The Term 25% Rule basically has two general uses.
— According to the 25% rule, the long-term debt of a local government cannot exceed 25% of its annual budget. Debt exceeding this threshold is considered excessive and poses a potential risk as the community may struggle to repay the debt.
— The 25% rule also refers to a royalty determination method whereby a party selling a product or service based on the intellectual property rights of another party must pay that party a 25% royalty of the gross profit of the sale. The 25% rule often also applies to trademarks, copyrights, patents, and other forms of intellectual property.
look at a glance
— The 25% rule is a heuristic that may refer to public finance law or intellectual property law.
— In the field of public finance, the 25% rule stipulates that the total debt of a public institution must not exceed a quarter of its annual budget.
— In the field of intellectual property, the 25% rule proposes a reasonable royalty that licenses must pay for their profits to the intellectual property owner.
Realizing the 25% Rule
In use of the term, the 25% rule is not an absolute or optimal threshold or strict legal requirement but is a general practice or empirical method (i.e., rule of thumb).
In the field of public finance, the 25% rule is a rough guideline for financial planning based on the trust of creditors and credit rating agencies. In the field of intellectual property, the 25% rule evolved from the usual tariffs negotiated between intellectual property owners and licensees.
25% Rule for Municipal Debt
Local governments or local governments must make assumptions about expected returns if they wish to finance their project through the issuance of local bonds, which can often arise from projects such as taxes or toll roads to support bond payments. If earnings fall below
expectations, these communities may not be able to repay their loans, which could prevent them from meeting their obligations and affect their creditworthiness.
Municipal bond holders want to ensure the solvency of their issuers, which may be at risk from excessive debt. As a result, bondholders are wary of buying bonds from local or state governments that violate the 25% rule.
Tax-free private activity bonds (bonds issued by municipalities on behalf of private or non-profit organizations) also have a 25% rule on bond yields. The rule states that no more than 25% of the loan proceeds can be used to acquire land.
25% Rule for Intellectual Property
Patent or trademark owners use the 25% rule as a yardstick for determining the appropriate royalty level. These rules assume that licensees must withhold 75% or less of their patented product profits because they have assumed most of the risks for product development and
intellectual property marketing. The patent holder pays the rest as a license fee.
The valuation of intellectual property is a complex matter. Royalty is usually measured as revenue, but the 25% rule applies to profits. The 25% rule also creates ambiguity in valuation calculations by not defining exactly what is included in “gross profit”. As this is a simple rule, we do not take into account the costs associated with marketing the product. For example, copyright owners usually pay for generating demand in the market through advertising, but Copyright Owners receive a 25% royalty.
In a 2011 action by Uniloc, USA, Inc. against Microsoft, the Federal Circuit Court of Appeals ruled that the 25% rule should not be used as a starting point for a statutory patent damage analysis. The Court of Appeals has reached the conclusion that this rule has not reached an acceptable level of evidence and cannot be used in patent litigation brought in federal court. The 25% rule may be used by other parties when estimating a proposed patent fee but should not be considered a legal obligation.