Monday, 3 November 2008

Reasonable royalties: do they smell right?

Via Technology Transfer E-News comes an article in the Journal of Accountancy, "How Reasonable Is Your Royalty?" by Glenn S. Newman (Pincipal, Parente Randolph LLC’s Forensic & Litigation Services Practice) and his colleagues Richard J. Gering and Jeffrey N. Press. According to the article's executive summary,

"In recent years, focus has shifted to the increased value of intangible assets. As such, competition, sometimes unlawful, has resulted in extensive litigation and/or negotiation between parties for the use of intangibles.

Methodologies to quantify a reasonable royalty are consistent with general valuation approaches–market (other licenses), income (profitability), and cost (design–round).
The Georgia-Pacific dispute [Georgia-Pacific v United States Plywood Corp. (318 F. Supp. 1116)] is the seminal case that identified 15 factors to consider in estimating a hypothetical reasonable royalty.

Be careful in determining an appropriate royalty base—consider what the market considers important, and the functional relationship between patented and unpatented products sold together.

Whichever method is used to determine a royalty, be forewarned that others will likely have an opposing point of view. Accordingly, make sure it passes the smell test".

I'm ashamed to say that I've never come across the term "smell test" within the context of IP royalties and the term doesn't seem to be explained as such in the article. Can any reader please enlighten me?


  1. It's the smell of money and whether there is enough of it (or too much)!

  2. I disagree. The smell test is simply another way of saying "does it smell right". Possibly with reference to something which looks good (e.g.) a nice piece of fish, but which your nose tells you is actually not a good option. It is a way of encompassing the wisdom of standing back and saying “yes, I see all that, does it really make sense”. In the context of the article, they are saying that you should stress test your arguments. This is the black swan point. Most people have a bias towards evidence which supports their own arguments. The smell test requires that you stand back and try to see another way of looking at (smelling) the arguments.