Source: https://www.complexip.com/the-demise-of-the-25-rule-for-patent-damages/
Timestamp: 2019-04-26 02:14:44+00:00

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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″).
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.
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)).
“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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