What is meant by the 25 percent rule.
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.