The 25% rule is confirmed dead

Auditors may still expect it, and IP appraisers may still use it—if only as a reasonableness check—but according to the most recent pronouncement by the U.S. Court of Appeals for the Federal Circuit, its decision in Uniloc v. Microsoft effectively “discarded” the 25% rule of thumb as a reliable measure of patent infringement damages, making it “inadmissible” in any calculation of reasonable royalty damages.

At the same time, the Federal Circuit is showing some leniency for parties and financial experts who applied the 25% rule of thumb before Uniloc but prior to their case reaching appeal. That’s what happened in this latest decision, which vacated an $8 million damages award (Whistserve, LLC v. Computer Packages, Inc., 2012 U.S. App. LEXIS 17510 (Aug. 7, 2012)). Moreover, both of the parties’ experts used the 25% rule, without any objection from either side, and so the Federal Circuit did not reverse on this ground alone. Instead, it criticized the plaintiff’s expert for first applying the 25% rule to the infringer’s profits, and then, after applying the Georgia-Pacific factors in a loose and “conclusory” fashion, for expressing a final royalty rate as a percentage of revenue. The Federal Circuit also discredited the expert’s reliance on noncomparable, lump-sum licenses as well as his ultimate conclusions, which would have swallowed up to three-quarters of the defendant’s profits and were, “frankly, out of line with economic reality.”