TGIF for Technology Pricing through Risk Allocation

Tradition has it that the rationale behind the 2-10% patent royalty rate "rule-of-thumb" starts with an a 25% gross profit margin on sales of a patented product before application of the "Goldscheider 25% Rule:"

"All things being equal, a licensee will pay 25 percent of profits as a reasonable royalty."

According to an August 4, 2004 article in IP Law & Business, Robert Goldscheider arrived at this now-famous calculation in 1959 when one of his clients, Philco Corporation, had about 18 European licensees for its radio and phonograph patents. Goldscheider calculated that Philco's licensees assumed the major risk of commercializing their products, about 75 percent. That left 25 percent of the risk to licensor Philco, reflected in a 25/75 percent split of pretax profits. Probably the best-known economic damages expert in the nation, the 75-year-old Goldscheider is reputed to have testified in more than 100 IP cases. "I have three homes, am worth several million dollars," he told Victoria Slind-Flor, "I don't have to work unless I want to."

And while you're out earning your next million, you may want to allocate some time to read "Technology Pricing in Joint Ventures," (PLI 2005) by Mark Petersen who writes that "pricing technology effectively is often more a means of extracting a fair share of the technology's value than one of putting a fixed dollar sum today on the potential future benefits to be derived from the technology. Techniques of finding means to fairly split the value given a range of potential risks and possible outcomes are those that will produce the best long term results." Instead of using Goldscheider's a rule-of-thumb, Petersen suggests a market-based financial analysis for quantifying each party's knowledge and assumptions relating to value in order to allocate risks and apportion the ultimate cash flow from the technology.

Thank Goodness It's Friday (and I don't have to work this weekend, unless I want to. . . ),

--Bill Heinze