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.

Connect on Linkedin®

Olivier Taillieu

Sarah Brooks

Also See:

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

Hall v. Bed Bath & Beyond: Federal Circuit Rejects District Court’s Pleading Standards for Design Patent Infringement

Arkema v. Honeywell Intl.: Federal Circuit Explains MedImmune Standard for Declaratory Judgment Jurisdiction Involving Indirect Patent Infringement

America Invents Act: First-to-File Priority for Patent Applications Begins March 16