To ensure sophisticated electronic devices all work together, global standard-setting organizations (such as the International Telecommunications Union and the Institute of Electrical and Electronics Engineers) require member companies to license “essential” patents at “reasonable and non-discriminatory” rates, or RAND.
In Microsoft Corporation v. Motorola, Inc., the parties have asked for a judicial determination of a reasonable RAND royalty. According to Microsoft, the proper framework for determining a RAND royalty rate is an “ex ante, multi-lateral negotiation” involving full participation of essential patent holders as well as all potential implementers. Motorola maintains that international standards clearly state that RAND license agreements are “bilateral in nature, such that they occur between only the patentee and the implementer.”
Although academic and standard-setting sources have discussed the importance of RAND rates and industry standards, the federal district court was quick to note the lack of any precedent on determining RAND rates and ranges. “Limited publication exists on the methodology a court should employ to determine a RAND royalty rate which in some way reconstructs the negotiation that would have taken place between Microsoft and Motorola.”
In the end—and citing the adaptability of the Daubert standard to new technical and scientific areas—the court permitted both parties’ experts to present their respective opinions and then held a RAND hearing, promising a RAND rate and range in the near future.
Read the complete digest of Microsoft Corporation v. Motorola, Inc., 2012 LEXIS 152244 (Oct. 22, 2012), in the January 2013 Business Valuation Update; the court’s opinion will be posted soon at BVLaw.
Ratification was expected, and last week, the European Parliament approved the unitary (or unified) patent, expected to lower costs for filing for a patent in European countries by over 80%. Under the new framework, a patent issued by the European Patent Office will be valid automatically in 25 countries (Spain and Italy are holdouts) and will be adjudicated in a new, single patent court, located in Paris. The first unitary patents are expected in spring 2014.
In still another decision, Energy Transportation Group, Inc. v. William Demant Holding, 2012 LEXIS 21200 (Oct. 12, 2012), the U.S. Court of Appeals for the Federal Circuit reaffirmed that the 25% rule of thumb is a “fundamentally flawed tool for determining a baseline royalty rate” in patent infringement cases, citing its recent opinion in Uniloc v. Microsoft.
At the same time, just because the plaintiff’s damages expert discussed the rule (“which is no longer a ‘rule,’” the court said), his analysis wasn’t “irretrievably damaged,” particularly since he relied more prominently on other factors. For instance, he separately determined that the infringing products earned 9.2% more in operating profits than noninfringing devices. He also conducted a Georgia-Pacific analysis to show that the royalty was reasonable in light of the “unique relationship of the parties, the nature of the invention, and the nature of the industry,” the court said, in an opinion by Judge Randall Rader. He could have stopped there, but sua sponte, the judge added the following line of dicta:
Once again, this court does not endorse Georgia-Pacific as setting forth a test for royalty calculations, but only as a list of admissible factors informing a reliable economic analysis.
In this particular case, according to Dan Jackson (AlixPartners): “The Federal Circuit is clearly telling everyone that Georgia-Pacific is not a means to an end; it is simply a tool to assist an expert in identifying the types of questions that may be important to a reasonable royalty analysis. Two very interesting observations I take away from the case,” he adds: 1) financial experts cannot derive a royalty based solely on an evaluation of just the Georgia-Pacific factors; but 2) a federal court should accept the analysis if reasoned and well supported.
The transfer of intangible property from one enterprise to an affiliate resident in a different country can significantly reduce the tax burden of a company. Conversely, such transfers reduce the tax revenues in countries where higher tax rates are being avoided. Countries on the short end are attempting to expose the transfer of the intangibles as improper, unfairly priced, and not “arm’s length.”
How does it work? One way is to attribute revenue to a marketing intangible, transfer the intangible to the lesser tax state (and a fair price), and allocate accordingly. Writing in TheLawyer.com, international transfer pricing attorney Stefano Simontacchi offered another example:
Marketing intangibles is one example: in recent cases a major reduction of the effective tax rate was achieved by centralizing the intellectual property in a company resident in a low tax jurisdiction and charging the other group companies—mostly resident in high tax jurisdictions—with royalties.
In effect, this is income transfer to the lower-taxed jurisdiction. It’s not surprising ktMINE is a favorite of revenue authorities and corporate tax departments alike because there are huge tax dollars at stake in proving such transactions are arm’s length, and ktMINE is the best tool available for locating similar (arm’s length) licenses and comparable royalty rates.
Darrell West, director for the Center for Technology at Brookings, recently wrote about the need for a consistent set of metrics to be used to evaluate research institutions’ technology transfer operations, suggesting the lack of uniformity makes it difficult for managers to learn what works best.
Top among West’s recommendations is a type of funds flow analysis. Currently technology transfer departments tend to focus on outputs—inventions, patents, licenses, startups, etc.— rather than on precisely how these outputs are achieved. Most schools report too little data on money in and money out.
Most metrics don’t reveal how well institutions of higher learning are doing in regard to research transfer and spinoffs. By comparing how much money is coming in versus going out, and what kind of university infrastructure is necessary to support transfer activities, better metrics would provide clearer incentives for university faculty and improve people’s understanding of research efforts.
West recommends standardizing reporting forms that include detailed sources of income, expenses, and a valuation of the innovation portfolio.
On the income side, [the report forms] should note royalties, licensing fees, legal settlements, legal fee reimbursements, equity investments with gains realized and unrealized, equity sales, university loans, extraordinary income, and general fund investments. [Expenses] should detail salaries and benefits, rent, overhead, legal fees, mandatory disbursements, and program outlays.
Reviewing a Johns Hopkins University presentation on technology transfer reveals a core truth: The goal is to “leverage [university] technology and intellectual property to maximize its value, both monetary and non-monetary.”
Central to this theme is “technology assessment.” When a lost Alice asks the Cheshire Cat for directions, the cat asks Alice where she is going. She states she doesn’t know, to which the cat responds: “If you don’t know where you are going, any place will do.” TTOs need to know the value of what they have to achieve value maximization. That valuation will contain market and industry assessments, competitive advantages, and the IP landscape and will incorporate a review of who is active in like markets and an analysis of IP licenses and royalty rates.
BVR has helped here, creating a portal for easy access by technology transfer departments to ktMINE’s vast reservoir of licenses and royalty rate information. Inquire for more details.
London-based EvaluatePharma estimates that $290 billion of sales are at risk from patent expirations between this year and 2018. In 2013, patents will expire on drugs that currently have sales of $29 billion annually, more than 70% of which will be lost to generics; that’s less than half 2012’s total.
Anthony Raeside, head of research for EvaluatePharma, estimates the pharmaceutical industry has invested $1.1 trillion in the last decade on research and development to try to offset the revenue shortfalls and tumbling of share prices resulting from reaching a patent cliff.
Approximately 120 drugs will reach patent expiry in 2013, topped by Eli Lilly’s anxiety and antidepression drug Cymbalta, which last year generated $4.9 billion in sales for the company. To see the top 15 at risk, read further.
The Licensing Letter Royalty Trends Report, published by EPM Communications, gives analysts an extensive look at trends for royalty rates, guarantees, and advances for every property type and product category, including analysis of the key business factors that affect them.
In addition, analysts will find 10-year trend lines for art, entertainment/character, fashion, sports, and trademark/brand, among others, so you can benchmark your target against industry norms.
Royalty rates are broken out for 16 key product categories and nine subcategories, from apparel and accessories to toys/games and food/beverages, including ranges that will help you maximize the return from your licensing agreements. The publisher includes all charts and graphs on an accompanying CD-ROM (or downloaded with a PDF purchase) as individual JPG files so you can quickly and easily add them to your proposals and reports. Email if you would like more information.
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