Monday, January 12, 2015

Nestler and Hellebrandt Square Off on Rules of Thumb

The question of how best to value patent licenses, whether in negotiation, for tax purposes, or for purposes of calculating damages, is a tough one.  In theory, it makes economic sense to assume that the parties to the license would have agreed to some sort of split of the profits to be earned from the use, but of course reality may be different.  For administrability reasons, the parties themselves may prefer some sort of heuristic, based on comparable licenses or industry-wide standard rates; and in litigation comparables sometimes may be a reasonable indicator of the value of the "license" the infringer has taken.  Moreover, if we are to base royalties on a percent of the profit (real or expected), what should we assume that percent to be--and how confident can we be that only the profit derived from the infringement, and not from other factors, will be used as the base?  On the other hand, what if there are no (very similar) comparables to be had?  Are industry-wide rights an accurate enough guide for all inventions (which seems quite doubtful to me), or only some (and if so, which ones)?

In the German press, Anke Nestler and Ortwin Hellebrand recently have expressed competing views on these issues.  Regarding Dr. Nestler, in September, I posted this:
Anke Nestler has published an article titled Die Ableitung von angemessenen Lizenzsätzen aus öknomischer Perspektive ("The Derivation of Royalty Rates from an Economic Perspective") in the June 2014 issue of Mitteilungen der deutschen Patentanwälten (pp. 262-66).  Here is the abstract:
In third-party licensing practice the licensing parties often orient themselves towards the licensee's expected future profits and split this between themselves within the framework of license negotiations.  This policy is economically sensible.  The derivation of reasonable royalty rates should be based on business analysis.
(According to footnote *, the article is a slightly modified version of an article originally published in Betriebs Berater 2013, 2027-29.)  The author argues that a 25-33% division of expected profits from the use of a patent, converted into a running royalty based on a percentage of turnover, can be a useful guideline--not a hard and fast rule, as rejected in the Federal Circuit's 2011 Uniloc decision--taking into account all other relevant considerations such as the parties' preferences for risk-sharing, the expected contribution of other patents or trademarks to the product's profitability, and so on.  The author cites a 1972 work by Knoppe, Die Besteuerung der Lizenz- und Know-how-Verträge, throughout as approving such an approach. 
An English-language translation of Dr. Nestler's Betriebs-Berater article is available here.

In response, Mr. Hellebrand published Ableitung von angemessenen Lizenzsätzen aus öknomischer Perspektive?  Eine Erwiderung ("Derivation of Royalty Rates from an Economic Perspective?  A Response") in the November issue of Mitteilungen der deutschen Patentanwälten (pp. 494-97).  Here is the abstract (as above, in my translation from the German):
Market-standard royalty rates delineate the freedom to set license fees within the competitive environment of a market for technical products in a manner that is more accurate and more reflective of market realities than does a profit split of the EBIT (earnings before interest and taxes) of a single licensee, even when the latter is refined vis-a-vis the Knoppe [rule-of-thumb] formula by the licensing firm's analysis for the planned use.
As suggested by the abstract, Dr. Hellenbrand believes that market-standard rates are more likely to accurately reflect the value of the technology, and to be more administrable in practice.

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