Federal Appeals Court Finally Rejects Silly Rules Of Thumb For Calculating Patent Damages

from the made-up-rules,-made-up-results dept

In the past, we've mocked the popular "25% rule," which many patent system supporters have used in legal cases going back decades. The basic gist of this rule is that, in calculating "damages" for infringement, the patent holder should be entitled to 25% of the profits as an approximation of what a "reasonable license fee" would have been, while the company, who actually took on all the risk, should get the remaining amount. Patent system supporters have often pointed to this as being a generous solution, since it leaves 75% of the profits to the company who supposedly infringed. Of course, it leaves out the fact that any modern technology product today probably involves hundreds, or even thousands, of things that someone else will claim patents on. Still, the 25% rule is brought up regularly,and is rarely questioned by courts... until now.

In a ruling in a patent infringement lawsuit between Uniloc and Microsoft, the appeals court for the Federal Circuit (CAFC) finally pointed out just how ridiculous the 25% rule really is and suggested that it should die a quick death. The court noted how the 25% rule is widely used, and even how the district court was troubled by such a "rule of thumb" rather than any actual look into damages, but that since it was so widely used, the lower court effectively shrugged its shoulders, and let the 25% rule remain. The appeals court rejected this commonly used tool, however, noting serious problems with it. CAFC admits that it has been just as guilty in accepting the 25% rule in the past and many other courts have simply used it just because everyone else is using it -- but no one's ever really asked a court if it's legitimate. But, no longer:

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.

The court then points out that the patent holder has the responsibility for demonstrating what the actual damages are and they must sufficiently tie the damages estimates to the facts of the case -- without doing that, and just using a rule of thumb, means that "the testimony must be excluded." The court doesn't beat around the bush here:

The meaning of these cases is clear: there must be a basis in fact to associate the royalty rates used in prior licenses to the particular hypothetical negotiation at issue in the case. The 25 percent rule of thumb as an abstract and largely theoretical construct fails to satisfy this fundamental requirement. The rule does not say any-thing about a particular hypothetical negotiation or reasonable royalty involving any particular technology, industry, or party. Relying on the 25 percent rule of thumb in a reasonable royalty calculation is far more unreliable and irrelevant than reliance on parties’ unre-lated licenses, which we rejected in ResQNet and Lucent Technologies....

[...]

.... Beginning from a fundamentally flawed premise and adjusting it based on legitimate considerations spe-cific to the facts of the case nevertheless results in a fundamentally flawed conclusion....

Separately, CAFC also rejected the idea of using the "entire market value rule," in determining a reasonable royalty rate. Again, the court dismisses this commonly used rule as not being tied to the specifics of the situation. This rule involves a patent holder trying to determine the reasonable royalty rate on the overall market value of a product, rather than figuring out the actual market value of the invention in question. This trick is useful for patent holders because they can toss out some huge number, to make any (otherwise huge) number sound reasonable. For example, in this case, the patent holder pointed out that Microsoft had made "approximately $20 billion" selling "the infringing product." When you use an amount that large, then a few hundred million dollars seems "small." The full market value is misleading, and CAFC makes that clear:

This case provides a good example of the danger of admitting consideration of the entire market value of the accused where the patented component does not create the basis for customer demand.... The disclosure that a company has made $19 billion dollars in revenue from an infringing product cannot help but skew the damages horizon for the jury, regardless of the contribution of the patented component to this revenue.

The court highlights how the patent holder's lawyers played up the "approximately $20 billion," and mocked a proposed $7 million royalty as only being "an effective royalty of approximately .000035%," which ignored, of course, that the patent in question was a very, very, very minor part of the larger product. In fact, Uniloc's lawyer specifically asked a witness:

And at the end of the day, the in-fringer, Microsoft, who violated the patent law, they get to keep 99.9999% of the box and the inventor, whose patent they in-fringed, he gets the privilege of keeping .00003%?

It's not hard to see how that clearly biases the jury. But CAFC is thankfully rejecting that too. While I often find that CAFC sides too strongly with patent holders, it's nice to see it pushing back a bit on some of the more ridiculous "rules of thumb" used for damages that are way out of scale with reality.

Filed Under: 25% rule, damages, patents, rules of thumb
Companies: microsoft, uniloc