"25% Rule" is Drawn and Quartered

"25% Rule" is Drawn and Quartered

According to venerable precedent, a prevailing patentee may seek the royalty that would result from a hypothetical negotiation occurring when patent infringement begins. Patent owners have used the "25% rule" as a starting point for determining what is "reasonable." In Uniloc USA, Inc. v. Microsoft Corp., 2011 U.S. App. LEXIS 11 (1st Cir. R.I. Jan. 4, 2011) [enhanced version available to lexis.com subscribers / unenhanced version available from lexisONE Free Case Law], the Federal Circuit admitted that it had "passively tolerated" the rule but declared it would no longer do so. In this Commentary, Joel Leeman discusses the 25% rule and examines relevant case law, including the Uniloc case. He writes:

The 25% rule - a popular method for splitting profits from patented technology

     A licensing consultant named Robert Goldscheider has employed the 25% rule for 50 years. Through constant advocacy of his approach in lectures and publications and in expert testimony by him and his acolytes in countless intellectual property lawsuits, Goldscheider has established broad acceptance of the 25% rule. The Licensing Executives Society has awarded him a gold medal for the prominence his rule has attained in patent valuation.

     The rule springs from Goldscheider's observation that many royalty negotiations arrive at a royalty rate that equals about one-quarter of the licensee's anticipated pre-tax profits derived from the licensor's technology.

     The rule assumes that a licensee should retain a majority, say, 75%, of the profits of a patented product because he has shouldered the considerable risks of developing the product and bringing it to market. The patentee takes the remainder as a license fee.

     . . . .

Appellate court scowls at 25% rule, smiles upon Georgia-Pacific factors

     In this month's Uniloc decision, the Federal Circuit confirmed Microsoft's liability for infringing a patent on anti-piracy software that Microsoft infringed via the copy protection keys used in sales of Office and Windows. But the court reversed the $388 million award in Uniloc's favor because the 25% rule was its foundation.

     The court concluded that the rule is a "fundamentally flawed tool" for establishing a royalty benchmark in a hypothetical negotiations because it lacks any foundation in the facts of the case.

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