The Federal Circuit’s decision in Uniloc v. Microsoft to abolish the 25% rule of thumb in reasonable royalty analyses couldn’t have been more clear. The case blew the 25% rule “out of the water,” said Steve Economou (Curtis Financial Group) at one of the closing sessions at the ASA’s Advanced BV Conference in Phoenix last week. Prior to the decision, he’d seen the rule used constantly and “too broadly.” An IP appraiser would collect the royalty data, pick the median rate, apply the 25% rule of thumb, and “see if it all worked, without considering the qualitative factors.”
But even post-Uniloc, “we still have to come up with a reasonable [royalty rate] conclusion that the client can support as well,” Economou told ASA attendees. Clients are still the “first line of defense” against taxing authorities, who historically accepted the 25% rule to resolve transfer pricing issues, and also auditors, many of whom will ask—if they don’t see the rule in the analysis—why the IP appraiser didn’t apply it. For these reasons, Economou said, he still includes the rule as a reasonableness check. And when he asked how many at the ASA session still consider it in their analyses, there was a substantial show of hands. As one audience member volunteered, “We used [the 25% rule] in one case because we knew the auditor still used it.”
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