Back-solving Unobservable Trademark Royalty Rates—The Case of ITT vs Xylem Group

Intangible assets like trademarks and patents are typically not traded on active markets, and the measurement of their fair values is based on valuation models that use significant unobservable (Level 3) inputs (i.e., guideline royalty rates under the relief-from-royalty method). Although widely accepted, all authors and lecturers emphasize the difficulties when determining guideline royalty rates under this method. Often, royalty rate analyses fail to survive audit, appeal, or other scrutiny. In developing robust Level 3 inputs, the appraiser must take into account all information that is reasonably available. A new approach is discussed, one that illustrates an alternative method with which to overcome difficulties in identifying and interpreting guideline license agreements. This approach was first introduced in a largely unnoticed lawsuit.