Royalties, Wrenched

Uniloc USA v. Microsoft, Corp.

The Federal Circuit has thrown a spanner into the works for patent holders seeking to use the 25 percent "rule of thumb" to establish a reasonable royalty for infringement damage calculations. In Uniloc USA, Inc. v. Microsoft, the court unequivocally rejected the often-used method of determining a baseline royalty rate. Reaching its holding as a matter of Federal Circuit law, the court said the 25 percent rule is a fundamentally flawed tool for determining a reasonably royalty because it fails to tie the 25 percent royalty base to facts of the case. As a result-especially for patent holder-plaintiffs with nothing else in their reasonable royalty tool-box-the formerly-favored damages theory now bears a striking resemblance to a wooden nail.

The patent in Uniloc covered a software registration system that deters software copying by end users installing copies of software programs on multiple computers. Uniloc alleged Microsoft included a Product Activation feature in many of its popular software programs that infringed Uniloc's patent. After a full trial, the jury found willful infringement and awarded $338 million in damages. Following the jury's verdict, the district court judge granted Microsoft's motion for JMOL of non-infringement and lack of willfulness and, alternatively, ordered a new trial on those issues. The court also ordered a new trial on damages. Uniloc appealed and Microsoft cross-appealed the district court's denial of JMOL on invalidity.

On appeal, the Federal Circuit focused much of its attention on the issue of damages. The court held that, by employing the 25 percent "rule of thumb" as the foundation for his damages calculation, Uniloc's damages expert had employed a methodology that could not survive review under Daubert's standards for expert witnesses. The court noted the relevant literature supporting use of the 25 percent rule and its own passive tolerance of it in cases where its use was not a primary issue. But the court concluded that, once directly challenged, use of the rule could not continue because it impermissibly allowed the introduction of a general theory without a direct link to the actual facts of the case. Specific criticism included the rule's failure to take into consideration the unique relationship between the patent and the accused product and the unique relationship between the parties. The court said the rule fails to account for "a particular hypothetical negotiation or reasonable royalty involving a particular technology industry or party."

The court also faulted the Uniloc expert's use of the entire market value of the accused products as a "check" against his valuation of them. Patentees may only assert damages based on the entire market value of an infringing product when the patented feature creates the basis for consumer demand. By mentioning that value, the expert let out a "$19 billion cat [that] was never put back into the bag," impermissibly skewing the damages horizon for the jury. Based on this ruling, the court affirmed the order for a new trial on damages and remanded the matter following a reversal of district court's JMOL on non-infringement.

Uniloc will necessarily result in large-scale re-tooling of damage calculations in pending infringement matters previously proceeding under the 25 percent rule. To succeed, patent holders will need to offer expert testimony on a royalty rate that "carefully tie[s] proof of damages to the claimed invention's footprint in the marketplace" - and the facts of the case. Existing or similar licenses and customary profits in the business under consideration will take on increasing importance as courts look to Georgia Pacific factors specially identified as probative by the Uniloc court. Accused infringers will want to use those same factors to vet any newly raised royalty rate theory for vestiges of prior improper calculations. Going forward then, the winning damage theory will depend on whether the proffering party is aiming to hit a damages nail-or thumb-on its head.

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