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Fed Circuit Nixes 25 Percent Rule of Thumb for Determining Baseline Royalty Rate

  by: Joseph Carnicella, an intellectual property associate at Picadio Sneath Miller & Norton, P.C.

The Federal Circuit in Uniloc USA, Inc. v. Microsoft Corp., Nos. 2010-1035, 2010-1055, 2011 U.S. App. LEXIS 11, at *56 (Fed. Cir. 2011), concluded that the 25 percent rule of thumb should no longer be used as a tool for determining a baseline royalty rate in a hypothetical negotiation.  Furthermore, the Federal Circuit decided that any evidence relying on the 25 percent rule of thumb that does not tie a reasonable royalty base to the facts of the case shall be inadmissible under Daubert and the Federal Rules of Evidence.

35 U.S.C. § 284 provides that damages shall be awarded in an amount no less than a reasonable royalty, together with interest and costs as fixed by the court, to compensate the claimant for the use of the invention by the infringer.  “In litigation, a reasonable royalty is often determined on the basis of a hypothetical negotiation, occurring between the parties at the time that infringement began.”  Uniloc, 2011 U.S. App. LEXIS, at *47 (citing Wang Labs Inc. v. Toshiba Corp., 993 F.2d 858, 869 (Fed. Cir. 1993)).  In the past, the 25 percent rule of thumb served as an approximation for the reasonable royalty rate that a manufacturer of a patented product would be willing to pay to the patent holder.

At the district court level, the jury awarded Uniloc $388 million based on certain testimony provided by Uniloc’s expert, who utilized the 25 percent rule of thumb as part of his damages calculation.  The expert then considered the Georgia Pacific factors and concluded that the factors did not change the royalty rate.  Microsoft challenged the application of the rule prior to trial, and while “the district court noted that ‘the concept of a ‘rule of thumb’ is perplexing in an area of the law where reliability and precision are deemed paramount,’” the district court determined that the use of the rule was reasonable since the rule had been widely accepted.  Uniloc, 2011 U.S. App. LEXIS, at *46.  However, with its first true opportunity to address this specific issue, the Federal Circuit decided to do away with the application of such an abstract theory.  “In short, [the expert’s] starting point of a 25 percent royalty had no relation to the facts of the case, and as such, was arbitrary, unreliable, and irrelevant.  The use of such a rule fails to pass muster under Daubert and taints the jury’s damages calculation.”  Uniloc, 2011 U.S. App. LEXIS, at *65.

This recent decision by the Federal Circuit will surely have a significant impact on future cases.  We intend on monitoring the impact of this decision and discussing these matters as they become relevant so stay tuned for future blogs.

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