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Written by : Shantel Torres
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royalty can be awarded based on the patent statute and is commonly used in license negotiations running royalties are royalties based on sales of an infringing product a lump sum or paid up royalty is a payment that is a single payment but frequently based on a running royalty calculation before getting into royalty rate specifics it's a good idea to step back and get a sense of how overall royalty calculations are done in this video I'll point out typical items that are in that big picture and then go through a sample calculation there are two important points to understand at the outset about royalties apart from the factors that might go into setting any particular royalty rate first royalties are based on the manufacturer sales and/or use in a particular country where a patent exists second royalties are based on the portion of the product that actually embodies the invention royalties can only be obtained in countries where a patent exists and an infringing act occurs royalty rates in any particular country will most likely vary based on what that particular countries laws are the United States typically has the highest royalty rates as its patent infringement Awards are the highest as well as the cost of litigating a patent from a potential infringers perspective as such potential infringers are more likely to pay more to avoid a u.s. lawsuit than they would to avoid lawsuits in other countries note that most patent statutes worldwide include some version of the make user cell language for infringement if you own a patent in a country where the product is manufactured you can then get a royalty on the manufacturing that is done in that country and by extension get a royalty on all the sales of the product however it's important that where that country of manufacture is has a decent patent enforcement system if no patent exists in the country of manufacture then one has to look at the sales and countries where the patents do exist US patents are valuable because the US is a large market even if the products are manufactured elsewhere for a patent owner this is an important consideration in many foreign countries it is expensive to maintain a patent over the course of the patents life if it is difficult to enforce the patent in those countries or the damage Awards are low it's not a good commercial decision to maintain a patent in that country for example in many countries in Europe it is impossible to get what is called discovery in the United States that is a patent owner cannot go to court with some level of evidence of infringement and requests that a potential infringer provide information using an improved method of manufacture for example a patent owner has limited ability to find out if its patent is actually being used in many countries in Europe in that case while the invention may be good it makes little sense to pay high maintenance fees for what is essentially an unenforceable patent the second point is that royalties are based on the infringing portion of the device this has become a more active area of the law recently as any particular product involves so many different patents for example if a pen relates to an improved GPS antenna on a cellphone the basis on which the royalty is calculated will be on the value of that antenna or the value of the GPS system to the whole phone not on the entire cellphone of course the royalty may be calculated based on the value of the phone in such case the royalty rate would be lowered it's just a little algebra to make that happen in licensing negotiations the royalty basis or cost basis is a heavily negotiated issue resulting in sometimes complicated licensing provisions frequently non patent issues come into play too the royalty basis needs to be easy for an accounting department to administer it is important to distinguish the difference between a quarter ward of a reasonable royalty and a negotiation of the value of a technology the difference between these negotiations is sometimes referred to as a caret versus stick licensing the stick is what a court might award both valuations use many of the same considerations however it's important to distinguish the two types evaluations courts award either lost profits or reasonable royalty for patent infringement cases there are rules for calculating both businesses take a broader view where the patents are but one part of an overall deal other important factors may have as much or more value than the patents for example the know-how trade secrets process specifications brand awareness and other factors may have a large bearing on a commercial technology transfer deal more so than simply the patent rights this presentation looks at the stick licensing approach what a court might award an infringer in a particular situation let's look in an example which is of course done in a spreadsheet the foreman details of the spreadsheet may vary but some version of these components will exist a market size in locations where a patent exists and infringing act occurs is estimated in units or cash sales adjustments are made to the net sales price to reflect the portion of the product the patent actually covers a royalty is estimated and the royalty to is calculated let's have a look at such a spreadsheet in this example I use a unit sales figure in this case a hundred thousand units the overall net sales price of each unit is made to be five hundred dollars remember this is an often negotiated point to address the idea that the net sales price encompasses items not associated with the patent I take a percentage of that price this is the situation where the patent might cover and improved GPS antenna for use in a cell phone the net sales price of the cellphone is based on any number of features not just the GPS in this example I use 15% of the net sales price being associated with the patent this can be done in a number of ways for example if one knows the actual specific component price for example the price of the GPS antenna that number can be used instead of an estimate together the net sales price and the percent associated with the patent create the cost basis for the royalty I then pick a royalty rate again a lot goes into that number but in this case I use 5% in the u.s. that's an example in practice be sure that the royalty rate is less than the profit margin consider additional royalties that the manufacturer might have to pay those cumulative royalties should not be higher than the profit margin I frequently use a number of rates in any particular spreadsheet the royalty rate times the cost base is a result in the royalty per unit this is a good sanity check number what a potential infringer really pay this or how much of a fight would it really be the royalty rate per unit times the number of units gives an overall royalty dip making the spreadsheet more complex one typically estimates the sales per year for the life of the patent or for the life of the proposed agreement adding more detail no particular countries are accounted for in this example patent royalties can only be obtained in countries in which there is a patent and an
Thanks for your comment Cody Gushue, have a nice day.
- Shantel Torres, Staff Member
Thanks for this interesting article
Thanks zapognjenj your participation is very much appreciated
- Shantel Torres
About the author
I've studied cognitive biology at Eastern Michigan University in Ypsilanti and I am an expert in civics. I usually feel okay. My previous job was floral designer I held this position for 2 years, I love talking about quizzes and qawwali. Huge fan of McFly I practice water polo and collect toys.
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