Chairman Weston Anson Has Historically Called Rule Into Question
Quoting from Wes Anson’s most recent book, IP Valuation and Management (published by The ABA, 2010):
The 25 percent rule. This “rule” states that an appropriate royalty rate is established by allocating 25 percent of profit as a royalty. The questions this rule raises are obvious and fall into three broad areas: First of all, where did this rule come from? No one knows. Second, what is the definition of profit?…The third observation on the 25 percent rule revolves around the lack of analysis of investment required, or the risk profile of the particular industry. Also, there is a complete lack of analysis as to any other negotiating conditions or concerns, such as the competitive environment, the market size, market share, etc. In sum, in our opinion, the 25 percent rule of thumb should never be used.
In an earlier book, The Intangible Assets Handbook (2007), Anson wrote:
The first and most important rule of thumb is that all rules of thumb are faulty…These include the so-called “25% rule of thumb” that allocates one-quarter of a company’s operating profit as an imputed royalty for use of the company’s intangible assets.
And even earlier, in the book Fundamentals of Intellectual Property Valuation (The ABA Section of Intellectual Property Law, 2005), Anson started to question the use of the 25% Rule when he noted that:
The 25% royalty rule recognizes as a benchmark that in a “normal” technology licensing relationship…the licensor should be entitled to 25% of the predicted “profits.” However, this 25% royalty rule is only a starting point. The profit split should then be adjusted up or down to reflect the exact circumstances of the license, and it is not unreasonable for the ratio to be adjusted so far as to be reversed.
Now that the 25% royalty rate rule of thumb is virtually dead, due to the recent Federal Circuit’s ruling in Uniloc USA, Inc., et al. v. Microsoft Corporation, stating that “This court now holds as a matter of Federal Circuit law that the 25 percent rule of thumb is a fundamentally flawed tool for determining a baseline royalty rate in a hypothetical negotiation. Evidence relying on the 25 percent rule of thumb is thus inadmissible under Daubert and the Federal Rules of Evidence, because it fails to tie a reasonable royalty base to the facts of the case at issue.” – those in the business of valuing and defending intellectual property assets can focus on establishing true and realistic values.