3. Granstrand, O. and Holgersson, M. (2012), ‘The 25% rule revisited and a new investment-based method for determining FRAND licensing royalties.pdf Flashcards
(14 cards)
What is the 25% Rule in IP licensing?
A rule of thumb suggesting that a licensee should pay 25% of its operating profits from a licensed product to the licensor.
Why has the 25% rule faced criticism?
It lacks theoretical grounding, doesn’t consider multiple patents or licensors, ignores investment levels, and was dismissed by U.S. courts for being too simplistic.
How does the “classic” version of the 25% rule differ from the simple rule of thumb?
The classic version is more flexible and allows adjustments based on case-specific factors, often incorporating guidelines like the Georgia-Pacific factors, while the simple rule of thumb applies a flat 25% royalty without such customization.
What alternative method to the 25% rule is proposed by Granstrand and Holgersson (2012)?
They propose an investment-based method where royalty payments are determined by equalizing the rate of return on investment (RoI) between licensors and licensees, reflecting the proportion of total investment each party made.
What is the core fairness principle behind the investment-based royalty method?
The principle is that all parties—licensors and licensees—should receive the same rate of return on their respective investments, which ensures equitable value-sharing.
In the investment-based method, how is the royalty calculated in a one-licensor/one-licensee scenario?
The licensor receives a share of the licensee’s operating profit equal to the licensor’s share of the combined investment.
For example, if the licensor invested 30% of the total, they receive 30% of the licensee’s operating profit as royalty.
How does the investment-based method apply to multiple licensees?
Each licensee pays a royalty based on their operating profit and their proportion of the total investment, ensuring each party’s return on investment is equalized.
What happens in the investment-based method when there are multiple licensors and licensees?
Royalties can be pooled and then distributed among licensors based on their investment shares, or each licensee can pay each licensor directly according to their investment proportion.
What are the advantages of the investment-based method for determining FRAND royalties?
It promotes fairness, works for complex multi-party licensing, aligns incentives between parties, supports open innovation, and can reduce legal disputes and transaction costs.
What are some limitations of the investment-based royalty method?
It doesn’t consider differences in R&D efficiency or essentiality of patents, may incentivize over-investment to gain higher royalties, and doesn’t fully account for synergies or substitute technologies.
Why is using operating profit as the royalty base preferred in the investment-based method?
Because it aligns the profit-maximizing goals of both licensors and licensees, unlike gross revenue, which might not reflect the actual profitability of using the IP.
Can the investment-based royalty method be applied to forms of IP other than patents?
Yes, it is applicable to any intellectual property, including know-how, as long as relevant investments and operating profits can be identified.
How does the investment-based method handle new entrants or latecomers to a licensing pool?
Latecomers must contribute royalties in line with their incremental value and investment, discouraging free-riding and encouraging early participation in patent pools.
What conclusion did the authors draw about the continued use of the 25% rule?
The authors concluded that the 25% rule should no longer be used as a general guideline and that more evidence-based and adaptable methods, like the investment-based method, are better suited to modern licensing environments.
