The typical licence royalty rate: a time of change

Here's the Editorial for the November 2014 issue of JIPLP, which we are pleased to post in full and at no expense to readers of this weblog.  For once, this is not a guest editorial but is actually written by the journal's editor!

The typical licence royalty rate: a time of change

The Curies: garden shed inventors ...

Many years ago, I found myself reviewing a book on protecting and commercialising ideas that had been written by a patent attorney. The intended readership was the stereotype of the day: the small-scale inventor who worked away on creative projects in his garden shed. This was before the advent of the personal computer, so prototypes were made by hand rather than designed by computer, while mathematical calculations were performed on battery-operated pocket calculators that had only a few years earlier become affordable. The book introduced the reader to some basic concepts of do-it-yourself patent law and some sturdily practical advice about keeping your invention secret till it was time to write your own patent application (which was not recommended) or show it to your patent attorney who would do it for you.

I read without excitement or interest until I came to a chapter on the business side of patents. This chapter explained that, once your patent was granted, you didn't have to use it yourself, since you could enter into a contract by which you would let someone else use make your invention in return for payment. I was then confronted with the most pointless sentence I had ever read in any intellectual property book up to then. Getting on for four decades later, I still doubt that I have read anything more pointless. The author wrote: “A typical licence royalty rate is 5 per cent”.

“How could anything be more meaningless”, I asked myself. There was nothing to explain why 5 per cent was typical, what sort of things it typified, or what precisely it was 5 per cent of.

Many years later, while still chafing at this proposition, I had come to understand the position of the author a little better. I now pictured him in practice, at his desk, and being asked on an almost daily basis by actual or prospective clients the perennial question: “what sort of royalty should I be charging?” Without access to reliable data in terms of the size and dynamics of the market, the repercussions in terms of changes in consumer spending patterns, comparable royalty rates elsewhere in the market and beyond, or any other helpful guidance, neither the client nor his patent attorney could say with confidence what the royalty rate should be. The innovating client however would both assume and expect that his patent attorney's experience in assessing the prospects of patentability, in drafting claims and in dealing with Patent Office formalities would enable him to intuit more successfully what that royalty rate should be.

Now in 2014 the situation is very different. Licence royalty rates still need to be fixed at the highest price that will confer a worthwhile economic benefit on the patent owner and on the licensee. However the patentee, his professional adviser and the would-be licensee are faced with too much information: commercial databases abound with information concerning corporate activity in the patent's field activity, as well as challenges to patent validity, the quantum of patent infringement damages and the bases upon which they were made, as well as more general economic data concerning consumer spend, the grinding of the tectonic plates of competing and complementary technologies with one another, the rate at which emergent technologies mature and ultimately fade into obsolescence and so on. The growth of pools of standard-essential patents has added to the complexity of licence royalty calculations, since there has to be a trade-off between the legitimate entitlement of patent owners to receive fair remuneration for the use of their inventions and the legitimate expectation of the free market that patents will not be used so as to create a market to which new entrants are forever barred.

It is notable now that an increasing amount of attention is being focused not on the provision of information necessary for negotiating sensible royalty rates, since that information is now largely available, but rather on techniques for making that information accessible and comprehensible to ordinary business folk, and to the financial institutions which back them. When such information can be visualised and then used by the parties to intellectual property transactions, we need never again feel the need to tell our client, as we guide him to the door: “A typical licence royalty rate is 5 per cent”.