Contents About the Author Acknowledgments Preface Chapter 1: Intellectual Property and Corporate Value Patents Trademarks Copyrights Trade Secrets Chapter 2: Licensing Intellectual Property Forces Behind Licensing Licensing Motivation Reasons Companies Engage in Licensing Chapter 3: Use of the Twenty-Five Percent Rule in Valuing Intellectual Property Introduction History of the Rule Explanation of the Rule Illustration of the Rule Application of the Rule Justification for the Rule Criticisms of the Rule Empirical Test of the Rule Royalty Rates Industry Profits Licensee Profits Royalty Rates and Licensee Profits Conclusions Chapter 4: Royalty Rate Guidelines Royalty Rates for Technology, Third Edition Royalty Rates for Trademarks and Copyrights, Third Edition Royalty Rates for Pharmaceuticals and Biotechnology, Sixth Edition Chapter 5: Comparable Licenses Internal Licenses Are Often Self-Serving Relevant Time Period Financial Condition of Both Licensing Parties Relevant Industry Transactions International Transactions Non-Monetary Compensation Exclusivity Package Licenses Comparative Analysis Summarized Chapter 6: Technology Royalty Statistics Automotive Chemicals Communications Equipment and Services Computer Hardware Computer Software Construction Electronics Food and Beverage Medical Equipment Pharmaceuticals and Biotechnology Semiconductors Waste Management Chapter 7: Trademark and Copyright Royalty Statistics Apparel Artwork Personal Care Publishing Restaurants Chapter 8: Profit Differentials and Royalty Rates Business Enterprise Framework Driving Forces Behind Royalty Rates Infringement Damages Analysis Generic Pricing Chapter 9: Investment Rates of Return and Royalty Rates Basic Principles Investment Rate of Return Royalty Rates Royalty Rates Royalty Rate for the Specific Patented Invention Benefits of Investment Rate of Return Analysis Chapter 10: Discounted Cash Flow Analysis and Royalty Rates Generic and Mature Commodity Corporate Value New Pharmaprod Corporation Royalty Rate Risk-Adjusted Net Present Value Success Rates Success Rate Adjusted DCF Example Valuation Using the Relief-from-Royalty Method Inputs for the Relief-from-Royalty Method Remaining Life of the Patent Protection Forecast Revenue Royalty Rate Tax Rate Discount Rate Present Value Calculation Chapter 11: Court-Awarded Royalty Rates Top Ten Frequency of Rates Awarded Industry Categorizations Considerations Cited by the Courts in Determining a Reasonable Royalty Federal Circuit Decisions on Royalty Rates Conclusion Chapter 12: Litigation Rates Are Higher Comparison of Litigated and Non-Litigated Licenses Chapter 13: Royalty Rate Services RoyaltySource®™ RoyaltyStat® Intellectual Property Research Associates (IPRA) Securities and Exchange Commission EDGAR Archives Chapter 14: Monitoring License Agreements and Financial Compliance Introduction What Is a Royalty Audit? Auditor Selection How Is the Royalty Audit Done? Desk Audits Drafting a License Agreement to Lower the Likelihood of Mistakes Common Errors Communications Between Licensor and Licensee Conclusion: Benefits of a Sound Monitoring Program Index Copyright © 2007 by John Wiley & Sons, Inc All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada Wiley Bicentennial Logo: Richard J Pacifico No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form, or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate percopy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978750-8400, fax 978-646-8600, or on the web at www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008, or online at http://www.wiley.com/go/permissions Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book, and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose No warranty may be created or extended by sales representatives or written sales materials The advice and strategies contained herein may not be suitable for your situation You should consult with a professional where appropriate Neither the publisher nor author shall be liable for any loss of profit, or any other commercial damages, including, but not limited to, special, incidental, consequential, or other damages For general information on our other products and services, or for technical support, please contact our Customer Care Department, within the United States at 800-762-2974, outside the United States at 317-572-3993, or fax at 317-572-4002 Wiley also publishes its books in a variety of electronic formats Some content that appears in print may not be available in electronic books For more information about Wiley products, visit our Web site at http://www.wiley.com Library of Congress Cataloging-in-Publication Data: ISBN: 978-0470-06928-8 Amy Lynne Shanahan saved me during the summer of 2006 This book is dedicated to her, with gratitude and love Thank you Amy About the Author Russell L Parr, CFA, ASA is president of IPRA, Inc (Intellectual Property Research Associates) He is a consultant, author, publisher, and lecturer focused on the valuation, pricing, and strategic management of intellectual property For over twenty-five years, he has advised his clients about the value and pricing of patents, trademarks, copyrights, and trade secrets His books are published in Japanese, Korean, Italian, Chinese, and Russian Mr Parr’s opinions are used to accomplish licensing transactions, mergers and acquisitions, transfer pricing, infringement damages litigation support, and joint venture equity splits His clients include multinational corporations, universities, and private inventors Past assignments have included the valuation of the Dr Seuss copyrights and the patent portfolio of AT&T Mr Parr has also conducted valuations and royalty rate studies, for technology and trademarks related to pharmaceuticals, semiconductor processes and products, agricultural formulations, automotive, biotechnology, photography, chemical formulations, communications, computer software and hardware, drug delivery systems, flowers, incinerator feed systems, lasers, medical instruments, and motivational book copyrights In addition to consulting, Mr Parr publishes three royalty rate resource books sold all over the world These books are Royalty Rates for Pharmaceuticals and Biotechnology, Sixth Edition; Royalty Rates for Trademarks and Copyrights, Third Edition; and Royalty Rates for Technology, Third Edition These books are dedicated to reporting detailed information about the financial aspects of intellectual property transactions, including licensing and joint ventures Mr Parr is a graduate of Rutgers University, having received a Bachelor’s in Electrical Engineering and a Masters in Business Administration He has also been awarded the professional designations of Chartered Financial Analyst, from the CFA Institute, and Accredited Senior Appraiser, from the American Society of Appraisers He is a member of the Licensing Executives Society and is on the advisory board of three professional publications, Licensing Economics Review, IP Litigator, and The Licensing Journal As an author and co-author, Mr Parr has created seven books published by John Wiley and Sons, about the valuation, management, and pricing of intellectual property, including Intellectual Property: Valuation, Exploitation and Infringement Damages In addition he has written twenty-six articles for professional publications such as Les Nouvelles and The Journal of Proprietary Rights He has made forty-three seminar presentations for organizations including the Licensing Executives Society, the American Intellectual Property Law Association and the World Intellectual Property Organization He has testified at deposition or trial fifty-five times regarding intellectual property infringement More information about Mr Parr, his firm, and its publications can be found at www.ipresearch.com Hydro Environmental Resources (HER), ECHFR system Hypoix tumor cell radiosensitizer, license deals I IBM, patent number Illinois Trade Secrets Act Income taxes calculation Incremental savings Independent publishers/bookstores, competition INDS, first filing Industrial companies, licensing insights Industriy categorization Industry litigated royalties Industry profits rates Industry transactions, relevance Inflationary risk Influenza drug, license deals Information knowledge secrecy, guarding source value Infringement damages analysis analytical approach example Intangible assets growth (1975–2005) illustration required return, example return Intangible property licensing, royalty rates (finding) valuation Integrated Paving Concepts Integrated Process Equipment Corporation (IPEC) Intellectual Property Association (IPA) Intellectual property (IP) contribution, operating profit level (accuracy) disputes, damages (establishment) dominance illustration investment, timing/amount involvement licensing out-licensing required return, example return valuation, Twenty-Five Percent Rule (usage) value, primary forces Intellectual Property Research Associates (IPRA) Interactive Pictures v Infinite Pictures Inter-company licenses Interline Resources Internal licenses identification self-serving behavior Internal research and development pipelines, insufficiency International transactions Internet publishers, competition Investment rate of return analysis, benefits principles royalty rates relationship Investment return, earning See Fixed assets allowance Investment risk, consideration IP See Intellectual property IPA See Intellectual Property Association IPassets, development reasons IPRA See Intellectual Property Research Associates Issued patent, worth IXYS J J.C Penney, megabrand ranking Johnson & Johnson biotech acquisition Johnson & Johnson, advertising spending Jones Medical Industries K Kaisha, patent number Kumho Tire Co v Carmichael L Laser finger-perforator technology, royalty statistics Laser hair removal, technology royalty statistics Later-stage technology, risk Law Relating to Inventions Made by Employees (Germany) Lee, William Leon B Rosenblatt Textiles v Griseto Library of Congress License agreements drafting monitoring perceptions Licensed product, distribution channels Licensed royalty rates Licensee profits 1999–2000 relationship See Royalty rates splits, distribution See Profit success See Successful licensees Licensees business, contact person internal controls Licenses See Package licenses comparison fees, distribution rights, transfer royalties, court determination self-serving behavior See Internal licenses underreported royalties, percentage Licensing See Intellectual property agreement royalty rate frequency company engagement, reasons exclusivity forces motivation parties, financial condition protection utility Licensor/licensee communications Lightning resistance, technology royalty statistics Lisinopril, generic drug savings Litigated licenses, non-litigated licenses (comparison) Litigation rates, increase Long-run product profits, expectation L’Oreal, advertising spending Lotto™, royalty statistics Lucky-Goldstar Group M Machinery, royalty rate guidelines Macintosh enhancement, technology royalty statistics Macy’s, megabrand ranking Mahurkar, Sakharam D (court-awarded royalty rate) Management competency Manufacturing, technology royalty statistics Manufacturing industries royalty income technology royalty statistics See Automotive manufacturing industry Market acceptance Marketing expenses Market risk Market share, expansion (impact) Marks See Trademarks Massachusetts General Hospital (MGH) Matsushita Electric Industrial, patent number Mature commodity corporate value McDonald’s Corp advertising spending megabrand ranking Medical equipment royalty rates, litigation/non-litigation comparison technology royalty statistics Medical supplies, royalty rates (litigation/non-litigation comparison) Medicinal, Chemicals and Botanical Products (SIC #2833) Medius Associates Merck & Co., advertising spending Metformin, generic drug savings Meyer III, Harold A (royalty rate guideline suggestions) MichellamineB/tropical vine leaves, license deals Mickowski v Visi-Trak Corporation et al Mikohn Gaming Corporation, court-awarded royalty rate Mikohn Gaming v Acres Gaming, Inc Mineral water, technology royalty statistics Mitsubishi Denki Kabushiki, patent number Mitutoyo Corporation, court-awarded royalty rate Mitutoyo Corporation et al v Central Purchasing, LLC Modems standards, technology royalty statistics technology royalty statistics Modified Black-Scholes option valuation methods Modine Manufacturing Company, court-awarded royalty rate Monetary assets, return Monte Carlo simulation Motorola, patent number MPEG LA N NAICS See North American Industry Classification System NCEs See New chemical entities NEC, patent number Nestor Traffic Systems (NTS) PRISM® fraud detection solutions Net cash flow calculation Net present value See Risk adjusted net present value Neupogen, license deals New chemical entities (NCEs) See also Self-originated NCEs submission New compound, valuation New molecular entities (NMEs) New product, licensed technology basis (example) New product revenue forecast, example New Restatement of the Law Third, Unfair Competition Nissan Motor Co advertising spending megabrand ranking Samsung Group sale NMEs See New molecular entities Nokia Non-cash expense Non-exclusive licenses Non-licensed IP, earnings Non-litigated licenses, comparison See Litigated licenses Non-monetary compensation Normal profit margin, equation North American Industry Classification System (NAICS) Northeast American Enterprises Notes Novartis, advertising spending NTS See Nestor Traffic Systems NTT DoCoMo Nucleic acid probe technology, license deals Nuvelo, commercialization rights O Odetics, federal circuit court writings Operating profits level, accuracy See Information Processing margins See Generic drugs rate, expectation Out-licensing See Digital Information Communications and Electronics; Intellectual property Overhead expenses omission P Package licenses Packaging, technology royalty statistics See Food/beverage industry Palomar Medical Technologies Patented drugs Patented invention remaining life royalty rate Patented technology valuation, relief-from-royalty method Patented therapeutic drugs, royalty rate (example) Patents See also Design patents; Plant patents; Utility patents applications history See United States patents importance See Digital Information Communications and Electronics number See Company patents owner distribution ownership, identification pending, worth protection, remaining life (determination) prototype, presence (worth) risks, validity technology classifications See also United States patents transfers, royalty rates See Biotechnology trends types worth See Issued patent Patent to Profit, guidance Paving, technology royalty statistics Pentium II processor, technology royalty statistics PepsiCo, advertising spending Pepsi-Cola, trade secrets Personal care, royalty statistics Personal digital assistant (PDA), patent example Pfizer, advertising spending Pharmaceutical Business News Pharmaceutical companies (pharmaceuticals) competition compound (discovery), pressure (increase) development stage, royalty rate intangible assets intellectual property invention, category license deals, fees research and development deficiencies, licensing activity supplement stage, average royalty royalty rates distribution guidelines information technology royalty statistics Pharmaceutical drug, clinical trials (worth) Pharmaceutical industry development stage, royalty rate royalty rates, increase Pharmaceutical preparations (SIC #2834) Pharmaceutical Research and Manufacturers of America (PhRMA) Plant patents Polo, royalty statistics Polyvinyl chloride pipe products, technology royalty statistics Posters, royalty statistics Post-site analysis/report generation Power conversion, technology royalty statistics Precision Materials Operation (PMO) Present value calculation Pre-site research Pretax profits Price premiums, obtaining Prints, royalty statistics Probability-of-success factor Procter and Gamble v Paragon Trade Brands Procter & Gamble Co advertising spending licensing restrictions Product commercialization, expenses Production efficiencies Product revenue forecast, example See New product revenue forecast patent enhancement Profit See Industry profits; Licensee profits; Operating profits amount differentials, royalty rates (relationship) duration expectation, risk (association) margins See General profit margins equation See Expected profits; Normal profit margin rates See Industry profits splits, licensee profits (distribution) twenty-five profit, rule of thumb Projections, usage Promega v LifeCodes Corporation et al Promotion agreements Property, economic life (remainder) Protection, duration PS/2 computers, technology royalty statistics Publishing houses, complaints royalty statistics Purchase price allocation, determination Q Qualcomm R Ralph Lauren, royalty statistics Ramtron International Rare Hospitality Raw idea, worth Razgaitis, Richard ReClaim Recycling Red flags Regulatory risk Relief-from-royalty method inputs usage See Patented technology valuation Remote metering, technology royalty statistics Research expenses Research Frontiers Restatement of Torts Restaurants consumer spending industry, impact (expectation) royalty statistics sales, job generation Return See Investment rate of return Return on investment Revenue, growth expectation Risk adjusted net present value Risk Management Association (RMA) Annual Statement Studies Risk reduction, consideration Rite-Hite Corporation et al v Kelley Corporation Royalties determination, Sixth Circuit Court of Appeals (impact) factors income See Manufacturing industries IRS report miscalculations, recurrence reasonableness, court considerations recipients, ranking saving statistics See Technology terms inclusion specification Royalty audits defining errors mistakes, likelihood (decrease) monitoring program, benefits process Royalty rates See also Biotechnology; Copyrights; Corporate royalty rate; Court-awarded royalty rates; Licensed royalty rates; Technology; Trademarks appropriateness awards frequency industry categorization ranking reasonableness details district court awards equation federal circuit decisions finding See Intangible property frequency See also Licensing; Trademarks guidelines See also Pharmaceutical companies ranking industry categorizations input, determination licensee profits, relationship ranking litigation, non-litigation (comparison) percentage primary factors relationship See Discounted cash flow analysis; Profit services successful licensee profits, relationship ranking Royalty Rates for Pharmaceuticals and Biotechnology Royalty Rates for Technology Royalty Rates for Trademarks and Copyrights RoyaltySource® data, Analysis Group study information royalty rates RoyaltyStat® usefulness Ruth’s Chris Steakhouse, royalty statistics S Sakharam D Mahurkar v C.R Bard Samsung Group, sale SBC Communications, advertising spending Scantek Medical Schaafsma, Paul Scientific databases SciMed Life Systems Sears, megabrand ranking Sears Holdings Corp., advertising spending Securities and Exchange Commission (SEC) EDGAR Archives Segan Limited Partnership v Trendmasters Self-dimmable rearview mirrors, technology royalty statistics Self-interests, argument Self-originated NCEs Selling expenses Semiconductors, technology royalty statistics Sharer, Kevin SI Diamond Technology Siemens AG, patent number Sign Builders of America (SBOA) Silicon Integrated Systems (SIS) Single inline memory modules (SIMMs), technology royalty statistics Site investigation Skoda Klatovy Slimfold Manufacturing Company v Kinkead Industries, Inc Smithkline Diagnostics, Inc (court-awarded royalty rate) Sony Corp advertising spending patent number Spirulina, license deals Spring, megabrand ranking Standard Manufacturing and DBP v United States Standard & Poor’s 500 (S&P500) company assets (1975–2005) Subject analysis Successful licensees profitability data profits relationship See Royalty rates Success rates adjusted DCF example adjusted present value calculations, usage therapeutic class, identification Sugar Foods Sunk costs T Tangible assets, return Tanning Research Laboratories Tapazole®, royalty statistics Target stores, megabrand ranking Tax law compliance Tax rate, determination Technology alternatives classifications See Patents; United States patents economic benefits, derivation obsolescence risk royalty rates statistics transfers, royalty rates See Biotechnology Territory restriction Textile patterns, royalty statistics Thin film ferroelectric technology, royalty statistics Third-generation wireless technology, technology royalty statistics Time period, relevance Time Warner, advertising spending Tire recycling, technology royalty statistics Titan Technologies T-Mobile, megabrand ranking Toikka, Richard Toshiba, patent number Total Containment v Environ Products Total earnings Total market, intangible value (percentage) Toyota Motor Corp advertising spending megabrand ranking Toys/dolls, royalty statistics TP Orthodontics, Inc (court-awarded royalty rate) Trademarks (marks) See also Established trademarks applications foreign nation filers applications (2005) royalty rates frequency royalty statistics Trade secrets evaluation Transaction terms Transaxles, technology royalty statistics Transfer pricing regulations Tristrada Technology, Inc v Mary Kay, Inc Twenty-Five Percent Rule application criticisms empirical test employment explanation history illustration cost side revenue side indeterminateness justification rule of thumb usage See Intellectual property introduction TWM Manufacturing v Dura Corporation U UMTS See Universal Mobile Telecommunications System Unilever, advertising spending Unisplay v American Electronic Sign United Fire Technology (UFT) United States advertisers, ranking United States government, advertising spending United States megabrands, ranking United States Navy, patent number United States Patent and Trademark Office (USPTO) registration United States patents applications 1850–2004 history technology classification Universal Mobile Telecommunications System (UMTS) University/government licensing insights Unocal Corporation, lawsuit Up-front payments Used oil recovery, technology royalty statistics US Philips, patent number Utility patents V Valero Energy, lawsuit Valuation See Patented technology valuation relief-from-royalty method Verapamil hcl SR, generic drug savings Verizon Communications advertising spending megabrand ranking Vidal Sassoon, royalty statistics Video patent pool, technology royalty statistics W WACOC See Weighted average cost of capital Wal-Mart, megabrand ranking Walt Disney Co., advertising spending Warfarin, generic drug savings Wart removal products, license deals Waste management, technology royalty statistics Water-jel burn dressings, license deals Weighted average cost of capital (WACOC) Weiler, David Wideband code division multiple access (W- CDMA) technology, royalty statistics Williams, Lonnie (court-awarded royalty rate) Windows operating system (Windows OS) code, technology royalty statistics Working capital (WC) illustration investments, timing/amount X Xerox, patent number Y YoCream, royalty statistics Z Zygo Corporation, court-awarded royalty rate ... Conclusions Chapter 4: Royalty Rate Guidelines Royalty Rates for Technology, Third Edition Royalty Rates for Trademarks and Copyrights, Third Edition Royalty Rates for Pharmaceuticals and Biotechnology,... Generic Pricing Chapter 9: Investment Rates of Return and Royalty Rates Basic Principles Investment Rate of Return Royalty Rates Royalty Rates Royalty Rate for the Specific Patented Invention Benefits... Preface Chapter 1: Intellectual Property and Corporate Value Patents Trademarks Copyrights Trade Secrets Chapter 2: Licensing Intellectual Property Forces Behind Licensing Licensing Motivation