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.
On January 4, 2011, the U.S. Court of Appeals for the Federal Circuit found that the so-called “25 percent rule of thumb” analysis long used by damages experts in patent cases to calculate a “reasonable royalty” is “fundamentally flawed.” Uniloc v. Microsoft (Fed. Cir. 2011).
On January 4, 2011, the Federal Circuit in Uniloc USA, Inc. v. Microsoft Corp., 632 F. 3d 1292, made two significant rulings on recurring issues in the area of patent damages: (1) It eliminated the criticized 25 percent “rule of thumb” frequently used as a baseline for determining reasonable royalty damages, and (2) It clarified that evidence of entire market value calculations - where the plaintiff attempts to tie the reasonable royalty to the full value of a product containing the patented invention - will not be permitted in absence of clear economic justifications.
In its Uniloc decision, the US Court of Appeals for the Federal Circuit provided much-needed clarification on the calculation of damages in patent infringement lawsuits.
“A reasonable royalty is the predominant measure of damages in patent infringement cases.”
Though the "25 Rule," which presumes that 25 percent of the operating profit from the sale of an infringing good is a reasonable royalty rate, has been frequently relied upon as a starting point in calculating patent infringement damages for more than 40 years, the Federal Circuit recently held that this rule of thumb "is a fundamentally flawed tool.
The Federal Circuit has recently rejected the so-called "25 percent rule" long used by litigants and accepted by federal courts to establish a "reasonable royalty" as compensation for patent infringement under Section 284 of the Patent Act.
Before the Federal Circuit’s recent decision in Uniloc USA, Inc. v. Microsoft Corp., patentees often used the so-called 25 percent rule to approximate a reasonable royalty ratei.e., the royalty rate that an accused infringer would have paid to the patentee during a hypothetical negotiation at the time infringement began.
On January 4, 2011, the Federal Circuit threw out the use of the "25 percent rule of thumb" in patent damage awards and also placed limitations on the "application of the entire market value rule."
The Court of Appeals for the Federal Circuit ruled last week that a damage expert's arbitrary use of what had become a commonplace starting point for royalty rates in patent cases, the so-called "25 percent rule," is a "fundamentally flawed tool" for determining a reasonable royalty and "is thus inadmissible under Daubert and the Federal Rules of Evidence.