Appendix C. Royalty Rate Data

• Author: Russell L. Parr
• Profession: President of Intellectual Property Research Associates
• Pages: 530-597

APPENDIX C

ROYALTY RATE DATA

Royalty rate data from real-world transactions is provided in this appendix. In separate

sections, royalty rates are provided for Technology, Trademarks, and Pharmaceuticals. The

information is this appendix is abstracted from books published by IPRA, Inc.: Royalty

Rates for Technology, 6th Edition, Royalty Rates for Trademarks& Copyrights, 5th Edition,

and Royalty Rates for Pharmaceuticals & Biotechnology, 8th Edition. The complete books

are available for purchase at www.ipresearch.com.

TECHNOLOGY ROYALTY RATES

Exhibit C.1 summarizes royalty rates across all the industries covered in Royalty Rates for

Technology, 6th Edition. Industries covered by this book include: Aeronautics, Agriculture,

Automotive, Chemistry, Communications, Computer Hardware, Computer Software,

Construction, Electrical Electronics, Entertainment, Financial, Food, Franchises, Glass,

Household Products, Internet, Mechanical, Medical, Natural Resources, Photography,

Semiconductors, Sports, Steel, Toys, and Waste Treatment.

The royalty rates reported are grouped by rate, as a percent of sales, and graphed by

the frequency of their appearance. Excluded from this graph are instances where royalty

payments are a xed amount per unit.

While royalty rates above 15% exist, they are rare and usually associated with extraor-

dinarily protable technologies such as those in the gaming and entertainment industry.

A cumulative analysis of the charted information provides the following insight:

• 20% of royalty rates are 2% or less.

• 35% of royalty rates are 3% or less.

• 43% of royalty rates are 4% or less.

• 67% of royalty rates are 5% or less.

• 72% of royalty rates are 6% or less.

• 77% of royalty rates are 7% or less.

• 81% of royalty rates are 8% or less.

• 82% of royalty rates are 9% or less.

• 92% of royalty rates are 10% or less.

• 96% of royalty rates are 15% or less.

530

Technology Royalty Rates 531

0

0.3%

2.5%

4.5%

6.5%

8.5%

10.5%

12.5%

14.5%

16.5%

18.5%

20.5%

22.5%

24.5%

26.5%

28.5%

30.5%

32.5%

34.5%

36.5%

38.5%

40.5%

42.5%

44.5%

46.5%

48.5%

50

Ro

y

alt

y

Rate, %

Royalty Rate Frequency

Number of Occurrences

100

150

200

250

EXHIBIT C.1. TECHNOLOGY ROYALTY RAT E FREQUENCY

PER-UNIT ROYALTIES. The chart in Exhibit C.1 shows that the vast majority (91%) of the

deals discussed in Royalty Rates for Technology, 6th Edition were based on royalty terms as

a percentage of sales. In 9% of the deals, royalties were paid on a per-unit basis. Examples

of per-unit royalties include trees, oil, diesel engines, fuel enhancement, and recycling

technology:

• Madison Avenue Capital, Inc. pays a royalty of $6 per tree for the licensing of a

genetically enhanced tree.

• A-Gas Pty Ltd. of Australia licenses a proprietary enzyme-based fuel enhancing

product from Virtual Technologies Pty Ltd. A-Gas pays $4.75 per kilogram for

production and distribution rights.

• Whelan Environmental Services, Ltd. licenses technology that allows for the ren-

ing of used oil from Interline Resources. Whelan pays a royalty of 6 cents per gallon

of oil processed.

• Hybrid Fuel Systems, Inc. is in the business of manufacturing and marketing retrot

systems for the conversion of gasoline and diesel engines, stationary or vehicular,

to non-petroleum-based fuels such as compressed natural gas and liqueed natural

gas. They pay Harrier, Inc. a royalty of $250 to $1,000 per engine.

• Allwaste Recycling, Inc.licenses an advanced operational system that utilizes recy-

cled broken glass (known as cullet), usually only suitable for landlls, to produce

an end product the company has named “Glassour,” a furnace-ready raw material

for berglass insulation and potentially suitable for glass container manufacturers.

Allwaste pays Eftek Corp. a royalty of $5 per ton.

Per-unit royalties protect licensors from falling prices. In competitive industries,

licensees often ght for market share using price competition. As product prices are

reduced, royalties based on a percentage of sales may yield lower royalty payments for

licensors. A per-unit royalty provides protection but at a price because if product prices

532 App. C Royalty Rate Data

increase, a percent-of-revenues royalty schedule allows the licensor to enjoy a portion of

increasing prices. A xed per-unit royalty does not.

LICENSE FEES. In 26% of the license deals reported in Royalty Rates for Technology, 6th

Edition, compensation to the licensor also included an up-front license fee. Sometimes

these fees are meant to cover the licensor’s costs for transferring the patents and technical

knowhow to the licensee. But sometimes these fees are substantial:

• Transplant Acquisition, Inc. licensed an articial blood product from DNX Bio-

therapeutics Inc. and paid a license fee of $18 million plus a running royalty of 3%

of sales.

• Citrix Systems, Inc. is a leading supplier of application delivery and management

software and services that enable the effective and efcient enterprise-widedeploy-

ment and management of applications. Microsoft Corp. agreed to license Citrix’s

software technology and agreed to a $75 million license fee plus future royalties.

• More typical is the $500,000 license fee that Energy Answers Corp. paid Polymerix,

Inc. for rights to construct and operate a Trimax™ lumber manufacturing facility

based on proprietary plastic technology.

The pie-chart shows a distribution of up-front license fees—26% of all the deals discov-

ered included running royalties and up-front license fees as part of the compensation terms

to licensors. Up-front payments included: cash only, a combination of cash and stock, and

stock only.

$20 million–$40 million; 2%

$5 million–$20 million; 9%

Upfront Fees

$1 million–

$5 million; 21%

$1–$300,000; 42%

$300,001–$1 million; 21%

Presented ahead are sample licensing agreement summaries from Royalty Rates for Tech-

nology, 6th Edition.

Aerospace—Collision Avoidance

Licensor: Advanced Acoustic Concepts,Inc.

Licensee: Flight Safety Technologies,Inc.

Royalty: $150,000 plus3% of sales

Flight Safety Technologies, Inc. is developing three new technologies designed to

enhance aviation safety and efciency. These technologies include SOCRATES®,

UNICORN™, and TIICM™. SOCRATES®is a technology being developed into