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25% Rule

25% Rule

What Is the 25% Rule?

There are two common usages of the term "25% rule":

  1. The 25% rule is the concept that a neighborhood government's long-term debt shouldn't surpass 25% of its annual budget. Any debt past this threshold is thought of as inordinate and represents a likely risk, as the municipality might experience difficulty servicing the debt.
  2. The 25% rule likewise alludes to a technique for determining royalties, which specifies that a party selling a product or service in light of another party's intellectual property must pay that party a royalty of 25% of the gross profit produced using the sale, before taxes. The 25% rule likewise commonly applies to trademarks, copyrights, patents, and different forms of intellectual property.

Figuring out the 25% Rule

In the two purposes of the term, the 25% rule is more a question of customary practice or heuristic (i.e., a rule of thumb), as opposed to an absolute or optimal threshold, or a severe legal requirement.

In the public finance setting, the 25% rule is an unpleasant guideline for fiscal planning in light of the confidence of bondholders and credit rating agencies. In the intellectual property arena, the 25% rule advanced from the customary rates negotiated between intellectual property holders and licensees.

25% Rule for Municipal Debt

Nearby or state governments hoping to fund projects through municipal bond issues need to cause presumptions about the revenues they to hope to acquire, frequently through taxation or undertakings like toll streets, which thusly will permit them to support bond payments. Assuming revenue misses the mark concerning expectations, those municipalities will be unable to make bond payments, which can make them default on their obligations and hurt their credit rating.

Municipal bondholders need to ensure that the responsible authority has the capacity to pay, which can be risked by getting too deep in debt. Bondholders are consequently mindful about purchasing bonds from nearby or state governments that are in violation of the 25% rule.

Tax-exempt private activity bonds — bonds issued by municipalities for the benefit of private or non-profit associations — likewise have a 25% rule applied to the proceeds from the bonds. This rule states that something like 25% of bond proceeds might be utilized for land acquisition.

25% Rule for Intellectual Property

Patent or trademark owners utilize the 25% rule as a measuring stick for characterizing a reasonable amount of royalty payments. The rule expects that a licensee ought to hold all things considered 75% of the profits of a patented product given that s/he took on the bulk of the risks of fostering the product and carrying the intellectual property to the market. The patent owner accepts the remainder as a license royalty.

Setting the value of intellectual property is a complex matter. Despite the fact that eminences are normally assessed against revenues, the 25% rule applies to profits. Besides, the 25% rule doesn't closely characterize what "gross profit" incorporates, which makes vagueness in the valuation calculation. Since it's a simple rule, it doesn't consider the costs associated with marketing the product. For instance, the holder of a copyright will receive a 25% royalty, however the party doing the selling typically causes the cost of drawing in demand in the market through advertising.

In the 2011 court case of Uniloc USA, Inc. v. Microsoft Corp, the [court of appeals](/re-appraising courts) for the Federal Circuit ruled that the 25 percent rule may not be utilized as a starting point for a patent damage analysis headed for the courtroom. The requests court presumed that the rule doesn't rise to a permissible level of evidence and may not be depended upon in a patent lawsuit in federal court. While the 25% rule might in any case be involved by different gatherings in assessing a proposed patent royalty, it ought not be viewed as a legal order.


  • In intellectual property, the 25% rule recommends the reasonable royalty that a license ought to pay an intellectual property holder on profits.
  • The 25% rule is a heuristic that can allude to either public finance or intellectual property law.
  • In public finance, the 25% rule recommends that a public element's total debt shouldn't surpass one-fourth of its annual budget.