How can an analyst benchmark a patent license royalty?


Though the courts have tossed the 25% Rule as a basis for a calculation of reasonable royalties, can it still be used as a benchmark for analysts auditing patent licenses? A KPMG white paper concludes there is a linear relationship between reported royalty rates and profitability measures, suggesting the market is efficient and, taken as a whole, profitability is factored into royalty rate negotiations. However, researchers found no general linear relationship between royalty rates and operating margins.

Still, if a down-and-dirty benchmark were desired to derive some sort of relativity, using the data found in Goldscheider et al (2002), the authors found a “’forced’ linear fitting seems to make the average royalty rate equal to 23 percent of the average operating profit margin.”

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