(from September 2008 issue of the Journal of Accountancy)
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–around).
The Georgia-Pacific dispute is the seminal case that identified15 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.