Cost approaches are utilized under the premise that a prudent licensee would pay no more for the intellectual property at issue than the cost to obtain, either by purchaser by construction, an exact replica of the subject technology or an alternative that achieves the same function. Two types cost methodologies predominate:
- Reproduction cost approaches examine the cost to construct or purchase an exact replica of the technology at issue. According to this approach, a licensee should pay no more for the intellectual property then it’s avoided economic costs from the creation of the subject technology.
- Replacement cost approaches, which are sometimes referred to as design around approaches, examine the costs to construct or purchase an alternative technology that performs the same function as the technology at issue, but in a form or appearance that may be quite different. According to this approach, a licensee would pay no more for the intellectual property than the cost to develop an alternative technology that although different, may be substituted for the technology at issue.