Other factors affecting price in Intellectual Property licensing agreements
It will be interesting to see what the forthcoming appeal of Schutz (UK) Ltd v Werit (UK) Ltd, to be heard in the UK Supreme Court, will bring out in relation to valuation of patents, and licensing valuations generally, given that on the facts it appears to be infringement of a patent by direct manufacturing. Although not directly a point in the appeal, the parties might of necessity, stray into the area of valuations of IP generally. However, in the interim, the following points on valuation are worth noting:
- It is not simple to find in IP licensing terms, the market price of goods (as in relation to other products). One issue is finding good comparators to discover market price.
- There are many factors that can affect market value of intellectual property (such as patentable inventions) – the strength of the patent itself, market size for the products that contain the patent, the wealth of the competitors who are prepared to challenge the invention.
- In relation to any rule, there are exceptions. One commentator referred to the music catalogue of the Beatles; the copyright and performing rights in their music will still have a ready predictable market (established market value); so such rights could be sold or licensed, the purchaser would only need to consider major questions such as whether such (market) value would hold firm over time.
- Consider the structure of payment in licensing systems. There can be upfront payments, and additional payments upon achievement of each ‘Milestone’. This structure can apparently occur in the Biotech sector; but might not suit wider industry.
- In industry, and negotiating licenses with industrial parties, they might consider a lump sum payment, in preference to royalty payments (such as on the basis of a percentage payment on net sales).
- Once the parties hit upon a payment structure (upfront payments, milestones, and/or royalties on sales) the amounts need to be decided to be charged in the license:
Charging methods for licences
- Method 1: what is the cost of generating the IP? Generally considered a very blunt instrument, the licensee only being interested in how much could be earned from the IP.
- Method 2: Use comparators to establish market price. You would need good reliable data for comparable deals; you would need to search extensively and draw lots of inferences when searching the Net and newspaper articles.
- Method 3: Rely upon the ‘experience’ of colleagues and licensing managers experienced in the financial elements in previous deals. However sometimes even the most experienced need to be acting on the best and up to date financial data, as they are expected to predict how much customers would be prepared to pay in the future. However difficult that may be, that is the task for the experienced licensing financial manager.
- Method 4: seek consultancy services for licensing valuation: this would require a party to be convinced as to the quality of data the consultant was acting on before paying for such a service. An attempt at doing the task oneself and data searching before going to a consultant is recommended.
- Method 5: the old ‘rule of thumb’ method (see previous post): there is the 25% rule: to be applied where a party knows the gross profits of the licensee. One commentator suggests that this is at best a method to be used as a sanity check, and nothing more. The other rule of thumb, the ‘5% rule’ for a royalty on net sales, is equally of limited value. A party would need to know in certain terms what the basis of such percentage was based upon, right down the chain of licensing, down to sublicensees, and sub-sublicensees (if ever) and what they are charging their customers.
The above summary is taken from Mark Anderson’s IP Draughts blog, which draws out more of the issues on the difficult issue of valuation in IP licensing.
The link to view the Supreme Court deliberations (via the Sky News site) in Schutz v Werit is:
p://news.sky.com/info/supreme-court