Two major holdings came out of this January 2011 decision: (1) the so-called 25% Rule is henceforth inadmissible, and (2) regarding the entire market value rule, plaintiff’s expert may not present to the jury the total salesof the accused product unless the patented feature is shown to be the basis of customer demand for those sales. The court clarified the entire market value rule somewhat, saying that it “allows a patentee to assess damages based on the entire market value of the accused product only where the patented feature creates the ‘basis for customer demand’ or ‘substantially create[s] the value of the component parts.”
Here, Uniloc’s patent is directed to a software registration system to deter copying of software. The jury awarded $388 million after hearing Uniloc’s expert, Dr. Gemini testify that damages should be $565 million. Gemini started with an internal pre-litigation document that valued the product key at $10 to $1,000 then split the lower value according to the 25% rule of thumb, arriving at a $2.50 royalty per unit, resulting in $565 million total royalties. He then conducted a reasonableness check to conclude that of the total gross revenues of $19 billion for Office and Windows, this represents a 2.9% royalty rate.
By way of background, the 25% rule of thumb suggests splitting the benefits (profits) derived from a pool of IP assets by allotting 25% to the patentee (licensor) and 75% to the licensee. After a lengthy discussion of the history of the 25% rule in literature and in the courts, 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 finds that Uniloc’s use of the $19 billion “check” was improper under the entire market value rule, since Uniloc had not demonstrated that the patented feature was the basis of customer demand for Office and Windows. The court notes that the “entire market value rule allows a patentee to assess damages based on the entire market value of the accused product only where the patented feature creates the ‘basis for customer demand’ or ‘substantially create[s] the value of the component parts’ “ (see Rite-Hite, which cites to Marconi). Presenting this amount would “skew the damages horizon for the jury.”
The Court then clarifies/overturns a point made in the federal circuits’ 2009 Lucent v. Gateway ruling, now stating that “Supreme Court and this court’s precedents do not allow consideration of the entire market value of accused products for minor patent improvements simply by asserting a low enough royalty rate.”
This case raises a couple questions:
- How long will it be before experts opine that profits should be split not 25/75 but rather 50/50 since at least there is an economic theory supporting such a 50/50 split in some circumstances (the Nash bargaining solution). [Answer: less than a couple months!] And will the courts be quick to dismiss that on the same grounds that it fails to properly consider the facts of the case? [Answer: at least one will.]
- By prohibiting the use of total product revenues (where the patented feature is not the basis of demand), the courts will push experts to do such calculations on a per-unit basis. Will that be acceptable? [Answer, at least one court says yes – see Lucent v. Microsoft district court decision of 2011.]
- Again the court is clearly seeking more rigorous economic analysis of the benefits derived from the patented technology. Yet oftentimes a benefit-specific analysis requires substantial judgment calls or relies on refutable facts/data. Will the courts be increasingly open to such analyses where substantial judgment is used?
Citation: Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292 (Fed. Cir. 2011)