US Federal Court abolishes '25 percent rule'
The US Federal Circuit has abolished a method for calculating a reasonable royalty rate for patent infringement damages.
According to the US Court of Appeals for the Federal Circuit’s ruling in Uniloc USA Inc. and Uniloc Singapore Private Ltd v Microsoft Corporation, the rule’s use has been “passively tolerated” in the past when its “acceptability has not been the focus of [a] case”.
Judges Randall Rader, Richard Linn and Kimberly Moore decided the case on January 4.
Uniloc’s patent covers a mechanism for preventing the copying of software. It claimed that Microsoft’s Product Activation feature for Word XP, Word 2003 and Windows XP infringed this patent.
In 2009, a jury of the US District Court for the District of Rhode Island awarded Uniloc $388 million in damages after it found Microsoft had wilfully infringed Uniloc’s patent.
Microsoft filed a post-trial motion for a judgment on non-infringement of the patent, as well as a motion requesting a new trial. District Court Judge William Smith granted a judgment for non-infringement and a new trial specifically on the issue of damages, overturning the jury’s $388 million award.
The Federal Circuit’s decision agreed with Judge Smith. It said that a new trial on damages had to be granted because the jury’s damages award was “fundamentally tainted by the use of a legally inadequate methodology”.
The decision said: “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.”
Finding the ‘25 percent rule’ inadmissible, the decision held that it “fails to tie a reasonable royalty base to the facts of the case at issue”.
David Howard, corporate vice president and deputy general counsel of litigation at Microsoft, said: “This is an important and helpful opinion with respect to the law of damages, and it may signal the end of unreasonable and outsized damages awards based on faulty methodology.”
He added: “The Federal Circuit reinforced the basic concept of the trial court as gatekeeper by emphasising that once a court determines that an expert’s methodology is faulty, the court must exclude that testimony. We look forward to the new trial.”
