On January 4, 2011, in Uniloc vs. Microsoft case, the United States Court of Appeals for the Federal Circuit allowed for a new trial on damages. The court found that “the jury’s damages award was fundamentally tainted by the use of a legally inadequate methodology”. The court, in effect, rejected the “25% Rule of Thumb” for calculating the reasonable royalty rate in patent infringement cases.
The patent at issue involved a software registration system, which requires customers to enter the product key supplied by the software manufacturer in order to install the product. The system, patented by Uniloc, is meant to deter customers from copying the software without the manufacturer’s permission. At trial, the jury found that Microsoft had infringed Uniloc’s patent and, basing its verdict on Uniloc’s expert testimony that the appropriate damages should be $565 million, the jury awarded Uniloc $388 million in royalty rate damages. Uniloc’s expert had used two rules in his calculation, the “25% Rule of Thumb” and the “Entire Market Value Rule,” both of which the Federal Circuit rejected on appeal.
The 25% Rule of Thumb is a tool that has been used to approximate the reasonable royalty rate that the manufacturer of a patented product would be willing to offer to pay to the patentee during a hypothetical negotiation.
Consistent with the goal of simulating a hypothetical negotiation, the court emphasized the need for Uniloc’s expert to use facts regarding the parties, technology, and industry to support the applicability of the 25% Rule of Thumb in this case. The royalty rate is meant to reflect the price that Uniloc and Microsoft would have actually negotiated prior to infringement. The court deemed that the expert’s “starting point of a 25% royalty had no relation to the facts of the case, and as such, was arbitrary, unreliable and irrelevant. The use of such a rule also fails to pass muster under Daubert and taints the jury’s damages calculation.”
The Court also emphasized a limitation on using the Entire Market Value test, which Uniloc’s expert used to “check” his calculations. He found that the estimated damages equaled only 2.9% of the gross revenue from Microsoft’s products that contained product keys, and thus it was a reasonable royalty rate. The Federal Circuit again, however, rejected this application due to the relationship between the patented product key and the infringing word processing software. The court ruled that using the infringer’s total profits as a basis for determining a royalty rate is only appropriate when the patent directly contributes to the infringer’s profits. For future cases, the Entire Market Value test should only be applied when the patented component is an integral part of the entire product.
The obvious implications of this case are the importance of facts and the need for experts to provide more proof on how their theories simulate hypothetical negotiations.