Federal Circuit Rejects the Use of the 25 Percent "Rule of Thumb" in Calculating Reasonable Royalty for Patent Infringement

Federal Circuit Rejects the Use of the 25 Percent "Rule of Thumb" in Calculating Reasonable Royalty for Patent Infringement

On January 4, 2011, the Federal Circuit Court issued its decision in Uniloc USA, Inc. v. Microsoft Corp., No. 2010-1035 (Fed. Cir. Jan. 4, 2011) [enhanced version available to lexis.com subscribers / unenhanced version available from lexisONE Free Case Law], rejecting the use of the 25 percent rule in calculating reasonable royalty damages:

This court now holds as a matter of Federal Circuit law that the 25 percent rule of thumb is a fundamentally flawed tool for determining a baseline royalty rate in a hypothetical negotiation. Evidence relying on the 25 percent rule of thumb is thus inadmissible under Daubert and the Federal Rules of Evidence, because it fails to tie a reasonable royalty base to the facts of the case at issue.

The case involved Uniloc's '216 patent for a software registration system found to be infringed by the Product Activation feature used on certain versions of Microsoft's Word and Windows products. Examining a hypothetical negotiation between the parties, Uniloc's expert employed the 25 percent rule to calculate a reasonable royalty of $2.50 per license based on an internal Microsoft document valuing Product Keys at $10 or more. Consideration of the Georgia Pacific factors left the proposed royalty rate unchanged, resulting in damages of nearly $565 million. Based on Uniloc expert's use of (i) the 25 percent rule of thumb and (ii) the entire market value rule for a feature of a product that was not the basis of consumer demand as a reasonableness check on total damages, the court affirmed the grant of a new trial on damages.

The Uniloc court noted that, despite its widespread and often begrudged acceptance by courts, "[t]he admissibility of the bare 25 percent rule has never been squarely presented to this court." The court compared the application of the 25 percent rule to the reliance on licenses unrelated to the hypothetical agreement to determine a reasonably royalty, finding that use of the 25 percent rule to be "far more unreliable and irrelevant" than reliance on unrelated licenses, which we rejected in ResQNet and Lucent Technologies." The problem, in short, is that "[t]he rule does not say anything about a particular hypothetical negotiation or reasonable royalty involving any particular technology, industry, or party." "Beginning from a fundamentally flawed premise and adjusting it based on legitimate considerations specific to the facts of the case nevertheless results in a fundamentally flawed conclusion."

Practical Implications of Uniloc
The Uniloc decision continues a recent trend of Federal Circuit opinions that seek to narrowly tailor a claim for patent infringement damages to the patent(s)-in-suit and the technology at issue. Reasonable royalty damages, including both the royalty base and the royalty rate, should be carefully linked to the facts and circumstances of the case at issue.

If you have any questions or wish to discuss how this decision may impact your company, please contact your attorney at Brinks Hofer Gilson & Lione.