The Demise of the 25% Rule for Patent Damages

In a ruling that reshapes how to calculate patent infringement damages based on a  reasonable royalty, the Federal Circuit Court of Appeals rejected the 25% rule which was “widely accepted” by lower courts for many years.  Uniloc USA, Inc. v. Microsoft Corp., Case No. 2010-1035, Jan. 4, 2011 (Fed. Cir. 2011)(available here).  The Court found that it had “passively tolerated” the 25% damages rule which generally stated that, in order to calculate reasonable royalty patent damages, a hypothetical willing licensee would accept a license for the patented product or method if the license fee was 25% of the licensee’s marginal profit for the product.  In greater detail, reasonable royalty patent infringement damages involve an analysis of a hypothetical negotiation between a willing licensor and a willing licensee immediately before defendant infringed the patent. In practice, the licensor’s and licensee’s marginal profits are base line factors.  In Uniloc, the patentee’s expert started with the widely accepted 25% rule to render his expert opinion regarding patent damages.

After reviewing the scientific basis and literature, the Court decided that the 25% rule was not based upon reasonable scientific evidence and should no longer be used to measure reasonable royalty patent infringement damages.
The Uniloc decision presented the Court’s view on a number of topics which several blog entries cover.  The remaining topics include (a) whether a patent claim divides infringement between two parties which may require the presence of two defendant parties in the suit and the importance of drafting patent claims to “structure a claim to capture infringement by a single party;” and (b) willful patent infringement and a review of some basic procedural concepts.

This blog discusses the 25% damages rule.
The Patent Statute “provides that on finding infringement of a valid patent, damages shall ‘in no event [be] less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court.’ 25 U.S.C. sec. 284.  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. Wang Labs Inc. v. Toshiba Corp., 993 F.2d 858, 869-70 (Fed. Cir. 1993). A reasonable royalty is the predominant measure of damages in patent infringement cases.” Uniloc slip opn. at p. 35-36 (herein “Uniloc p. 35-36″).

According to the Court, “The admissibility of the bare 25 percent rule has never been squarely presented to this court. Nevertheless, this court has passively tolerated its use where its acceptability has not been the focus of the case, see e.g., i4i Ltd. P’ship v. Microsoft Corp., 598 F.3d 831 (Fed. Cir. 2010), cert. granted, 562 U.S. — (U.S. Nov. 29, 2010) (No. 10-290); Fonar Corp. v. General Elec. Co., 107 F.3d 1543, 1553 (Fed. Cir. 1997), or where the parties disputed only the percentage to be applied (i.e. one-quarter to one-third), but agreed as to the rule’s appropriateness, Finjan, Inc. v. Secure Computing Corp., slip op. No. 2009-1576, -1594 at 23 (Fed. Cir. Nov. 4, 2010).” Uniloc p. 39

District courts have the responsibility to ensure that all expert testimony must pertain to “scientific, technical, or other specialized knowledge” under Federal Rule of Evidence (“FRE”) 702, which in turn requires the judge to determine that the testimony is based on a firm scientific or technical grounding.  Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 589 – 90 (1993); Kumho Tire Co. v. Carmichael, 526 U.S. 137, 148 (1999). See Uniloc p. 41.

In sweeping away the 25% rule the Court stated: “This court now holds as a matter of Federal Circuit law that the 25 percent rule of thumb is a fundamentally flawed tool for determining a baseline royalty rate in a hypothetical negotiation. Evidence relying on the 25 percent rule of thumb is thus inadmissible under Daubert and the Federal Rules of Evidence, because it fails to tie a reasonable royalty base to the facts of the case at issue.”  Uniloc p. 41

Under Daubert, the district court must exercise a “gatekeeper” function to ensure that scientific testimony is relevant and reliable. Kumho Tire Co. v. Carmichael, 526 U.S. 137, 137 (1999) (discussing Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 589 (1993)).

“The bottom line of Kumho Tire and General Electric Co. v. Joiner, 522 US 136 (1997) is that one major determinant of whether an expert should be excluded under Daubert is whether he has justified the application of a general theory to the facts of the case.  Consistent with this conclusion, this court has held that ‘[a]ny evidence unrelated to the claimed invention does not support compensation for infringement but punishes beyond the reach of the statute.’ ResQNet.com, Inc. v. Lansa, Inc., 594 F.3d 860, 869 (Fed. Cir. 2010).”  Uniloc p. 43

“To be admissible, expert testimony opining on a reasonable royalty rate must ‘carefully tie proof of damages to the claimed invention’s footprint in the market place.’ ResQNet, 594 F.3d at 869. This court has sanctioned the use of the Georgia-Pacific factors to frame the reasonable royalty inquiry. Those factors properly tie the reasonable royalty calculation to the facts of the hypothetical negotiation at issue. This court’s rejection of the 25 percent rule of thumb is not intended to limit the application of any of the Georgia-Pacific factors. In particular, factors 1 and 2—looking at royalties paid or received in licenses for the patent in suit or in comparable licenses—and factor 12—looking at the portion of profit that may be customarily allowed in the particular business for the use of the invention or similar inventions—remain valid and important factors in the determination of a reasonable royalty rate.”  Uniloc p. 46; see Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970).

The Court noted that the evidence of damages must tie the Georgia-Pacific factors “to the relevant facts and circumstances of the particular case at issue and the hypothetical negotiations that would have taken place in light of those facts and circumstances at the relevant time.”  Uniloc at p. 46.  The 25% rule was not tied to the relevant factors in the Uniloc case.

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