Parties and courts had come to rely on the so-called "25 percent rule" as a way of calculating a reasonably royalty rate in patent infringement cases. Under this rule, a licensee pays a royalty rate of 25 percent of its expected profits for the products that incorporate the infringed patent. But then, on January 4, 2011, the Federal Circuit issued its opinion in Uniloc USA, Inc. v. Microsoft Corp., Case No. 2010-1035, -1055 (Fed. Cir. January 4, 2011), in which it held
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.
Despite this holding, which appeared to signal the end of this "rule", courts appear to continue to use this rule of thumb as a guide in determining a reasonable royalty for patent infringement.
One such example is the recent decision in Douglas Dynamics, LLC v. Buyers Products Co., 3-09-cv-00261 (WIWD Sept. 22, 2011, Order) (Conley, J.).
In Douglas, Douglas accused Buyers of infringing several of its patents. On summary judgment, Buyers was found not to infringe Douglas' "pioneering" patent but did infringe Douglas' "minor" patents. A jury then awarded a 3.3% royalty rate on past infringement. After post-trial briefing, the court grappled with a royalty rate going forward. The court ultimately awarded an ongoing royalty rate of 6.225%.
Although the court discussed various interesting issues it considered in reaching this rate (including that the royalty rate for past and future infringement need not be the same), of note was the fact that the court considered "the 25 percent rule" in reaching its royalty rate.
Specifically, in largely rejecting the competing royalty rates proposed by the parties, the court stated
Instead, the court is persuaded to start with the approach used by the district court in Paice. [Paice LLC v. Toyota Motor Corp., 504 F.3d 1293 (Fed. Cir. 2007)]. There the court applied "the 25% Rule of Thumb," which entailed setting the ongoing royalty rate at 25% of Toyota's 9% profit margin or 2.25%. Paice, 609 F. Supp. 2d at 630. Here, 25% of Buyers' 12.9% profit margin is 3.225%. Buyers offers to raise the royalty amount to 5% since the 3.225% is so close to the amount awarded by the jury. An additional 2% is reasonable, since continued use of the infringed patents would likely only provide a slight increase in sales for Buyers and little, if any, lost sales for Douglas.
Opinion at 5.
The court did not rely on the 25 percent rule as its sole basis for determining an ongoing royalty. Indeed, had the court done that, it would have arrived at virtually the same royalty rate the jury found for past infringement. Furthermore, the court's sole reliance on this "rule" would be contrary to the CAFC's holding in Uniloc. Nevertheless, the court did appear to use this rule, at least as a benchmark for its ongoing royalty, begging the question whether courts will continue to use this rule -- post-Uniloc -- as a quick and dirty royalty rate reality check?