Determining Royalties

A royalty rate is the formula by which compensation is paid to the owner or licensor of the patent rights.  The following factors are relevant to setting a appropriate royalty:

• strength of the patent
• availability of competing technology
• cost of developing the invention and obtaining protection of the same
• savings or profit to be realized
• cost of bringing suit for infringement
• type of license being granted
• negotiating costs
• desirability of a relationship with the licensee and the possibility of obtaining cross licenses with respect to patents assigned to the licensee
• the investment required by the licensee
• the desirability of licensing the patent on a worldwide basis to the licensee

A common royalty base is the sales volume of the patented component.  Sales volume-based royalties are easy to calculate, the licensee is obligated to pay only when it has made of a sale of the product using the licensed patent, and the sale volume basis is the least capable of manipulation to the licensor’s disadvantage.  A general guideline is that one-quarter to one-third of the anticipated profit from the use of the invention is usually an appropriate royalty.