Royalty rate

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Royalty rate = allocation of operating margin improvement between licensee and licensor.

Reference some definitions:

https://legal-dictionary.thefreedictionary.com/licensor

https://legal-dictionary.thefreedictionary.com/license

https://legal-dictionary.thefreedictionary.com/licensee

Patent licenses and operating margins

A patent license reduces competition for a commercial activity, which allows the rights holder to charge a premium price. Being able to charge a higher price allows the rights holder to generate a better operating margin.

Example:

  • Licensee is considering licensing a patent for the Device.
  • Licensee typically generates a 20% operating margin from its activities.
  • Licensing the patent will allow licensee to generate a 35% operating margin for sales of the Device.
  • Benefit = additional 15% of operating margin for sales of the Device

Running sales royalty

Let’s add a 5% running sales royalty. What happens?

Licensor receives one-third of licensee’s additional 15% of operating margin.

  • Licensor receives 5%
  • Licensee receives 10%

Licensee likely to receive a larger portion of the benefit.

Robert Goldschieder explains:

The licensor and licensee should share in the profitability of products embodying the patented technology. The a priori assumption is that the licensee should retain a majority (e.g., 75%) of the profits because it has undertaken substantial development, operational, and commercialization risks, contributed other technology/intellectual property, and/or brought to bear its own development, operational, and commercialization contributions1.

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