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,
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?
"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".