRANSPORTATION:7%
•PHARMACEUTICALINDUSTRY:6-8%
•EQUIPMENT/COMPONENTS:6%
•MACHINERYANDTOOLS:6%
•TELECOMMUNICATIONS:6%
•CHEMICALPRODUCTS:5-6%
•INDUSTRIALENERGY:5%
•AUTOMOBILEINDUSTRY:5%
•MANUFACTURE/INDUSTRIAL:5%
•INFORMATIONTECHNOLOGIES:5%
•ELECTRONICS:4-6%
•LIFESCIENCE/HEALTH:4-6%
•FOODINDUSTRY:4%
•CLEANTECHNOLOGIES:3%

©CIPS,2019.*LilianaKorosiisalawyerforROBIC,LLP,afirmoflawyers,patentandtrademarkagents.†TheRoRusedinthisarticleistheaverageorthemedianflatroyaltyrateusedingeneral,regardlessofthebasefor
itscalculation.

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Inthemajorfieldswithinthehigh-techsector(HTS),suchasaerospace,software,
computers,cleantechnology,communications,medicaldevices,semiconductors,
consumerproducts,andelectronics,theaverageRoRinthepatentandtechnologylicense
agreementsoscillatebetween5%and6%:
•AEROSPACE:11.14%
•CLEAN/GREENTECH:3.74%
•MED&HEALTCARE:5.25%
•MANUFACTURE&INDUSTRIAL:4.34%
•SOFTWARE:6.82%
•SEMICONDUCTOR:4.38%
•IT:4.36%
•CONSUMERPRODUCTS:4.46%
•ELECTRONICS:4.46%
•TRANSPORTATION:6.21%
•NANOTEHC:4%
Inthebiopharmasector,themedianRoRincreases,ingeneral,withthedevelopment
stage:
•PRECLINICAL:5%
•PRE-PROOFOFCONCEPT:5%
•POST-PROOFOFCONCEPT:16%
•PATENTED/MARKETED:15%
AsfortheRoRusedintrademarkslicenseagreementsspecifically,wereferyoutothe
listbelow:
•APPAREL:11%(6,5-12%)
•PHARMACEUTICALS:5%(4-8%)
•COSMETICS/PARFUMS:7%(5-8%)
•JEWELLERY:10%(6-12%)
•PRESENTS:8%(6-12%)
•HOUSEHOLDPRODUCTS/BEDDINGANDLINENS:8%(5-9,5%)
•ALCOHOLICBEVERAGES:5%(3-8%)
•NON-ALCOHOLICBEVERAGES:4%(3-7%)
TheRoRusedindifferentindustries(asanindicationonly;sometimesdifficulttodetermine
intheabsenceofreliablespecializedsources)isoneofthefactorstoconsiderforthe
purposesofnegotiatinganddetermininganRoRwhichrespondstotheparticularitiesand
thecontextofeachIPlicenseagreement.Wehaveillustratedinthelistbelow,asrandom
examplesonly,someofthesefactorswhichmayinfluencetheRoR:

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•Calculationbasisforroyalties:TheRoRwouldbehigherifcalculatedbasedon
netsales(themostcommoncalculationbasis),comparedtotheRoRbasedon
grosssalesorproductcosts,orthepriceperproductunit.
•Exclusivityornon-exclusivityofthelicense:Anexclusivelicensewouldusually
triggerahigherRoR.
•Merchantability:IfthelicenseemustfindanewmarketoriftheIPtargetsanew
market,theRoRwouldbelower,especiallyatthebeginningoftheterm,suchasto
takeintoaccountthecostsassociatedwiththedevelopmentofsuchnewmarket.
•Marketdemand:AhigherRoRwouldbeconsiderediftheIPrespondstoaneed,
toaspecificandimportantmarketdemandwhichisnotfulfilledotherwise.Market
researchesandsurveysarealwaysrecommendedbeforedecidingontheIP
protectionstrategy,aswellasonthecommercializationstrategyfortheproduct
incorporatingit.
•Licenseagreementterm:Alongertermofthelicenseagreementmayjustifya
higherRoRorevenamodulatedRoR(higheratthebeginning,thengradually
decreasing,orviceversa,dependingonthedifferentstagesoftheproduct
commercialization).
•Competitiveproductsalreadyonthemarket:Additionaleffortswouldbe
requiredfromthelicensee,andthemarketwouldbelimited,ifoneormore
competitiveproductsarealreadyappreciatedonthemarkettargetedbythe
licensedIP,suchthattheRoRwouldbelower.
•Licensefeeorprice:Whenthelicenseagreementprovidesfor(i)alicencefee,
eitherinafixedamountpayablewithacertainfrequency(uponsignature,and
thereafter,annually,quarterly,etc.),orinacertainpercentageoutofanyother
amountreceivedunderthelicenceagreement,or(ii)alumpsumamountpayable
uponthesignatureoftheagreement,theRoRwouldbelower.
•ImportanceofthelicensedIP:AnimportantimpactofthelicensedIPonthe
marketorintheindustryingeneralwouldtriggerahigherRoR.
•Limitsastheterritoryand/ortheexploitationfield:Abroaderterritoryand/or
exploitationfieldwouldinprincipal,triggerahigherRoR.
•Needtojoinanadditionaloradjacenttechnology:TheRoRwillfluctuate
proportionallywiththepercentagerepresentedbythelicensedIPinthefinalproduct
ortheaccesstoanalternativeIP.
•Level/stageinthedevelopmentofthelicensedIP:AhigherRoRwouldbe
considerediftheIPisadvancedorreadyforcommercialization,astherisksand
thedevelopmentcostsforthelicenseearelower.
•Objectivesormilestones:Fixedamountsmaybeattachedtoeachofthe
importantstagesormilestonesforthedevelopmentorthecommercializationofthe
product,suchas(i)obtainingcertaincertificationsorregulatoryapprovals
(especiallyregardingpatentsinthepharmaceuticalindustry)or(ii)achievinga
certainlevelofnetorgrossproductsales,suchastolowertheRoR.

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•Stageoftheregulatoryapprovalsand/orofthecertificationproceedings
(especiallyforpatents):TheRoRwouldbehigheriftheregulatory
approvals/certificationstageisadvanced(alreadyobtainedregulatoryapprovalsor
alreadyissuedpatents,forexample),astherisks(andpotentiallythecosts)forthe
licenseediminish.
DeterminingtheRoRinalicenseagreementrequirestherefore,acomplexanalysisofthe
circumstancesofeachspecificsituation.Ananalysisontheimportanceofthevalueand
potentialoftheIP,madebyaspecializedevaluatorwithinthespecificindustrysector,may
beequallyusefulincertaincircumstances.Thelistoffactorsmentionedinaboveisbyno
meansexhaustive,butratheranindicationofthefactorsmostfrequentlyanalyzedbythe
partieswhennegotiatingintellectualpropertylicensingagreements.
Foranyquestionsoradditionalinformation,weinviteyoutocommunicatedirectlywith
ROBIC’sbusinesslawteam.