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A relatively simple method for ongoing retrospective valuations of intellectual property (IP) for the purpose of setting royalty rates is described. The method uses measureable variables that indicate directly the value of an IP to a licensee over time. Protections are built into the method to preclude royalties that would be unfair to either the licensee or licensor. Unlike the cost- or income-based methods used in current practice, the described method does not require any assumptions about the future and is therefore immune to the uncertainties and possible inaccuracies that are inherent to prospective valuations. Although forecasting is needed for some purposes, such as for certain tax purposes or for the overall valuation of a company by stock analysts, the described retrospective valuations can be usefully applied for setting royalty rates that closely track and reflect changes in market conditions, patent protection, and product design.
