Intellectual Property: Valuation, Exploitation and Infringement Damages 2013 Cumulative Supplement, 11th Edition

CHAPTER 45B

* THE 25% RULE IS DEAD (NEW)

The United States Court of Appeals for the Federal Circuit in Uniloc USA, Inc. v. Microsoft Corporation held “as a matter of Federal Circuit law that the 25% rule is a fundamentally flawed tool for determining a baseline royalty rate in a hypothetical negotiation,” and that “[e]vidence relying on the 25% rule of thumb is inadmissible under Daubert¹ and the Federal Rules of Evidence, because it fails to tie a reasonable royalty base to the facts of the case at issue.”

As discussed in the main text of Chapter 22, “Use of the 25% Rule in Valuing Intellectual Property,” a royalty rate is determined by dividing the operating profit margin from use of the subject intellectual property, with 25% going to a patent holder and 75% retained by the user of the patented technology as return for assembly of the capital required to practice the invention and bring about commercialization. Empirical evidence has provided support for the viability of the 25% rule, as shown in Chapter 22 and many other studies. One of the other studies was published in 2008. It compared profit margin information earned by companies using licensed technology with the royalty rates being paid for the technology. The authors concluded, “We agree with many authors that the 25% rule serves as a good starting point for royalty negotiations.”²

Furthermore, support for the rule is provided by its wide use among licensing executives at major universities and many large corporations. ...