Does Upfront Payment Reduce Running Royalty Rate‘ Theoretical Perspectives and Empirical Analysis

les Nouvelles, September 2010

Posted: 13 Mar 2010 Last revised: 15 Apr 2012

See all articles by Jack Lu

Jack Lu

Intellectual Property Market Advisory Partners(IPMAP), LLC

Date Written: March 18, 2010

Abstract

It is an intuitively plausible supposition that upfront payment reduces running royalty in a license agreement. While the supposition seems to be valid if license market is efficient, the imperfection and distortions in real license market renders its validity much less warranted. Empirical test is deemed to be challenging due to the availability and quality of royalty data, as well as the wide variety of factors in royalty determination. This study tries to test the hypothesis, using the data from exclusive license transactions in medical device industry. The dummy variable regression analysis shows that the presence of upfront payment reduces running royalty rate by 1.7 to 1.9 percentage points on average. Also, it appears that upfront payment is negatively associated with running royalty rate; such a relationship, however, is not statistically significant. The conclusions seem to validate that license market, despite its imperfection, is sufficiently efficient in fathoming that upfront payment does draw downstream royalty toward the advance. The regression analysis also indicates that individuals and academic institutions as licensors are more willing or likely to accept a haircut on royalty rate, in an amount of 2 percentage points lower than the average rates of other transactions in this industry.

Keywords: Upfront Payment, Running Royalty Rate, Reasonable Royalty Determination, License Agreement, License Market, Licensing Transaction, Royalty Payment, License Negotiation, Dummy Variable, Regression Analysis

JEL Classification: O32, O34, C13

Suggested Citation

Lu, Jiaqing, Does Upfront Payment Reduce Running Royalty Rate‘ Theoretical Perspectives and Empirical Analysis (March 18, 2010). les Nouvelles, September 2010. Available at SSRN: https://ssrn.com/abstract=1570154

Jiaqing Lu (Contact Author)

Intellectual Property Market Advisory Partners(IPMAP), LLC ( email )

13785 Research Blvd,
Suite 125
Austin, TX 78750
United States
(512)238-3088 (Phone)

HOME PAGE: http://www.ipmapllc.com

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