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Royalty Rates For ·· Technology ...... ·. .., : Edition 4th I I I I 11 I I I: , , I 11 . IP1 , , Inc~ 1 1 • • Intellectual Ptop rty Researc.li AsJociates l I I • I ' I Copyright © 2008 by IPRA, Inc. All rights reserved. Published by IPRA, Inc. No part of this publication may b~ reproduced, stored in a retrieval sysem, 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 wither the prior written permission of the Publisher. Requests for perssission should be addressed to Permission Department, IPRA, Inc., 1004 Buckingham Way, Yardley, Pennsylvania 19067 Limit of Liability/Disclaimer of Warranty: While the publisher and the authors and editors 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 ssales mat.erials. The advice and/or strategies contained herein may not be suitable for your situation. You should consult with a a professional where appropriate. The publisher, authors and editors shall not be liable for any loss of profit or any other commercial damages. For more information about IPRA, Inc. - Intellectual Property Research Associates - and our books and consulting services visit www.ipresearch.com. I I f _I 1 1 1 l i l l i I I l 1 \ 1 About the Author I l Russell L. Parr, CFA, ASA is president of IPRA, Inc. He is a consultant, author, publisher and lecturer focused on the valuation, pricing and strategic management of intellectual property. For over 25 years he has advised his clients about the value and .p ricing 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, univeITsities 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, computer hardware, drug delivery syst~ms, flowers, incinerator feed systems, lasers, medical instruments, and motivational book copyrights. In addition to consulting, Mr. Parr publishes three royalty rate resource books, which are sold all over the world. These books are titled Royalty Rates for Pharmaceuticals & Biotechnology, 61h edition, Royalty Rates for Trademafks & Copyrights, I 3rd edition and Royalty Rates for Technology, 4th 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 (BSEE) and a Masters in Business Administration (MBA). He has also been awarded the professional designations of Chartered Financial Analyst (CFA) from the CFA Institute and Accredited Senior Appraiser from the American Society lof Appraisers. He is a member of the Licensing Executives Society and on the advisory board of three professional publications, Licensing Economics Review, IP Litigator and The Licensing Journal. Mr. Parr is also on the Advisory Board Member of Innovation Asset Group, a company developing enterprise software for intellectual property management. He also served on the Intangible Asset Valuation Standards I Committee of the American Society of Appraisers -Member I As an author and co-author Mr. Parr has created seven books published by John Wiley & Sons about the valuation, management and pricing of intellectual property including Intellectual Property: Valuation, Exploitation and Infringement Damages and . He has made 43 seminar presentations for organizations including The Licensing Executives Society, American Intellectual Property Law Association and The World Intellectual Property Organization. He has also testified at deposition or trial 55 times regarding intellectual property infringement matters. More information about Mr. Parr, his firm and its publications can be found at www.ipresearch.com. l --, I I I I I I 1 l --, i 1 I l l i -; \ I I 1 I PREFACE I I I This new edition of Royalty Rates for Technology has been greatly enhm;iced. In addition to new I Royalty Rate Data this new edition also cqntains a comprehensWe~"'ffi'scus'Ston about Royalty Rate Derivation Models. At the end of the book is an article about using Roy'\lty Audits to assure compliance with license agreements. Real Deal Royalty Rates I i This fourth edition of Royalty Rates for Technology contains more information about technology i pricing than any other publication. This bookl represents over a decade of research. Included in these pages you will find information about technology royalty rates, license fees and milestone payments. Also reported is information about infringement darriage awards and settlements. All of the information in this book is provided to show different types o~ value indications for various technologies in different industries. 1 The information in this book has be9n' collected from .reliable sources since September 1990 through June 2008 and is considered to repliesent a comprehensive collection of technology pricing information. All of the information in this repof is categorized by the following industries: 1ndustries Aeronautics & Defense Computer Softwate Franchises Medical Agriculture Construction Glass Photography 1 Automotive Electrical & Enerb Semiconductors Sports Chemical Electronics Household Products Toys Communications Entertainment Internet Waste Treatment Computer Hardware Food & Beverage Mechanical i Calculating Royalty Rates Royalty Rate Derivation Models are iiiicluded in this edition and illustrate the theory associated with quantifying royalty rates for patented technology. It is not always possible to find comparable royalty rates for a technology being licensed or! valued. In such cases royalty raets may need to be derived from financial analysis. This new chapter prorides a comprehensive discussion of intellectual property value along with illustration of the most credible methods for calculating royalty rates. Examples are included. Royalty Audits 1 Also included in this new edition is an! article discussing the techniques that should be employed to assure that you are getting the royalty paY1¥ents you deserve. This n~w chapter is written by Debora Rose Stewart, CPA, Mangaing Director of Invdtex Group · I I Royalty Rate Summary As you review the information cont31ined in this book it will become apparent that the most frequently negotiated royalty term is 5% of sales. Especially intere~ting is that the 5% royalty rate is found across a diverse number of industries inqluding automotive, ch¢miqal, communications, computers, defense, energy, electronics, food, franchises, glass, householf products, mechanical, medica( 1 i photography, sports, toys and waste treatment. Ws everywhere. Examples include: i I • In the sports industry, Easy dolf Corp. manufactures, and sells a proprietary golf improvement product known as 1"The Swing-Channel™ Golf Mat". Easy Golf pays the inventor 5% of sales. · 3 -, l Royalty Rates for Technology - 4th Edition l • In the medical industry, Baush & Lomb entered into an exclusive worldwide license I agreement to develop, manufacture and market a cast-molded multi-focal soft contact lens using Unilens' patented multi-focal soft contact lens design. Bausch & Lomb pays Unilens a royalty ranging from 3% to 5% of the product's worldwide sales. • In automotive, Research Frontiers Inc. licenses Glaverbel SA the rights to manufacture and l sell self-dimmable automotive vehicle rear-view mirrors. Glaverbel's pays Research Frontiers 5% of sales. • In communications, TechAlt, Inc. produces a secure wireless communications toolset to be 1 used by emergency first responders for interagency interoperability, communication and collaboration. TechAlt pays a royalty of 5% of sales for the underlying technology. l The chart below summarizes royalty rates across all the industries covered in this book. The royalty range from 0.50% to 40% of sales, are grouped by rate and then graphed by the frequency of their -iI appearance. Excluded from this chart are instances where royalty rates are specified on a per unit basis. Royalty Rate Distribution Across All Industries I ! Source: Royalty Rates for Technology, 4th Edition www.ipresearch.corn 100 90 80 l > 70 uc "' <::::lr 60 .l.!.:. so l !!: I c"::' ?£ 40 ">' c0: : 30 ---,i I ! 20 10 l 0 1 2 4 5 7 8 10 11 13 14 16 17 19 20 22 23 25 26 28 29 31 32 34 35 37 38 40 Royalty Rate,% While royalty rates above 15% exist, they are rare and usually associated with extraordinarily profitable technologies such as those in the gaming and entertainment industry. A cumulative analysis of the charted information provides the following insight: ---, l 1 I I i I Royalty Rates for Technology - 4th Edition I I 3 9% of royalty rates are 3 % or tess, 79% of royalty rates are 8% or less, 46% of royalty rates are 4% or. le. ss, 81% of royalty rates are 9% or less, 65% of royalty rates are 5% or less, 90% of royalty rates are 10% or less, and 71 % of royalty rates are 6% or 1less, · 95% of royalty rates are 15% or less 7 5% of royalty rates are 7% or jless, l Per Unit Royalties I I The chart just discussed could lnot incorporate royalties' paid ~n a per unit basis. The vast --, majority (93%) of the deals we discov~red were based on royalty terms as a percentage of sales. I I In 7% of the deals, royalties are paid on a per unit basis. Examples bf per unit royalties include trees, oil, diesel engines, fuel enhancement and recycling technology: : I • Madison A venue Capital, Inc. pays a royalty of $6 penli tree for the licensing· of a genetically enhanced tree. . , j l • A-Gas Pty Ltd. of Australia licenses a proprietary enfYme-based fuel enhancing product from Virtual Technologies Pty Ltd. A-Gas prys $4.75 per kilogram for production and distribution rights. • Whelan Environmental Services, Ltd. licenses technolog that allows for the refining of used oil from Interline Resources. Whelan pay. s a royrlty of 6 cents per gallon of 1 oil processed. ' • Hybrid Fuel Systems, Inc. is in the business of manufaduring and marketing retrofit systems for the conversion of gasoline and diesel .. ~ngine~, stationary or vehicular, to non-petroleum based fuels such as compressed natpral g~s and liquefied natural gas. They pay Harrier, Inc. a royalty of $250 to $1,000 per en$ine. • All waste Recycling Inc. licenses an advanced operJtional system that utilizes I recycled broken glass (known as cullet), usually oniy suitrble for landfills, to produce an end product the company has named "Glassfltjur", a1 furnace-ready raw material for fiberglass insulation and potentially suitable for gl,ss container manufacturers. Allwaste pays Eftek Corp. a royalty of $5 per ton. Per unit royalties protect licensors from falling prices. In conlpetitive industries, licensees often fight for market share using price competition. As product lrices are reduced, royalties based on a percentage of sales may yield lower royalty payments for licensors. A per unit royalty provides protection but at a price because if product prices increase, percent of revenues royalty schedule allows the licensor to enjoy a portion of increasing prices. A fixed per-unit royalty does not. License Fees In 20% of the license deals we discovered, compensation to the licensor also includes an up-front license fee. Sometimes these fees· are meant to cover the lie nsor' s costs for transferring the patents and technical know-how to the licensee. But, sometimes t ese fees are substantial: • Pioneer Hi-Bred International, agreed to pay a royalty t Monsanto for the use of the Bt gene that instructs a corn plant how to make a atural insecticide that kills ! European corn borers. Pioneer paid Mon~anto a one-t me $38 million fee for the license to use the gene. · 5 Royalty Rates for Technology - 4th Edition I I • Transplant Acquisition, Inc. licensed an artificial blood product from DNX Bio therapeutics Inc. and paid a license fee of $18 million plus a running royalty of 3% of sales. • Citrix Systems, Inc. is a leading supplier of application delivery and management software and services that enable the effective and efficient enterprise-wide \ deployment and management of applications. Microsoft Corp. agreed to license I Citrix's software technology and agreed to a $75 million license fee plus future royalties. ---, I • More typical is the $500,000 license fee that Energy Answers Corp. payed I Polymerix, Inc. for rights to construct and operate a Trimax™ lumber manufacturing facility based on proprietary plastic technology. I l The pie chart below shows a distribution of up-front license fees. $7 million plus $3 to $7 million 6% 5% ---, i I $1 to $3 million 25% $100,000to l $300,000 i 24% $300,000ta __- ' 750,000 - 20% We discovered the following: • 20% of all the deals discovered included running royalties and up-front license fees as part of the compensation terms to licensors. Up-front payments included: cash only, a combination of cash and stock, and stock only. l • The vast majority of up-front license fees (82%) were cash ~nly. • Approximately 9% of the deals that include up-front license fees had fees comprised of only stock. -, I \ ! • Less than 7% of the d~als that include up-front license fees had fees comprised of a combination of cash an~ stock. l I • The medical device industry represented 2 7% of the deals that used up-front license fees as part of licensor compensation. • The three largest license. fees discovered were $18 million, $38 million and $75 million. 6 I i l ) Royalty Rates fo Technology - 4th Editi. n l • The average cash-only license fee. was over $2 million wh n the three largest fees are included in the calculation. l • The average cash-only license fee, xcluding the three largest fees, was $987,225. • The majority oflicense fees (61%) ere $500,000 or less. l • For the license fee segment that r ged between $1 million d $3 million, 44% were $1 million fees. • Only three deals had license fees a ove seven figures. l • License fees above $1 million oc urred in 22% of the de ls having up-front licensee payments. l I Conclusion J The data suggests that when negotif1ing a license agreement: l • An up-front licensee fee is less lik y to come into play and i it does the fee is most likely going be cash only. I ~o • The royalty arrangement is almost . ertainly going be base4 on a percentage of sales l and the rate is most likely going to e 10% or less.: I : I l infor~ation This publication is designed to provide accur te and authoritative about the subject matter cove~ed. All of the i~formation in thi report has b0ee~ obtained from repu~a~I.e and reliable sources and 1s therefore beheved to be accur te. The pubhsh~r accepts ~o respons1bihty for any l damages that any party may experience fro relying on the 'nformatio~ presented herein l l l l l l l 1 i 1 1 I I I l l l l l l I I l 1 I I i ----, I \ l I I