Federal Circuit: there goes the 25% rule of thumb!

The U.S. Court of Appeals for the Federal Circuit just reaffirmed that the 25% rule of thumb is a “fundamentally flawed tool for determining a baseline royalty rate” in patent infringement cases, citing its recent opinion in Uniloc v. Microsoft.

The plaintiff's appraiser in this case made out better than you might expect because he relied more prominently on other factors. For instance, he separately determined that the infringing products earned 9.2% more in operating profits than noninfringing devices. He also conducted a Georgia-Pacific analysis to show that the royalty was reasonable in light of the “unique relationship of the parties, the nature of the invention, and the nature of the industry,” the court said, in an opinion by Judge Randall Rader. He could have stopped there, but for emphasis, the judge added the following:

Once again, this court does not endorse Georgia-Pacific as setting forth a test for royalty calculations, but only as a list of admissible factors informing a reliable economic analysis.

As BVWire readers know, Judge Rader has publicly criticized the Georgia-Pacific framework outside of the court, calling it a “flawed methodology.” In this particular case, according to Dan Jackson (AlixPartners): “The Federal Circuit is clearly telling everyone that Georgia-Pacific is not a means to an end; it is simply a tool to assist an expert in identifying the types of questions that may be important to a reasonable royalty analysis. Two very interesting observations I take away from the case,” he adds: 1) financial experts cannot derive a royalty based solely on an evaluation of just the Georgia-Pacific factors; but 2) a federal court should accept the analysis if reasoned and well supported.

Read the complete digest of Energy Transportation Group, Inc. v. William Demant Holding, 2012 LEXIS 21200 (Oct. 12, 2012), in the January 2012 Business Valuation Update; the Federal Circuit’s decision will be posted soon at BVLaw.