Royalty Rate Determination for

Valuation of Brands /
Patents in Litigation Cases

JUNE

2022
Valuation | Investment Banking
Restructuring | Transaction Services
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 “ Royalty Rate at 25%

1
of Operating Margin” -
Page No. 03
Robert Goldscheider (1950)
- History & Background

Specific Factors
2 impacting Royalty Rates Page No. 06

Case Study - Standard

3 Manufacturing Co. v. Dept of
Defence, Govt of USA (1999)
Page No. 12

Indian Courts Perspective -

4 Determining fair Royalty Rates Page No. 17

5 Conclusion Page No. 19

 one 1
“Royalty Rate
at 25% of
Operating
Profit Margin”
- Robert Goldscheider (1950)
- History & Background
The 25% Operating
Profit Margin Rule

01
The 25% Rule for determining Royalty Rates was popularized in the year 1950 by “Robert
Goldscheider”, a Renowned Legal Practitioner for licensing and patent related disputes.

In 1950 Robert did an empirical study of series of commercial license arrangements which
02 had been entered in past several years. Based on this study, he was able to corroborate the
25% Royalty rate rule.

Robert advocated the 25% Rule as part of the 2-stage process, wherein the licensor &
licensee (collectively referred to as “Parties”) in the 1st stage determine Royalty rate as
03 25% of the operating profit margin (the “25% Threshold”). This is followed up with step 2
of upward/downward adjustments to the 25% Threshold, depending on the bargaining
power of each of the Parties involved.

In several of the past settled litigation cases, Robert found that the Court ruled Royalty
04 rate were in the range of 12% of operating profit margin to 50% of the operating profit
margins.

Courts across the globe have embraced the 2-stage, “25% Threshold Rule”, as one of the
05 alternative mechanism for triangulation & determination of fair Royalty Rates in
infringement litigations.

The US court of law, in the case of GEORGIA-PACIFIC CORPORATION vs. UNITED STATES
06 PLYWOOD CORPORATION (1970) had given a landmark judgement, proposing a framework
of 15 factors, to be used for upward/downward adjustments to the 25% threshold.

In this Research Paper, we discuss the above 15 factor approach. We also discuss the

07
renowned case study of Standard Manufacturing Co. and DBP Ltd v. United States of
America (1999), where the court used the 15 factor approach for royalty rate
determination.

08
In the latter part of this research, we also touch upon the various approaches that the
Indian Courts have been taking for determining fair royalty rates in infringement cases.

Royalty Rate Determination for Valuation of Brands / Patents in Litigation Cases 04

The 25% Operating
Profit Margin Rule
Factors impacting determination of fair royalty rates

Royalty Rate as
Sr. No. Factor Description
a % of OPM

Robert Goldscheider’s Baseline Rule 25%

Upward/Downward Adjustment on account of the 15 Factors as proposed in the case of

GEORGIA-PACIFIC CORPORATION vs. UNITED STATES PLYWOOD CORPORATION (1970)

01 Established Royalty – Licensor’s Perspective +/- %

02 Established Royalty – Licensee’s Perspective +/- %

03 Nature and Scope of License under dispute +/- %

04 Monopoly of the patented product +/- %

05 Existing commercial relationship between disputed Parties +/- %

06 Infringed Branded Product resulting in increased sale of non-branded products of the licensee? +/- %

07 Duration and term of license +/- %

08 Whether Patented Product is Commercially Successful? +/- %

09 Level of Technology enhancement imbibed in the Product +/- %

10 Nature of Invention +/- %

11 The extent of use of invention/brand by infringer +/- %

12 Royalty rate for Substitute Products +/- %

13 How much of product profitability contributed by other factors of Production/Sales? +/- %

14 Expert Opinion +/- %

15 Reasonable Royalty Rates +/- %

Adjusted Royalty Rate 25% of OPM

In extreme cases, as the one we are going to see in the case of Standard Manufacturing Co vs. Department of Defence
(USA); given the revolutionary/ground breaking nature of the patent/brand under dispute, the courts have gone ahead and
awarded royalty payment to the innovator at close to 100% of the OPM on the sales made by the infringing entity

Courts contend that, if the product is ground breaking, the innovator has a very strong bargaining power.

Royalty Rate Determination for Valuation of Brands / Patents in Litigation Cases 05

 2
two

Specific
factors
impacting
Royalty Rates
Specific factors impacting
Royalty Rates
Factor 1 and 2 – Established Royalty – Licensor and Licensee’s Perspective

Where licensor AND/OR licensee already has a licencing agreement in place for a similar/complimentary product with
an independent (non-related) party; Valuer may want to assess whether such agreement may be used as an apple to
apple comparison and can be used for estimation of fair royalty rate?

Key considerations to determine whether the existing agreement is an apple to apple comparison or not includes:

Whether the comparable

Geographic Location
covered under the existing
licensing agreement
Review the Contract licensing agreement has
Termination Clauses/ Renewal equivalent material impact
Clauses/ Damages and on the revenue of the
indemnity obligations licensor, vis-à-vis the
subject matter of litigation?

Consideration towards Established

Royalty – Licensor & Licensee

Whether royalty
Key covenants/ Whether the licensing
Whether the rate/ royalty
obligations of agreement provide for
licensee has a payment is subject
Parties to the a pinpoint royalty rate
sublicensing right? to certain conditions
Contract? or a range?
precedents?

Royalty Rate Determination for Valuation of Brands / Patents in Litigation Cases 07

Specific factors impacting
Royalty Rates
Factor 3 through 7 – Commercial Considerations

Factors 3 through 7 – These factors include commercial considerations made by both parties in a negotiation. For
example, the scope of the license (exclusive or non-exclusive), the licensor’s established licensing policy, the
relationship between the licensor and licensee (i.e., are they competitors), the term of the patent, and if sales of the
patented product generate sales of related, non-patented products (also known as convoyed sales)

Whether the Patent in

question is awarded on Current or Existing
What is the spillover Exclusive or Non-Exclusive relationship between
effect of conveyed sales? basis or is restricted in nature Licensor and Licensee
or is limited in scope

Considerations towards
key commercial terms

Is the Patent Monopoly Terms and Condition Duration of

of the Inventor? of license license

Royalty Rate Determination for Valuation of Brands / Patents in Litigation Cases 08

Specific factors impacting
Royalty Rates
Factor 8, 9 and 10 - Technological Revolution & Nature of the Patented Product

Factor 8, 9 and 10 talks about the utility and advantage of the patented property viz a viz old products (Technological
Revolution) , its profitability and nature of Invention by the Patentee.

Understand the cost savings on account Whether the product made under the patent is
of upgraded technological use highly profitable and commercially successful?

Consideration towards Technological

Revolution and Nature of Patented Product

Whether the product made under the patent Understand the market in which the product will
has improved the Technology? be launched, its current and future profitability
to licensee and its commercial success

Royalty Rate Determination for Valuation of Brands / Patents in Litigation Cases 09

Specific factors impacting
Royalty Rates
Factor 11,12 and 13 – Use of Invention and Profit attributable to that invention

Factor 11, 12 and 13 talks about the extent of use of invention/brand by infringer, Royalty rate for Substitute/
Complementary Products and how much of product profitability contributed by other factors of Production/Sales?

Understand the business model as well as

Industry wise data
proportion of profits attributable to royalty
bank for royalty rates
payments use

Considerations towards Use of Invention

and Profit attributable to that invention

Whether commercial royalty rates are Whether there is reasonable evidence as to

available in similar/comparable industry measure the portion of realized profits ascribed
to patented innovation?

Royalty Rate Determination for Valuation of Brands / Patents in Litigation Cases 10

Specific Factors impacting
Royalty Rates
Factor 14 and 15– Expert Opinion and Reasonable Royalty Rates

Factor 11, 12 and 13 talks about the extent of use of invention/brand by infringer, Royalty rate for Substitute/
Complementary Products and how much of product profitability contributed by other factors of Production/Sales?

Understanding of all 14 factors and tying the loose ends to adjust the 25% Rule

Consideration towards
expert opinion

Whether there are experts available in the Engage an expert in the subject domain
subject domain whose knowledge and having relevant expertise
experience can be relied upon?

Royalty Rate Determination for Valuation of Brands / Patents in Litigation Cases 11

 three 3
Case Study -
Standard
Manufacturing
Co. v. Dept of
Defence, Govt
of USA (1999)
Standard Manufacturing Co.
v. Dept of Defence, USA
The Dispute :

The Applicant i.e. Standard Manufacturing Company, Inc (herein referred to as “Standard”) claimed that the respondent i.e.
United States of America - Department of Defense (herein referred to as “United States”) has infringed its patent no. 548
related to Aerial Weapons Handling Trailer. Accordingly, applicant claims for the recovery of his reasonable and entire
compensation for such use of patent by respondent.

Court’s view :

The United State Court of Federal Law has concluded that under the statue, United States of America is not an infringer, but
rather a compulsory, non-exclusive licensee. Thus, the patent owner cannot prevent the government from taking such
license, but the owner is entitled to its reasonable and entire compensation for use of patent

• The reasonable royalty rate for the compensation has been determined as follows:

Initially establish the baseline royalty rate based on 25% rule

The 25% Threshold is adjusted upward/downward depending on the strength of parties’ position under the
Georgia-Pacific factors.

The summary of the adjustment made by Court to the 25% Threshold are described as follows:

Sr. No. Factor Court Decision Adjustment to baseline rate

01 Established Royalty – Licensor’s There is no evidence of any established No Adjustment

Perspective royalty for the patent in suit. Therefore,
this factor should not result in any
adjustment in base rate.

02 Established Royalty – Licensor’s No royalty is being paid under No Adjustment

Perspective comparable patent licences. Therefore,
this factor should not result in any
adjustment in base rate.

03 Nature and Scope of License USA Air force needed the trailers for its Downward adjustment of
under dispute own use and had no plans to market and the royalty rate.
sell them as there is no civilian market.
Accordingly, this factor favours the
government

02 Monopoly of the patented Standard, at the time of the hypothetical No adjustment to

product license negotiation, would not have royalty rate
been able to manufacture the trailers for
the Air Force simply because the Air
Force felt constrained to allow only AAI
to manufacture them.

Royalty Rate Determination for Valuation of Brands / Patents in Litigation Cases 13

Standard Manufacturing Co.
v. Dept of Defence, USA
Sr. No. Factor
05 Existing commercial
relationship between
disputed Parties
06 Infringed Branded Product
resulting in increased sale of
non-branded products of the
licensee?
07 Duration and term of license
08* Whether Patented Product is
Commercially Successful?
09* Level of Technology
enhancement imbibed in
the Product
10* Nature of Invention
11 The extent of use of
invention/brand by infringer
12 Royalty rate for Substitute
Products
Court Decision Adjustment to baseline rate
With the kind of cost savings which could This factor strongly favours
have been created by Standard’s trailers, an increase in royalty rate
the company would have emerged as a
material vendor to Air Force.
The revenue on which the infringement No adjustment to
royalty is being calculated already royalty rate
include non braded products also.
Demand for trailers from Air Force is No adjustment to royalty
expected to be long term in nature. Had rate
the demand been short terms, it might
have negatively impacted royalty rate
The patented product would have led to This factor strongly favours an
significant cost savings to Air Force increase in royalty rate
Standard's patented invention This factor strongly favours an
represented a technological step increase in royalty rate
forward
The court agreed that trailer performed a This factor strongly favours
function which no prior trailer had been an increase in royalty rate
able to perform and represented elegant
solution to difficult design challenge.
However it did not rise to the level of a
"pioneer" invention which provides a
totally new function.
Air force just cant do away without the This factor significantly
use of these trailers. These trailers are favours an increase in royalty
not only critical for their existing air rate. The patented product
crafts; but have the capacity to influence have far reaching implications
their long term decision making of on the defence purchasing
buying related defence products. strategies of Air Force.
Industry custom should not be No adjustment to royalty rate
considered due to unique character of
patented inventions and of the
circumstances for development and its
use
Royalty Rate Determination for Valuation of Brands / Patents in Litigation Cases 14
Standard Manufacturing Co.
v. Dept of Defence, USA

Sr. No. Factor Court Decision Adjustment to baseline rate

13 How much of product The substantial cost saving is the only No adjustment to
profitability contributed by profit to Air Force. The effect of this royalty rate
other factors of factor has already been considered in
Production/Sales? factor 11

14 Expert Opinion The expert testimony offered in the case No adjustment to

is considered under the other factors royalty rate
where it was pertinent.

15 Reasonable Royalty Rate This factor is basically a summary of the No adjustment to

entire hypothetical negotiation process. royalty rate

16 Other factor specifically The court agreed that there was no This factor favours an
considered by court alternative product at the time of increase to the royalty rate
hypothetical negotiations

(*) These factors had been analyzed jointly by Court considering commercial success and level of technological
advancement.

Royalty Rate Determination for Valuation of Brands / Patents in Litigation Cases 15

Standard Manufacturing Co.
v. Dept of Defence, USA
Royalty Rate as
Sr. No. Factor Description
a % of OPM
Base Rate as per Robert Goldscheider’s Baseline Rule 25%
Upward/Downward Adjustment on account of the 15 Factors as proposed in the case of
GEORGIA-PACIFIC CORPORATION vs. UNITED STATES PLYWOOD CORPORATION (1970)

01 Established Royalty – Licensor’s Perspective No Adjustment

02 Established Royalty – Licensee’s Perspective No Adjustment

03 Nature and Scope of License under dispute -5.8 %

04 Monopoly of the patented product No Adjustment

05 Existing commercial relationship between disputed Parties +11.6 %

No
06 Infringed Branded Product resulting in increased sale of non-branded products of the licensee? Adjustment
07 Duration and term of license No Adjustment

08 Whether Patented Product is Commercially Successful? +11.6 %

09 Level of Technology enhancement imbibed in the Product +11.6 %

10 Nature of Invention +11.6 %

11 The extent of use of invention/brand by infringer +23.2 %

12 Royalty rate for Substitute Products No Adjustment

13 How much of product profitability contributed by other factors of Production/Sales? No Adjustment

14 Expert Opinion No Adjustment

15 Reasonable Royalty Rates No Adjustment

Adjusted Royalty Rate after analyzing Georgia-Pacific Factors 88.8%

16 Other factor specifically considered by court +5.8%

Adjusted Royalty Rate as a % of OPM 94.6%

The Court was of the opinion that this was a very important invention for the Dept of Defence. It had the capacity to
influence future defence buying strategy of the Dept. Therefore, the Court has gone ahead and awarded 94.6% of OPM on
goods sold to Dept of Defence as a fair royalty payment to the innovator. The innovator was in a very strong bargaining
position in this situation.

Royalty Rate Determination for Valuation of Brands / Patents in Litigation Cases 16

 4
four

Indian Courts
Perspective -
Determining fair
Royalty Rates
Indian Courts Perspective -
Determining fair Royalty Rates
Patent disputes in India have witnessed a paradigm shift from being plain infringement suits to those involving a
complex interface of patent and competition laws. These complex disputes are termed as Standard Essential Patent
(SEP) suits whose jurisprudence has grown exponentially.

India’s legal position on adjudicating such disputes has been evolving over time. Courts are following in the footsteps
of their counterparts in developed jurisdictions and shaping their approach with the budding international scenario.

RBSA highlights effective approaches for Indian Courts to incorporate while dealing with reasonable royalty rate
determination under SEP disputes.

Incremental Earnings The Profit Split

Quantify the incremental profits that the
subject IP generates through cost savings or a
price premium. (When IP has not yet
commercialized, estimates of cost savings
based on prototypes or consumer research
needs to be done)
Using the EBIT as a starting point and
unraveling the charge for tangible and other
intangible assets will establish an excess
margin. This margin then can be attributable to
royalty rates based on qualitative or
quantitative weightings of value drivers

Approaches to Royalty
Rate determination

The 25% Rule

The application of 25% of Operating margin is a Transaction Approach
widely used thumb rule to determine royalty
Analyze the recent transactions between
rates, however, to make it more precise the courts
appropriate parties to determine reasonable
apply various factors for upward/downward
royalties
adjustment, depending upon the negotiation
power of disputing parties

Royalty Rate Determination for Valuation of Brands / Patents in Litigation Cases 18

 five 5

Conclusion
Conclusion
The 25% Threshold Rule based on historical observations provides useful guidance for how a
licensor or licensee should consider negotiating a royalty payment.

Richard Razgaitis a leading consultant in the field of technology valuation has identified 6 reasons for
why 25% rule makes sense. He advocates that 75% of profit should be retained by licensee & 25%
profit to be transferred to licensor as Royalty because:

1. It is considered an industry norm

2. 75% of work and efforts needed to commercialized a product under patent needs to be done by
licensee
3. He who has the Gold makes the rule (Licensee’s dominate the market due to numerous
investment alternatives)
4. A 3x payback ratio is common i.e.; licensee retaining 75% profits by investing the rest 25%
5. Technology is the one of 4 required steps of commercialization, other three being products
manufacturing viability, actual manufacturing and selling efforts all of which rests on the heads
of licensee (again a 3:1 risk reward relationship)
6. The ratio of R&D to profits is normally in the range of 25% to 33%

The rule whether used in litigation or non litigation setting provides a fairly resonable tool to be
augmented by a more complete royalty analysis. Georgia pacific factors are quite helpful in adjusting
this simple 25% number up or down based on number of qualitative assessments as delineated
previously and have also been widely acknowledged by courts across the world in IP Litigation and
Patent infringement case judgements.

Royalty Rate Determination for Valuation of Brands / Patents in Litigation Cases 20

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