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A Simple Method For Calculating A “Fair” Royalty Rate

Damien Salauze

Institut Curie VP, Business Development & Licensing, Paris, France

During a licensing deal (i.e. license of a patent protecting a product), several methods are commonly used to determine what is intended to be a “fair” royalty rate. It is even recommended to combine several methods in order to cross-check that there is no discrepancy between one method and another. These methods fall into three typical groups [1-4]: (i) comparison with previous similar deals done by others, (ii) alignment with industry or internal practice, and (iii) calculation.

In light of a common experience, it appears that comparison with previous similar deals is always questionable because, even if data are extracted from a reliable database, negotiators have the feeling that no deal is really similar to the deal they are currently discussing.

Alignment with industry or internal practice is generally frustrating when one of the parties does not belong to the industry (i.e. an academic institution), or when one of the parties has limited bargaining power. Therefore, sentences such as “we have always done it like that,” or “there is no way that the rate should be out of this usual range,” are very unlikely to create a “win-win” feeling.

Calculation is often felt to be more rational. However, calculation may rapidly become complex, especially if one takes into account probabilities and wishes to introduce options, and relies heavily on the assumptions that are introduced [4]. In addition, calculation-based methods usually do not take into account the amount of money to be invested by the licensee to license and its subsequent associated risk.

At Institut Curie, which is an academic research institution, we have introduced a relatively simple calculation-based method which allows sharing the “benefit” made by the licensee and which – very important - takes into account both the amount of money to be invested by the licensee further to license, and its subsequent associated risk. This method is so far satisfactorily used, in the sense that its outcome is felt by parties to be both rational and fair. This method is applicable to any kind of business, although Institut Curie is primarily involved in life sciences (it is a Paris-based Comprehensive Cancer Center created one century ago by Marie Curie when she received her second Nobel Prize).

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