Patent Law | Expert Legal Commentary

April 14, 2011

Uniloc USA, Inc. v. Microsoft Corp.: The Federal Circuit Rejects the 25% Rule

Uniloc USA, Inc. v. Microsoft Corp.

By Olivier Taillieu of The Taillieu Law Firm and Sarah Brooks of Stradling Yocca Carlson & Rauth

Uniloc USA, Inc. v. Microsoft Corp.: The Federal Circuit Rejects the 25% Rule

The Federal Circuit recently rejected the 25 percent rule in calculating damages and assessing a reasonable royalty. In Uniloc USA, Inc. v. Microsoft Corp., 2011 WL ________(Fed. Cir. Jan. 4, 2011), the Federal Circuit found that the 25 percent rule of thumb was an arbitrary rule and was not tied to the particular facts of the case. Therefore, the Federal Circuit reaffirmed its reliance on the Georgia-Pacific factors and held that these factors “properly tie the reasonable royalty calculation to the facts of the hypothetical negotiation at issue.”

BACKGROUND

Uniloc’s patent claims a software registration system which is designed to deter software piracy.  Microsoft’s Word XP, Word 2003 and Windows XP all have a feature called Microsoft Product Activation feature that is accused of infringing Uniloc’s patent.

At trial in the United States District Court for the District of Rhode Island the jury awarded $388 million to Plaintiff Uniloc in damages based on the testimony of Uniloc’s expert.

Uniloc’s expert largely relied on the so-called 25 percent rule in calculating damages and a reasonable royalty.  The 25 percent rule has been used to approximate the reasonable royalty rate that a licensee would offer to pay during a hypothetical negotiation and “suggests that the licensee pay a royalty rate equivalent to 25 percent of its expected profits for the product that incorporates the IP at issue.”

The Federal Circuit Rejects the 25 Percent Rule

The Federal Circuit found that Microsoft is entitled to a new trial on damages.  The Federal Circuit in Uniloc, held that as a matter of Federal Circuit law “the 25 percent rule of thumb is a fundamentally flawed tool for determining a baseline royalty rate in a hypothetical negotiation.  The Federal Circuit came to this conclusion because such a “rule of thumb” failed to tie a reasonably royalty rate to the facts at issue in the case.  In other words, such a rule of thumb did not take into account the unique facts of each case, the particular product industry at issue or other licenses in the same field of technology.

The Federal Circuit in Uniloc further emphasized that it is the patentee’s burden to prove damages, and as such, the patentee must rely on license agreements that are similar or comparable to the patented product at issue.

The Federal Circuit also reaffirmed its adoption of the so-called Georgia-Pacific factors as a guide to determining the reasonable royalty rate, which includes considering licenses granted for the particular patent at issue as well as licenses obtained by the accused infringer.

The Federal Circuit held that the Georgia-Pacific factors “properly tie the reasonable royalty calculation to the facts of the hypothetical negotiation at issue” and that its rejection of the 25 percent rule is not meant to limit these factors in any way.

CONCLUSION

The Uniloc decision will have a significant effect on calculating damages and a reasonable royalty in patent cases.  No longer can Plaintiffs rely on the 25 percent rule of thumb as a fall-back position. Instead, each Plaintiff and its expert must go through each of the fifteen Georgia-Pacific factors in order to calculate a reasonable royalty.

About the Authors

Olivier A. Taillieu is the Principal at The Taillieu Law Firm, a litigation boutique firm specializing in complex litigation.

Sarah Brooks is an Associate of Stradling Yocca Carlson & Rauth, focusing on intellectual property litigation.

Image Credit: ©iStockphoto.com/s_john79

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Olivier Taillieu
Sarah Brooks

Companies Mentioned

Also See:

MDS (Canada) Inc. v. RAD Source Technologies: 11th Circuit Finds Federal Circuit Does Not Have Exclusive Jurisdiction When Patents at Issue in Breach of Contract Claim

AMP v. Myriad Genetics, Inc.: Unanimous Supreme Court Limits Patentability of Human Genes

CLS Bank Intl. v. Alice Corp. Pty. Ltd.: En Banc Federal Circuit Cements Confusion Over Patent-Eligibility for Software

Bowman v. Monsanto Co.: Growing Patented Soybeans for Replanting is Infringement

Gunn, et al., v. Minton: Supreme Court Denies Federal Jurisdiction for Patent-Related Malpractice Suit

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Companies Mentioned

Patent Law

The following companies are mentioned in Patent Law Updates:

Boston Scientific Corp.

Microsoft Corp.

Boston Scientific Scimed, Inc.

U.S. Patent and Trademark Office

Samsung Electronics America, Inc.

Stryker Corp.

Cordis Corp.

Ranbaxy, Inc.

Nokia, Inc.

SmithKline Beecham Corp. d.b.a GlaxoSmithKline

Prometheus Laboratories, Inc.

SmithKline Beecham PLC

Mayo Collaborative Services d.b.a. Mayo Medical Laboratories

Sanyo North America Corp.

Glaxo Group Limited d.b.a. GlaxoSmithKline

Scimed Life Systems Inc.

Smithkline Beecham Corp. (d.b.a. GlaxoSmithKline, plc.)

Johnson & Johnson, Inc.

United States Patent and Trademark Office

Honeywell International, Inc.

HT Window Fashion Corp.

Mylan Laboratories, Inc.

Mylan Pharmaceutical, Inc.

Ortho-McNeil Pharmaceutical, Inc.

Acumed, LLC

Audiovox Communications Corp.

Stryker Sales Corp.

Teva Pharmaceuticals USA, Inc.

Glamourmom LLC

McKesson Information Solutions, Inc.

Stryker Orthopaedics

Target Corp.

Bridge Medical, Inc.

Howmedica Osteonics Corp.

Kohl’s Department Stores, Inc.

Smith & Nephew, Inc.

Cohesive Technologies, Inc.

J.C. Penney Company, Inc.

Waters Corp.

LG Electronics, Inc.

Elizabeth Lange LLC d.b.a. Liz Lange Maternity

Association for Molecular Pathology

Quanta Computer, Inc.

Federated Department Stores

Egyptian Goddess, Inc.

Swisa, Inc.

K-Mart Corp.

Motorola, Inc.

Dror Swisa

Sears Holding Corp.

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