Bensen on Patent Damages Landmark Ruling: Uniloc USA, Ltd. v. Microsoft Corp.

Bensen on Patent Damages Landmark Ruling: Uniloc USA, Ltd. v. Microsoft Corp.

In Uniloc USA, Inc. v. Microsoft Corp., 2011 U.S. App. LEXIS 11 (1st Cir. R.I. Jan. 4, 2011) [enhanced version available to subscribers / unenhanced version available from lexisONE Free Case Law], the Federal Circuit held that: (i) the 25% Rule is a "fundamentally flawed tool" for determining a baseline reasonable royalty; and (ii) total revenues for an accused product cannot be considered by a jury unless the Entire Market Value Rule applies. The ruling likely will result in greater emphasis on the patentee's burden of apportionment and proof. In this Analysis, Eric Bensen, co-author of Milgrim on Trade Secrets and Milgrim on Licensing, discusses Uniloc and the pertinent legal principles. He writes:

     The "25% Rule". In its simplest form, the 25% Rule provides that a licensee will pay 25%-33% of its profits on an item incorporating a licensed-in patent as a royalty for the patent. That is, if the licensee expects to make a $10 profit on an item incorporating a claimed invention, it would, under the Rule, presumably be willing to pay a royalty of $2.50/unit to license the patent while retaining $7.50 as compensation for its labor, risk and investment. The rule originated from research done in the 1950s involving a collection of 18 licenses entered into by a subsidiary of a U.S. company, but was more fully expounded in Robert Goldscheider, et al., Use Of The 25 Per Cent Rule in Valuing IP, 37 les Nouvelles 123 (Dec. 2002), where the authors reviewed 347 real world licenses from 15 industries concluding that the average royalty in those licenses was 25% of average industry profits.

     . . . .

Decision on Appeal

     The Federal Circuit's decision in Uniloc included two landmark holdings respecting patent damages law.

     The "25% Rule". It is no overstatement to say that the Federal Circuit flatly rejected any use of the 25% Rule in damage analyses:

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 [v. Merrell Dow Pharms., 509 U.S. 579 (U.S. 1993)] [enhanced version / unenhanced version] and the Federal Rules of Evidence, because it fails to tie a reasonable royalty base to the facts of the case at issue.

     The court gave three reasons for this unequivocal holding: (1) the Rule fails to account for the unique relationship between the patent and the accused product, (2) the rule fails to account for the unique relationship between the parties and (3) the Rule is essentially arbitrary. The court acknowledged that it has previously "tolerated" the rule, most notably in i4i Ltd. P'ship v. Microsoft Corp., 598 F.3d 831, 856 (Fed. Cir. 2010) [enhanced version / unenhanced version], which supporters of the Rule have recently cited as the Federal Circuit's endorsement of the Rule, and that lower courts have "invariably admitted evidence based on the 25% Rule." It reconciled its own cases with its holding by pointing out that the validity of the rule was not at issue in its previous decisions and dismissed lower court's holdings as being based on apparent widespread acceptance of the Rule or a lack of challenge to the Rule.

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