How is a reasonable royalty determined?
A royalty is often calculated as a percentage of the net selling price of the goods or services sold by the Licensee. In other cases it is a fixed amount per sale. Surveys have shown that royalties paid in connection with License Agreements can range between 0.1% to 50% of the net selling price. This is a very wide range and shows that each case needs to be considered on its merits. To start the process of determining a fair royalty, it is often appropriate to prepare a business plan to try and calculate the profit that a licensee may make from working the license (not clear). It is sometimes said that a fair royalty is one that, over the life-term of the License, gives the Licensor about approximately 25% of the profit made by the Licensee from the exploitation of the IP. This is only a guide and is appropriate in only some cases.
