Inventor remuneration when selling a patent portfolio

When selling a patent portfolio, how should the invention value for employee inventions be determined? If the purchase price is not calculated by adding the individual purchase prices negotiated for each patent family, what is the starting point for determining the invention value: the gross income? Or a value analysis?

The Arbitration Board of the DPMA has issued an interesting proposal for agreement in such a case (Arb.Erf. 30/17). The case concerned the sale of a patent portfolio consisting of 177 patent families. The employer had received a purchase price of € 40,000,000. The claimant was a co-inventor of 1/3 of the patent families involved in this sale.

Purchase price share according to value analysis?

The value of the invention resulting from the sale of the patent family was the subject of the dispute.

The employer had argued that 90 % of the purchase price was attributable to standard essential patent families. These are so-called 'value drivers'. The employer had applied a conversion factor of 25 % to these patent families in order to determine the value of the invention to be paid for.

The employee inventor, on the other hand, argued that a value analysis of the patent families should be carried out in order to determine the portion of the purchase price attributable to his employee invention and that a conversion factor of 40 % should be used.

Invention value in the sale of a patent portfolio

In the given case, the employer had sold the employee invention as part of an IP pact. The Arbitration Board issued several unofficial guidelines in this case. According to these guidelines, the portion of the purchase price attributable to an individual patent should be determined on the basis of the value expectations of the parties to the purchase agreement - but not by analysing the value of the patent families.

In order to determine the value of the invention, it was therefore first necessary to determine what proportion of the purchase price of € 40,000,000 was attributable to the claimant's employee invention (gross income). Specifically, the Arbitration Board calculated the gross income as € 40,000,000 x 0.7 / 19 = € 1,473,684. It considered it appropriate for the employer to allocate 90 % of the purchase price to the patent families identified as "value drivers".
"However, this gross income is not the starting point for determining the value of the invention. First of all, items not related to the invention have to be deducted to arrive at the net income. In addition, a significant part of the net income must remain with the company as company profit in order to take account of the company's risk. Therefore, 20 % to 50 %, usually 40 %, of the net income represents the invention value", the Arbitration Board states as an unofficial principle.

Know-how share in the sale of a patent portfolio

If it is not possible to determine the net income from the gross income, 'the only option is to adjust the gross income to the net income and to deduct the company profit in one step by considering 16 % to 40 %, usually 25 %, of the gross income as the invention value', the Arbitration Board explained in principle. This also includes a possible deduction of know-how, which is often the subject of licensing agreements and the sale of property rights, the Arbitration Board explained.

In the given case, where 90 % of the patent families are attributable to the standard-essential patents, a flat conversion factor of 35 % on the gross sales price seems appropriate to arrive at the invention value, the Arbitration Board recommended and also established this as a further unofficial principle:

If the transfer of the patents to be valued was the value-determining factor in the negotiation of the purchase price, so that it can be assumed that any co-assigned know-how played no or a very subordinate role, then a flat conversion factor of 35 % on the gross purchase price, which is significantly higher than the standard value, appears appropriate to arrive at the value of the invention.

In this case, the Arbitration Board calculated an invention value of
1,473,684 (gross sales) x 0.35 (flat-rate conversion factor) = € 515,789.

Share factor and amount of employee invention remuneration

The share factor to be applied in determining the employee invention remuneration was disputed, too. The employer assumes a share factor of 11.5 % (a=2+b=2.5+c=2). The employee inventor, who holds a doctorate in engineering and was employed as head of a standardisation department attached to the research department, claimed a share factor of 51 % (a=5+b=4.5+c=5).

The share factor is determined by adding value figures and then converting them into percentages, which are used to assess the employee's advantages over a freelance inventor or the share of the invention attributable to the company in terms of the position of the task (value standard 'a'), the solution of the task (value standard 'b') and the employee's position in the company (value standard 'c'). Sometimes, employee inventors and employers often disagree about the share factor, and this was also the fact here.

The Arbitration Board decided on a share factor of 14 % with the values a = 2 + b = 2.5 + c = 3. The Arbitration Council therefore agreed with the employer on the value standards a and b, but considered the value c = 2 to be too low. According to the Arbitration Board, the decisive factor was the insight into the company's development that the employee inventor's position provided. As the inventor's area of responsibility was linked to the research department and he also had a management function, the Arbitration Board considered a value of 'c=3' to be appropriate.
In the given case, this resulted in an inventor's remuneration of
515,789 (value of the invention) / 3 (co-inventor's share) x 0.14 (14 % share factor) = € 24,070.

Sale of the patent portfolio - how much is the inventor's remuneration?

If you have any questions about the amount or determination of an inventor's remuneration, especially when selling a patent portfolio, please contact us. We have many years of experience in calculating and interpreting employee remuneration and can provide you with competent and legally compliant advice.

Please contact us by phone +49 69 69 59 60-0 or send us an email info@kollner.eu.