Federal court rejects 25% patent infringement damages rule of thumb

By now, you’ve probably heard about last week’s decision in Uniloc U.S.A. v. Microsoft Corp., in which the Federal Circuit Court of Appeals resoundingly rejected the 25% “rule of thumb” in the calculation of patent infringement damages. Despite its prior wide use by patent authorities and passive acceptance among courts, the Federal Circuit declared the 25% Rule inadmissible under Daubert “because it fails to tie a reasonable royalty base to the facts of the case” and, as an abstract and largely theoretical construct, “is a fundamentally flawed tool.”

The court confirmed Microsoft’s patent infringement liability, but reversed the jury’s $388 million award and remanded the case on the sole question of damages. To pass Daubert, any expert’s calculations “must carefully tie proof of damages to the claimed invention’s footprint in the marketplace,” as supported by the Georgia-Pacific factors, “and the hypothetical negotiations that would have taken place.”  The court also rejected the expert’s use of Microsoft’s $19 billion entire market share as a “check” to support reasonable royalty damages, when the patented component did not create the basis for customer demand. Look for the case digest in the March 2011 Business Valuation Update—and we’ve just posted the court’s landmark decision as a free download at BVR’s IP Valuation Resource Center.

The expert failed Daubert before. Interestingly, Uniloc’s expert—a Ph.D without any apparent BV credentials— also appeared for the plaintiff in IP Innovation LLC v. Red Hat, Inc., 2010 WL 986620 (E.D. Tex.)(March 2, 2010). With Judge Rader from the Federal Circuit presiding, the court found the expert committed a “stunning methodological oversight” by simply assuming that the oft-unused patented feature supported a royalties derived from 100% of the defendants’ revenues. Moreover, the expert relied on a general consultants’ study instead of prior licensing agreement to improperly inflate the rate. (That case digest was reported in the June 2010 BVU and the court’s decision is now also available for BVWire readers as a free BVR download.

IP experts in demand. Taken together, the two cases signal a tightening of federal standards in calculating reasonable royalty rate damages in patent infringement cases—and a Daubert rejection of any expert calculations that fail to meet the heightened evidentiary hurdle. Learn more this Friday, January 14, in “Damages in Patent Infringement Lawsuits,” Part 2 of BVR’s Advanced Webinar Series on Lost Profits Damages, featuring Robert Surrette (McAndrews Held & Malloy) and Richard Bero (The Bero Group and a contributor to The Comprehensive Guide to Lost Profits Damages, 2011 edition). Click here for more information about this Friday’s webinar.